Boys from the black stuff

'Just now the smaller sister looks the most attractive'

Once upon a time there were the seven sisters. This is what those companies that dominated all aspects of trade in oil around the world were called. They were integrated businesses. That is to say they prospected for black gold, extracted it from the ground, controlled the production and refined and sold the end product to a wide range of customers, picking up margin all the way along the supply chain.

Once upon a time there were the seven sisters. This is what those companies that dominated all aspects of trade in oil around the world were called. They were integrated businesses. That is to say they prospected for black gold, extracted it from the ground, controlled the production and refined and sold the end product to a wide range of customers, picking up margin all the way along the supply chain.

Once considered among the most powerful businesses in the world, like so many other old economy industries, their star has waned over recent years. But oil remains an important commodity and these are powerful companies still, even if there are fewer of them that can claim to be at the top of the tree these days. Exxon, BP Amoco and Royal Dutch Shell now occupy positions once held by seven businesses.

One is American, one British and one Anglo/Dutch, but their countries of incorporation and the markets in which they have their primary listing matter little. These are truly global concerns with a powerful international reach. Almost everyone will have heard of them. The big question is, does it make sense to own their shares?

Shell and BP have reported recently, and there can be little doubt that these companies have benefited from the rise in the price of petroleum over the past year or so.

Recently we have seen Brent Crude hand back some of these gains, but a higher price for oil does these boys no harm. It is no longer the sole - or even arguably the principal - reason for holding the oil majors, but it remains important to understand what might happen to the price going forward.

Opinion is divided on this score. There are those who believe the release of more production from OPEC will bring the price back to the mid-teens. Certainly, a slowdown in economic growth among the developed nations, at a time when more barrels are coming out of the ground, does not bode well for the oil price in the mid-term. Yet others feel the spike down to sub $10 a barrel in 1999 was an aberration. Oil bulls will point out the price was over $40 a barrel 20 years ago.

Despite all the concerns that oil will run out and alternatives will need to be found, petroleum products remain key to our energy needs and new supplies keep coming on stream.

Back in the 1970s, when oil quadrupled in price as a consequence of the Yom Kippur war, many predicted dry wells by the new millennium. No sign so far. The unforeseen benefit that the concerted Arab action had nearly 27 years ago has been to make everyone - governments particularly - become more energy efficient. These days a little oil goes a long way.

There are not really enough oil companies around these days to justify a fund (although there has been the odd energy trust around in the past). Given that Exxon is an American company - still difficult and expensive to buy for the average UK investor - it is probably better to concentrate on BP Amoco and Shell.

BP is presently in the middle of a rebranding campaign, trying to make itself look more environmentally friendly. The results, which disclosed pre-tax profits up a massive 164 per cent, were the first to include Atlantic Richfield, or Arco, its second US acquisition in as many years.

Sir John Browne, the chief executive, is considered to be "the manager's manager" - a magnate in a pullover, whose stewardship of this company has markedly improved its fortunes. But with the shares up a third from their low point of the year, and within 10 per cent of their peak, much of his achievements appear to be in the price.

I would plump for Shell, perhaps one of the most widely held shares by private investors. "You can be sure of Shell," the old advertising slogan goes. Last week's results were not quite as dramatic as those from BP, but then there is no recent major acquisitions to throw into the figures.

Shell has a strong brand (though no corporate makeovers here) and even though it trails third behind Exxon and BP Amoco, with operations in 135 countries, it would be inappropriate to describe the company as anything less than global.

Oil still has a place in a diversified portfolio. And just now the smaller sister looks the most attractive.

* Brian Tora is Chairman of the Greig Middleton Asset Allocation Committee