For the past five months, I’ve grown increasingly concerned about the steady surge in oil prices. Back in November,I noted that several sectors could be affected if oil moved past $100 a barrel. With oil now approaching $110 a barrel, you can forget that qualified statement. Oil will affect various swaths in the economy.

Here’s why…
 

Some market watchers suggest oil has only temporarily moved onto a higher plane and that prices will eventually come back down. Then again, they’ve been saying that for the past six months. It’s increasingly hard to see why oil prices will suddenly pull back.

“The turmoil in the Middle East is unlikely to be resolved quickly or easily, meaning that oil market volatility is likely to remain high,” analysts at Merrill Lynch say. At this point, the only major catalyst to bring oil prices back down (besides a sudden resolution to all of the Middle East’s troubles) would be a slump in demand. And demand would only fall because oil prices rose so high that they choked off economic activity.

When I looked at surging oil prices again in February, I suggested that airlines, restaurant chains and auto makers would be the first to feel the impact. Recent auto sales trends imply that consumers are quickly switching to smaller new cars. This means the auto industry may be able to make up some of the effect from falling pick-up truck sales. Yet other sectors and asset classes won’t be so lucky — these groups are sure to start feeling the pain.

Emerging markets
After a powerful multi-year rally, I fear emerging markets will take it on the chin in 2011. Many of these countries are grappling with rising inflation, which is leading their central banks to start raising interest rates. Oil plays such a big role in many of these economies that these central bankers will be forced to raise rates even more than they would like. This leads to a strong possibility that these economies will cool or even flatten out.

Which countries are vulnerable? Let’s start with Korea. The iShares MSCI South Korea Index (NYSE: EWY) has recently surged on expectations that lost economic activity in Japan will be picked up in Korea. The index has doubled in the past two years. Yet South Korea’s central bank just announced that inflation has risen to 4.7%, a 29-month high — and that’s before the impact of the further recent spike in oil prices. From shipbuilding to consumer electronics, Korea is highly dependent on freight traffic and freight costs. Yet unless oil prices fall back below $100 a barrel this year, orders for new Korean ships are bound to slow sharply as trans-oceanic freight volume starts to drop.

If you own any emerging-market investments, take a close look at whether that country or region is a net exporter or importer of oil. Oil exporters such as Brazil will at least generate rising income from oil, even as their central banks continue to try to tame inflation.

Lodging/travel
Gasoline prices are approaching $4 a gallon in many places, right at a time when many consumers are starting to plan summer vacations. In the most recent monthly survey of consumers by the University of Michigan, expectations of future inflation rose from 2.9% to 3.2%, the highest since early 2008, with most citing gas prices as their concern. All of the sudden, a 400-mile road trip becomes that much more expensive. So an increasing number of consumers may look to take local vacations and save on fueling expenses. The same logic applies to business travel, as expense receipts start to show sticker shock.

This may well spell trouble for the lodging industry, which needs high occupancy rates and full prices to make a profit. If occupancy rates fall, price wars ensue and industry profits can take a deep hit. That’s what happened a few years ago, the last time oil spiked above $100. If consumer and business travel starts to slow, then lodging stocks such as Marriott (NYSE: MAR) and even Disney (NYSE: DIS) would start to feel the pain. For that matter, cruise ship operators such as Carnival (NYSE: CCL) and Royal Caribbean (NYSE: RCL), both of which count fuel as their largest expense, would surely take a hit to profits.

Agriculture
Fuel is also a major cost component in agriculture, whether it’s the gas or diesel powering a tractor, or the expense of delivering produce or livestock to market. Farmers tend to sort out their expenses according to need. They can’t easily cut down fuel consumption, but they can easily defer any non-essential spending until cash flow improves.

In recent years, high farm prices have enabled farmers to upgrade everything from irrigation equipment (made by firms such as Lindsay Manufacturing (NYSE: LNN)) to large combines made by Deere (NYSE: DE) and others. A few years ago, when oil was also in triple-digit territory, demand for these types of equipment fell sharply. The current spike in oil holds a similar threat.
 
Action to Take –> With every $10 rise in oil, the stock market has still managed to power even higher. All along the way, economists have been suggesting that the U.S. economy can withstand the commodity‘s upward move. Yet certain sectors are so dependent on oil that it’s impossible to see how they aren’t feeling the pain. Share prices may not yet be reflecting the oil spike, but we may finally be at a tipping point. Keep an ear open on first-quarter conference calls. Discussion about rising oil prices is bound to dampen profit outlooks at an increasing number of companies. 

P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America’s electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here’s what’s going on…