How to join the oil rush

IS IT too late to jump aboard the energy bandwagon that has pushed oil prices to a heady $55 a barrel? Many of those who remember 1998, when they were below $10, think this is a bubble which will soon burst.

Perhaps not. Demand is racing away, led by the Chinese economy which is growing at a rampant 9.1%. China has only a few days' oil supplies. What if it decides prices could keep on rising and starts to stock up?

Prices above $50 will bring fresh supplies on the market - some day. New fields take three to five years to develop.

Robin Batchelor and Poppy Buxton, who run the World Energy Fund at Merrill Lynch Investment Managers, reckon global demand is at its strongest for 20 years, and supplies are very tight. Oil can be sold forward at close to $40 a barrel up to 2010. Output in the US, which discovered oil in the first place and is still one of the largest producers, is in decline.

Though George W Bush, himself an oilman, gave explorers big incentives, the US is sucking in ever more imports to feed its energy habit.

Batchelor says that without new investment, US gas fields' output is falling at 25% a year. Imports will soon come to 68% of US gas needs. Unsurprisingly, the gas price, stuck at $2 in the 1990s, has quadrupled.

Another complication is that as light, 'sweet' US oil grows scarce, it is importing heavy, 'sour' Saudi and Venezuelan crude. Many refineries need costly refits to process this. It is, as railmen might say, the wrong kind of oil.

Even if crude drops back to $30 or $35, oil companies will still be making fantastic money. So the boom may not be over.

One of the problems for investors is that individual exploration stocks are risky, while there are very few energy investment funds. But MLIM's World Energy Fund has had a wonderful year, its price rising by more than 50%. It has stakes in UK winners Cairn and First Calgary, but most of its assets are in North America. Steering clear of the giants to seek faster growth, it has stakes in Occidental, Talisman, Anadarko and refiner Valero Energy.

World Energy, based in Luxembourg, is taxed as an offshore fund - capital gains on sale are taxed as income. This is onerous, but will change on November 8 when it wins UK status.

You can read about it on the www.mlim.co.uk website and buy units direct from Merrill Lynch (tel 0800 445522), minimum $5,000. Officially there is a 5% initial charge, but you should demand and expect a big discount. The buying price is $13.22; soon there will be a sterling price. For the adventurous, one of the fund's top holdings is Texas-based XTO Energy. Founded as the Cross Timbers Oil Company, it has grown its gas reserves by a string of shrewd acquisitions. Third-quarter gas output was 19% ahead of last year, while nine-month profits rose 48% to £184m.

Over five years, it pumped out gas at a cost of $1.40 and sold it for more than $4. Now it is getting $5-plus. The shares are up from $18 in January to $35, valuing XTO at £4.8bn. Compared to its reserves, they still look cheap.

If you prefer to stay closer to home, Premier Oil at 635p has lagged the oil sector by a distance this year. It is chasing prize assets off Mauritania, where drilling news is due next month. Teather & Greenwood values its assets at 715p a share.