Oil prices are moving strongly higher today following a government report that showed inventories dropped dramatically last week.

Today's report from the Energy Department indicated that oil inventories fell by 8.4 million barrels last week, in stark contrast to the increase of 1.2 million barrels that analysts had been expecting to see for the precious crude.

A new U.S. administration's promise to create a more self-reliant, energy-independent nation and the impact of efforts to first limit, then eliminate global warming from fossil fuels opens the door to alternative energy source development.

But, as Saudi Arabia reminds us, barring a breakthrough technology, fossil fuels with remain a major energy source for the world for at least the next thirty to 50 years. In other words, the U.S.'s romance with the car lives: it's merely paused, not ended.

Oil is down now, but it's not out and it isn't going away anytime soon, which is why risk-tolerant investors should consider Chevron.

When I suggested In December 2006 that Valero Energy (NYSE: VLO) would be a smashing investment in 2007, I looked great as it rose from around $50 to almost $80 per share. When I stuck with it, recommending it for 2008, I got sandbagged big time as it sank from a 52-week high of $73.68 to a recent low of $14.59.

Valero was trapped by rapidly rising crude prices and shrinking margins on the refined product. However, in the last quarter it was able to show a year-over-year increase in profits.

VLO reported third quarter 2008 income from continuing operations of $1.2 billion, or $2.18 per share, which compares to $848 million, or $1.34 per share, in the third quarter of 2007. The third quarter 2008 results include the company's pre-tax gain of $305 million on the sale of its Krotz Springs, Louisiana refinery to a subsidiary of Alon USA Energy, Inc., which was effective July 1, 2008. Excluding this gain, third quarter 2008 income from continuing operations was $982 million, or $1.86 per share.

This morning the company said it planned significant turnarounds in 2009, with projects planned at two of its Texas refineries. The company also said it had scaled back capital spending in 2008 and 2009 by deferring projects until 2010 and 2011. "As it turns out, 2009 should be a more significant year for turnaround activity," said Chief Operating Officer Rich Marcogliese.

Oil falls, yet the price of gasoline is hanging up there, in the stratosphere. What's going on here?

Well, as is often the case in the oil and gasoline markets, the reasons are many.

First, the price of oil is falling on concerns that both the global economy and the U.S, economy will slow to a crawl (if not worse) due to the current credit crisis, says economist David H. Wang.

Oil, which fell $3.96 to $91.76 per barrel Tuesday at midday, has declined more than 30% since hitting a record high of $147.27 per barrel in July.

"The financial crisis suggests that emerging market oil demand growth will slow, and that's the primary reason you're seeing the price of oil decline," Wang said. "Strong demand for oil in China and India really boosted oil's price in the last three years. You lower that China-India demand and you have a different oil market."

Now, what about gasoline prices? Here, U.S. motorists will face a wide range of prices, depending on where they live in the U.S., economist Peter Dawson told BloggingStocks Tuesday.

"The biggest factor short-term for gasoline is Hurricane Ike, which shut down a fuel pipeline and refinery capacity in Texas," Dawson said. "This will reduce the supply of gasoline in the South, so price increases of 50 cents or more in the Southwest and Southeast will not be unusual."

The losses from Gustav are significant, but not nearly as bad as they could have been.

That's the early read regarding onshore / offshore property and infrastructure damaged caused by Hurricane Gustav, with losses pegged at $4 billion to $10 billion, according to estimates by Risk Management Solutions. In contrast, Hurricane Katrina in 2005 caused about $50 billion in damages.

Risk Management said losses from Gustav were lessened by the fact that the storm weakened, and hit the coastline as a Category 2 hurricane, and the fact that it came ashore about 70 miles southwest of New Orleans. Those factors, combined with better preparation by companies with vulnerable property in the area, will result in lower damages totals, Risk Management said.

However, RMS was quick to point out that the $4-10 billion damage total does not include loses from flooding in New Orleans that could occur in the days ahead.

Gustav: Little U.S. GDP impact

Economist David H. Wang, who runs U.S. GDP models each quarter, said Tuesday he expects "only a minimal U.S. GDP impact from Gustav."

"Of course human safety is the primary concern. But regarding regional GDP, the Southeast U.S. will incur a 0.1-0.3% GDP reduction in the third quarter from the hurricane, but the overall impact on U.S. GDP will be minimal," Wang said.

Oil fell $3.92 to $133.08 per barrel Wednesday at mid-day after the U.S. Energy Information Administration announced that weekly crude oil inventories unexpectedly rose by 803,000 barrels.

Economists surveyed by Bloomberg News had expected crude oil inventories to decrease by 1.1 million barrels last week. It was the first rise in weekly oil inventories in six weeks. Also, gasoline supplies fell by 153,000 barrels.

A rarity: A bearish oil report

Traders took a bearish view of the weekly oil report, and sold the major energy commodities. In mid-day Wednesday trading unleaded gasoline fell about 3 cent to $3.43 per gallon. Heating oil fell about 3 cents to $3.78 per gallon. Natural gas declined 19 cents to $12.82 per million BTUs.

The upward arc of gasoline prices in the United States continues.

The average U.S. price for a gallon of gasoline rose 10 cents in the past two weeks to $4.10, the Lundberg Survey announced, The Associated Press reported Monday.

Mid-grade gasoline averaged $4.22 per gallon; premium, $4.33. Tulsa, Oklahoma recorded the cheapest regular unleaded gasoline in the nation, at $3.76; the Los Angeles and Fresno areas of California, the highest, at $4.59 for regular unleaded.

Further, the average gasoline price is up $1.10 or 36% compared to a year ago. The Lundberg Survey collects price data from 5,000 gas stations nationally.

Further, gasoline's record price rise has renewed a policy debate between Republicans and Democrats in Washington concerning the most effective way to lower gasoline prices, Bloomberg News reported. Republicans favor lifting the ban on offshore drilling, while Democrats favor increasing vehicle fuel efficiency requirements.

Gasoline Analysis: Despite a considerable reduction in U.S. gasoline consumption, year-over-year, U.S. gasoline prices continue to march higher, due to higher oil costs and an inadequate U.S. refinery system. Further, assuming prices follow their historical, seasonal path -- upward through at least the July 4 holiday period -- in the U.S., the average gasoline price is likely to exceed the U.S. Energy Information Agency's estimate of $4.15 per gallon -- a level that will continue to reduce disposable income and lower GDP growth.

Readers of this space know that one of the preferred sectors has been the oil/oil services sector. Further, with oil now well above $110 per barrel, one may think that all of the affordable oil plays have been bid up. Indeed, most have, but not Chevron.

Chevron Corporation (NYSE: CVX) is the third-largest integrated oil company in the United States.

Chevron's organic reserve replacement, excluding Canadian oil sands, is sub-par, but just about every other dimension of CVX's operation rates good to strong.

Chevron's most attractive dimension? CVX has the equivalent of 'the facilities of significance' in an oil-challenged world, and especially in a gasoline-challenged United States: 22 fuel refineries, to go along with 2 asphalt plants, for a total refining capacity of 2.21 million barrels per day. Almost half of that fuel refining is based in the United States.

Oil is treading water -- for now -- at a near-record $122 per barrel Wednesday, after a U.S. Energy Information Administration report indicated that weekly crude oil inventories rose a larger than expected 5.7 million barrels.

Economists surveyed by Bloomberg News had expected crude oil inventories to increase by 1.63 million barrels last week. Also, gasoline supplies rose by 800,000 barrels.

Oil idles near $122

The larger than expected increase in oil inventories put a brake on oil prices, for the moment. Oil rose just 30 cents to $122.14 per barrel in Wednesday morning trading. The other major energy commodities were also virtually unchanged. Unleaded gasoline gained 1 cent to $3.11 per gallon. Heating oil rose about 2 cents to $3.37 per gallon. Natural gas gain 2 cents to $11.15 per million BTUs.

Readers of this space know that one of the preferred sectors is oil / oil services. Given oil's importance in a growing global economy, oil and oil services companies are likely to continue to experience steady demand for their services/products. And with the aforementioned in mind, Berry Petroleum is worth a review.

Berry Petroleum Company (NYSE: BRY) is an independent energy company engaged in the production, development, acquisition, exploitation and exploration of crude oil and natural gas.

Analysts like Berry's ability to cost effectively identify properties with heavy crude oil reserves for sale to refineries. Berry has proved reserves of 150.3 million barrels of oil equivalent.

In addition to its core operations in three southern California counties, analysts also like that Berry is investigating several other basins, which would establish another core area and provide additional growth opportunities and diversification of the company's predominantly heavy oil resource base. The Reuters FY 2008/FY 2009 EPS consensus estimates for BRY are $3.38 to $3.66.

Readers of this space know that one of the preferred sectors is oil and oil services. Given oil's importance in a growing global economy, oil and oil services companies are likely to continue to experience steady demand for their services/products. And with above in mind, ConocoPhilips is worth a review.

ConocoPhilips (NYSE: COP) is the third largest oil company in the United States. With proven reserves of 35 billion barrels of oil, COP has the oil assets, upstream production and -- equally important -- downstream refining capacity to benefit from both oil's current high price and its likely, continued ascent, long-term.

Further, COP's 12 U.S. refineries represent the most compelling operations positive for the next 3-5 years ahead. In addition, COP has a $3 billion plan in place to expand the company's ability to refine heavy sour crude oils.

The highly improbable may be happening. U.S. gasoline consumption may be arcing downward, The Wall Street Journal reported Monday (subscription required).

Confronted with near-record gasoline prices, an anemic-growth U.S. economy, and rising food costs, among other living expense increases, U.S. gasoline consumption has fallen about 1.1% in the past six weeks, on a year-over-year basis, The Journal reported Monday, citing U.S. Government data. Further, excluding Hurricane Katrina in 2005, which destroyed energy facilities, the six-week drop in demand is the longest drop in 16 years.

If the 'mini' trend strengthens or at least holds on a year-over-year basis, experts say it will limit gasoline price increases that typically occur during the summer driving season - - a period when U.S. gasoline consumption historically increases and oil companies increase gasoline prices to take advantage of that higher demand.

U.S. crude oil inventories increased 3.2 million barrels for the week ending February 22, 2008, the U.S. Energy Information Administration announced Wednesday (pdf). Economists surveyed by Bloomberg had expected a 2.6 million barrel increase.

Oil continued to trade at near-record levels on the news. Oil was down 33 cents to $100.25 per barrel Wednesday at mid-day, after trading above $102 earlier in the session. The other major energy commodities were mixed at mid-day. Heating oil gained about 1 cent to $2.81 per gallon, unleaded gasoline rose 1 cent to $2.53 per gallon, and natural gas declined fell about 10 cents to $9.11 per million BTUs.

If you do not own Valero Energy Corporation (NYSE: VLO) already, you were not listening last year when I was ranting and raving every month why this was a must-own stock. It was one of my favorites last year, remains one of my favorites now and looks to have an open road ahead of it in 2008.

Valero's profit margins were squeezed in the second half of 2007 by high crude prices rising while pump prices were stable, but that is likely to change, and I think the stock can continue to appreciate significantly. It may not change fast , as the economy is going through some rough spots. Also, VLO, which is reporting earnings on January 29, may still have some lingering margin issues.

Last year this was one of my top picks and jumped 36%. I rarely make specific predictions as analysts tend to do, but I feel comfortable stating VLO can beat all the major indices. Everything I liked about Valero last year is still in play now, so I'm letting this winner ride.

Investors and readers know about the barely-adequate crude oil refining system in the United States.

It's hard to believe, but when the U.S. opens its next refinery, it will be the first new one in more than 20 years. Meanwhile, demand for refined crude products, including gasoline, continues to rise. That's why it makes sense to consider a refining stock or two, such as Valero Energy (NYSE: VLO).

Valero is the largest oil refiner in the United States, but that's not the only compelling dimension to VLO. Valero also boasts what oil analysts call "refining flex." Valero can process large amounts of lower-cost heavy and sour crude -- refining these into cleaner-burning, higher-margin products, including low-sulfur diesel.

Another VLO advantage: Valero has refineries throughout the U.S., in New Jersey, Delaware, Louisiana, Oklahoma, Tennessee, Texas and California, in addition to facilities in Aruba and Canada. The company's overall production capacity is 3.1 million barrels per day. The Reuters F2007/F2008 EPS consensus estimates for VLO are $8.19/$8.16.

The risks? A major U.S. economic slowdown or recession would hurt VLO's results. Further, margins on selected product grades may narrow in 2008, but many grades will still be above historical norms.

The First Call mean rating for VLO is: Buy. [21 firms.] Mean 2008 target: $80.40. [high: $110, low: $51.]

Stock Analysis: Valero is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than one year should be rewarded from VLO's shares. Sell / Stop Loss if you were to purchase shares in this company: $44.