Back in early 1999, venerated magazine The Economist famously ran a cover story entitled "Awash in Oil" predicting crude oil would trade around $5 per barrel for a prolonged period. With oil at more than $120 per barrel today, that now seems like a ridiculous prediction.
 

But at that time, many pundits believed the world was in the midst of a global oil glut. OPEC seemed powerless to control supply, and new deepwater discoveries were seen as a potential stronghold for non-OPEC producers. As the chart shows, oil prices had languished for the better part of two decades, hovering under $20 per barrel. At that level, $5 per barrel seemed a

lot more probable than even $50.

Fat Profits in Lean Years
You might assume that this era of lower oil prices spelled trouble for oil companies. Certainly that was true in some cases, but there was one group that bucked the trend and managed to produce solid returns for investors: "Big Oil" companies.

Consider that ExxonMobil (NYSE: XOM), then called simply Exxon, produced a gain of more than +1,200% between 1985 and 2000. That's a nearly +19% annualized gain; slightly higher than the return for the S&P 500 over the same time period. And Exxon managed this impressive performance despite the prolonged weakness in oil prices.

So what was the secret to Big Oil's success? First and foremost, these firms had access to the world's most attractive oil and natural gas reserves. These fields were prolific and could produce at a low per-barrel cost. That meant even when oil prices were hovering around $10 per barrel, many of the Big Oil firms could still turn a profit.

In addition, these large firms are "integrated" oil companies and are involved in three different business lines: production of oil and gas, refining, and chemicals.  While the production side of the business directly benefits from higher oil and gas prices, that's not necessarily true for refining and chemicals.

Diversifying with Refining and Chemicals
Refining is the process of turning raw crude oil into the products we consume every day, such as gasoline and jet fuel. Refiners make money on the difference, or "spread," between the price of oil and the prices for refined products -- refiners do not benefit directly from high-priced oil.

As long as gasoline prices are high relative to oil, refiners can make money even with oil at $10. Refining operations offer the integrated oil companies a measure of diversification -- when weak oil prices put pressure on production profits, refining profits might be able to pick up some of the slack.

Chemicals manufacturing involves producing products like plastics that are manufactured from oil and/or natural gas. Profits from chemicals manufacturing are cyclical and depend on factors like the health of the overall economy. So the profit cycle for the chemical business isn't necessarily in lockstep with crude oil prices -- which further helps to diversify the revenue stream for integrated oil firms.

Fat Profits in Good Years
With their diverse operations, the integrated oil companies managed a respectable performance during the lean years for oil. And you can imagine what has happened more recently as oil rallied to $120 per barrel.

Profits for companies like Chevron, ExxonMobil, ConocoPhillips, and BP have soared to all-time records; with the production side of their businesses bringing in the lion's share of revenues. And the stocks have risen to reflect that surge in profitability -- the S&P 500 Integrated Oil Index is up +210% since 2000. That beats the S&P 500's roughly +8% gain over the same period by a factor of 25-to-1.

New Players and More Investment Opportunities
Meanwhile, a new player has emerged on the global oil scene over the past few years: the national oil companies (NOCs). National oil companies are firms created by governments to manage local oil resources. In some cases, NOCs are completely state-owned; however, in many countries governments have decided to partly privatize these businesses, selling at least a minority stake to the public. Many are also listed as ADRs on the U.S. exchanges like Brazil's Petrobras (NYSE: PBR) and China's PetroChina (NYSE: PTR).

NOCs have preferential access to oil and gas reserves located in their local market. In many cases, NOCs partner with integrated oil firms on major production projects. In such partnerships, the integrated oils provide much of the technology and know-how and receive a certain percentage of production from the project as compensation. Since many of the world's best reserves are controlled by NOCs, these partnership deals are frequently the only way for the integrated oils to get access to the most promising projects.

Fueling Your Portfolio with Diversified Oil
Large integrated oils and national oil companies offer an outstanding way to play strong growth in global energy demand. Meanwhile, these firms have a proven track record of weathering the inevitable downturns in the energy business.

With this in mind, in a recent issue of the StreetAuthority Market Advisor newsletter, editor Paul Tracy scoured the oil patch and profiled two of his favorite picks. These include a national oil company with a new discovery that, by some estimates, could contain 30 billion barrels of oil -- which would make it the most important producer in its oil-rich region. And with refining demand only getting stronger, Paul also uncovers an integrated oil company posting some of the fattest refinery margins in the industry. 
   
To learn the name of these securities, and to view the Market Advisor's "Beat the S&P" Portfolio -- which has outperformed the S&P 500 for five consecutive years --  we invite you to try a no-risk subscription to the Market Advisor. To learn more, please visit this link.