Suppose you invest in oil stocks on wall street, for example you hold
stock in Exxon, Mobil, BP and other oil companies. If there is an oil
shortage, and gas prices rise (as they did after hurricane Katrina),
then does the stock price of the oil companies go up?

In other words, if I invest in oil and there is a shortage, could I
profit off of the shortage?

In general, Yes.  

The shortage simply means that demand is greater than supply.  This
leads to a price increase.  The price increase means that (assuming
the oil companies you own are producing the same amount of oil) the
companies will make more profit.  This increased profit will drive the
stock prices up.


However, a shortage caused strictly by the decreased production of the
companies you own stock in could potentially lower the stock value
significantly.  For instance, if Exxon conducts a study and finds that
they only have 2 years left of drilling before they run out of oil in
the ground then Exxon stock will plummit even though there will be a
shortage.

You have a good point. Thanks. So most probably a oil sector mutual
fund would be less of a risk, which is what I had in mind. From what
I've seen - the funds have been doing very well.

The risk involved partly due to the fact that they have been doing so
well in the last few years.  Oil prices have been at all time highs. 
If they continue to rise then the stock prices will rise along with
them.  But if prices fall to a more historically normal level then the
stock prices will fall.

OPEC may try to see to it that prices don't fall too much, but they
only control about 1/3 of the oil production in the world, much less
of the market than most people assume.

I would like to add that many investment banking firms have predicted
in their reports that prices have a good chance of decreasing further
as we are still in the "oil spike" that we're currently experiencing.
The oil spike is expected to be temporary. This oil spike, or high
price, is caused by the fact that the difference between world demand
and world capacity is less than 5%, making markets very volatile to
things like hurricanes, disturbances, interruptions, etc. You can
obtain investment bank reports from library journal databases or
subscriptions, where available.