Given the recent gusher in oil — it streaked to a record-breaking $115 earlier this week in an increasingly roller-coaster market — Wall Street is hotly debating what to do with energy stocks.

The shares are off an average of about 8% this year, but over the past three years, energy was the darling of the stock market, with many stocks posting gains of 50% to 100% or even more of their portfolios in the industry.

Marc Heller, an Oregonian who manages $3.5 million of his family’s assets, is an energy bear. Via email, he recently wrote: “I am short a handful of energy stocks, including Chevron. They remind me of the hula hoop craze of the 1950s, a disaster waiting to happen. There is no shortage of crude supplies, oil demand is not surging and if we get a recession, oil could drop to $50 a barrel, maybe less. I wouldn’t own an energy stock now because I think they’re vulnerable as hell. Is there anyone of any prominence on Wall Street who agrees with me? If so, I would be interested in reading their views.”

I rang up one of Wall Street’s most respected energy analysts, Oppenheimer & Co.’s Fadel Gheit, and he echoes some of Mr. Heller’s thinking. “Trees don’t grow to the sky and oil is walking on stilts,” he says.

He attributes much of oil’s recent strength to the trillions of dollars in global funds that have made commodities such as oil a new asset play. The falling greenback (oil is traded in dollars) and rising inflation are also buoying the price of oil. Another spur: low margin requirements, which enable traders to buy a barrel of oil futures at six cents on the dollar, versus a 50% margin requirement to buy a stock.

Arguing that the price of crude is out of touch with fundamental realities, Mr. Gheit observes that oil can be produced anywhere in the world at $60 a barrel. Further, he notes, the replacement cost of oil in the ground is less than $20 a barrel, which leaves plenty of room to pay for taxes and overhead.

So why the big investment demand for high-priced oil, which Mr. Gheit contends is greatly inflated and has been manipulated for a year? “Because it’s the only game in town, the last bastion for traders,” he replies.

Pointing, also, to adequate oil inventories, plenty of oil worldwide, and the 3 million to 4 million barrels a day of excess capacity, he says he’s convinced oil prices lack the legs to stand at more than $60 a barrel. “The key with oil,” he says, “is its price has more downside risk than upside potential.” He expects oil to wrap up 2008 at $50 to $60 a barrel.

A drop in oil to $60 wouldn’t be a shocker, he says, because that’s what it averaged last year. This year, it’s averaging about $85 after having averaged $90 in the first quarter.

By the same token, he’s not ignoring inherent risks in the volatile international arena, which at any moment could push oil prices materially higher. He points, for example, to Venezuela and Nigeria, which between them are producing 1.2 million barrels a day less than they did five years ago. Mr. Gheit is neutral on energy stocks, telling me: “I would no longer chase them because the oil market is so unpredictable.” His advice is to “sit tight with the best names.” His favorites are Occidental Petroleum, Devon Energy, and Exxon Mobil.

In contrast, Alan Gaines, a onetime adviser to Carl Icahn in his attempted hostile takeovers of oil giants Texaco and Phillips Petroleum who is now chairman of Houston-based Dune Energy, says it certainly pays to own energy stocks. “We’re now living in a $100-a-barrel oil world,” he says, citing reasons that include insatiable demand from America, China, and India; diminishing output from the Gulf of Mexico, our largest oil-producing province, and the inability of OPEC members — other than possibly Saudi Arabia — to increase supply. He allows that oil could come down temporarily, but to $70 a barrel, not $40. Actually, he sees oil headed to $125 to $150 for the remainder of 2008, and he expects a further jump to $225 to $250 in two to three years. Likewise, he looks for gas to average $4 a gallon nationally this summer, versus the current average of $3.38. A diehard energy bull, he personally holds a sizable eight-figure portfolio of energy stocks, among them Chesapeake Energy, Marathon Oil, Range Resources, Comstock Resources, and Newfield Exploration.

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