But if you must know, global demand is outpacing supply – though not by much. Only a couple of million barrels a day prevents supply from keeping up with demand, but that’s enough to push the price of crude to record prices.

Ah, life must be good in the oil patch. Companies are making record or near-record profits. Don’t look now but the good times may be coming to an end for the miners of black gold.

We’ve already addressed in an earlier article the number one problem of oil companies: raising production. It’s a losing battle. The best fields are past their prime. Once they’re gone, they’re replaced with smaller fields with harder-to-get oil.

It’s like the Boomer generation looking for the fountain of youth. Boomers can slow down the decline here and there. But the fall from grace is inevitable. Oil producers face the same predicament. They can only see maximum rates of oil production in the rear view mirror.

So, what does the other side of oil production look like? It could be worse. So far, falling production plus soaring prices have brought oil companies huge profits.

The oil companies know they’re thriving on borrowed time. And they’re trying to do something about it. Ideally, they’d like to raise production. But at the very least they’d like to find a way to slow the fall of crude output.

To do so, they’re going after oil that a decade ago was beyond their reach. It lies thousands of feet underneath the oceans of the world.

This is new territory for the oil companies. It’s much too early for the oil companies to have a firm idea of what their costs will be. And while they’re pretty sure they have the technology to get to this oil, they’re still not sure how these technologies will work together.

Here’s a snippet of an earnings call by an offshore drilling contractor I caught last week on this very subject.

Analyst
“… the issue associated with the debate out there of drill ships versus semis, is the 8500 series equipment capable of something like offshore Brazil, would there be modifications required? Is there deck load issues? Just expand on the pros and cons and how much more opportunity when people debate this drill ship versus semi?”

Jeff Saile - SVP Operations
“Why don’t you ask a hard question, Pierre. Certainly we can work offshore Brazil. I don’t know if — I think there’s, a lot of that’s to be understood in the future. I certainly think the 8500 can get in there and compete. I don’t think it’s going to compete with a drill ship. It’s going to come in behind these ships when they do some of this. Some of these ships are going to do advanced exploration … the 8500 is certainly equipped to drill. It can drill in 10,000 feet of water. We’re going to have to do minor modifications to it. We’re reviewing that now. It can certainly drill in deeper water. And we can get out there with the equipment on them and drill these ultra deep wells, as well.”

The semi’s they refer to are semisubmersible rigs. They’re floating offshore drilling units with pontoons and columns. They can be anchored to the sea bottom with mooring chains or dynamically positioned by computer-controlled propellers or “thrusters.”

It’s not just the desperate oil majors who are willing to wade into these tricky deep waters. State-controlled oil companies see these basins as their next big money maker.

Deep-sea drilling is the next frontier. And these semis will help make it happen.

They have plenty of drilling to do … in the 30 billion barrel (from early estimates) Tupi basin off of Brazil … to Chevron’s estimated 15 billion barrel discovery in the Gulf of Mexico … to China’s recently discovered offshore field containing perhaps 2.2 billion barrels .. plus others.

These are major reservoirs. If the preliminarily estimated numbers hold up, Brazil’s Tupi would be the third largest underwater oil find ever.

But there’s a fly in the ointment in all of this … costs.

As I said, it’s too early to get a firm handle on costs. But I’ll tell you this much right now. It won’t be cheap.

And it’s getting more expensive all the time.

Petrobras (from Brazil) is hogging the word’s deepwater rigs and singlehandedly causing a shortage of these sought-after rigs. There are only 21 of them in the world. Petrobras is negotiating to lease 17 on top of what it already has to help explore its Tupi basin and nearby fields.

As a result, these rigs are going way up in price. BP leased one for $480,000 per day at the beginning of the year. Now, they’re going for as much as $600,000.

Shallow offshore drilling is also becoming much more expensive. For example, the company in the excerpt above said its jackup rates (jackup rigs operate in waters of 400 feet or less) in Asia went up 5 percent in the first quarter this year (compared to the fourth quarter of 2007).

• Existing home sales have increased, but new-home sales are down and home prices continue to fall.
• Orders for durable goods fell in the most recent report.
• Consumer confidence is in the cellar and consumer sentiment also continues to decline.

But the big news was that GDP numbers for the fourth quarter of 2007 showed an abrupt slowdown.

The definition of a recession is two consecutive quarters of negative GDP growth. We cannot call this slowdown a recession yet, but the numbers look bad enough to surmise America is near one.

So how is an investor to respond? What is the prudent course when faced with a probable recession?

Are We Really at the Bottom?

As a contrarian investor, this is a question I don’t feel the need to answer.

I know the market is down, which signals a buying opportunity. And I know that empirical studies show it’s impossible to time the market and find the absolute bottom. I would be arrogant to believe I can do what the smartest minds on Wall Street cannot do.

Therefore, I am not in and out of stocks with the latest CNBC breaking story. Instead, I take comfort in the knowledge that today is a good time to buy stocks that I intend to hold for a period of five to six years or more. If you don’t intend to hold your stocks for an extended period, I recommend that you don’t buy equities. Put your money in a CD. The returns in CD’s are miserable right now, but at least you won’t lose money.

Also remember that even in a bear market, some stocks continue to shine. But what types of stocks do you buy when the market is down? There are numerous compelling areas of value in the market. Here are two sectors and three companies that I believe every investor should be looking at for long-term success.

Oil and Oil Service Companies

Speculation is rampant on Wall Street that the stocks of oil firms are too high and need to be sold. I actually consider this negative sentiment a pause in the long-term story of growing appetites around the world for a better life. As the BRIC countries (Brazil, Russia, India and China) continue to move more citizens from poverty to the lower-middle class, the need for more energy and basic materials is exploding.

Even with oil at $80 a barrel, major oil firms are printing money. They have been showing financial discipline and therefore are increasing returns to shareholders. Natural gas supplies are tightening after a return to colder winter temperatures and firms specializing in providing this clean-burning product are throwing off immense amounts of cash. Plus, the oil service stocks have paused even as oil exploration budgets are growing.

Here are a few ideas:

Ensco International (NYSE: ESV) is a global offshore oil and gas drilling contractor and it is benefiting as oil exploration increases offshore. It’s trading at a PE of 9, with year-over-year quarterly growth of more than 12%, and return on equity of 28.5%. This stock is headed higher.

Conoco (NYSE: COP) is the cheapest of the large integrated oil companies. COP is trading just over 10 times earnings. Conoco has had year-over-year quarterly revenue growth of almost 30%. Return on equity is 14%, but cost-cutting and consolidation of past acquisitions is paying huge benefits. Because of a larger exposure to cracking spreads from refining, Conoco will remain healthy even if oil prices slide somewhat.

Chemical Firms

The raw material for most chemicals is petroleum. When oil prices head higher, chemical firms traditionally suffer. In this cycle, price increases have minimized the impact of expensive oil. All across the sector we see tremendous value. So when the entire sector is on sale, buy the best firms.

My money is on Dow Chemical (NYSE: DOW).

This giant of the chemical business is trading at a PE of 12.6 and pays a fat yield of 4.6%. So not only does it pay more than CDs, you get a capital gains reward, too, when this bellwether heads higher after the slowdown.

Whether the market is at the bottom, only time will tell. But if you chose stocks wisely for the long term, you need not lose any sleep.

Good investing,

Floyd

Floyd Brown, a regular contributor to Investment U and The Oxford Club, began his highly successful investing career while still in high school… and made his first million before turning 30. Here are five more of his energy picks.