If there's one thing that the oil industry can't stand (other than dry wells, that is), it's uncertainty. The break-even point for big oil projects often doesn't occur until more than a decade after the project begins. With time frames that long, the oil companies that bankroll the projects can't justify investing in them unless they have all of their ducks in a row.

One of these "ducks" goes by the name of stable pricing, and it happened to be running wild for much of 2008 and 2009. The popping of the commodities bubble and the recession cut crude prices by more 75% from their July 2008 peak to their December bottom. This didn't sit well with oil giants such as Chevron (NYSE:CVX), Shell, and ConocoPhillips (NYSE:COP), who responded by slashing their capital spending budgets. The industry's budgeted spending for oil exploration and production work for 2009 is believed to be 21% lower than 2008 levels -- and that's sure taken a bite out of the earnings and stock prices of oil services and equipment companies such as Schlumberger (NYSE:SLB) and National Oilwell Varco (NYSE:NOV), who rely on the projects of the giants for much of their business.

Demand remains healthy
But, interestingly enough, the markets now seem to be remembering that the world still needs plenty of oil to keep itself running, recession or not. Global oil consumption is down less than 3% from its peak last year, and with economic activity picking up, the declines seem to have stopped.

In addition, once you look past 2009, the growth outlook for oil demand is still pretty strong, thanks to the developing world. While the average American consumes about 25 barrels of oil per year, and the average European Union resident 12 barrels, people in China consume only 1.9 barrels per year, and those in India 0.8. Expect the latter two numbers to grow over time. The International Energy Agency (IEA), for its part, sees global oil consumption growing by 1.4% in 2010, and steadily moving higher in future years.

New technologies to the rescue? Maybe not.
Needless to say, the government of every oil-importing country wants to keep a lid on demand, whether for economic, environmental, or national security reasons. But there's only so much that governments can do. Sure, cars will keep becoming more fuel-efficient, but this is going to be offset by an explosion in the number of cars on the road in places like China and India -- especially with low-cost vehicles like Tata Motors' Nano hitting the market.

Alternative energy technologies such as solar and wind, while definitely good for the environment, can't provide much relief, either. Since they're directed at electricity use rather than cars, and oil accounts for less than 7% of the world's electricity generation (1.6% in the U.S.), they're going to have a bigger impact on fossil fuels other than oil.

Stability returns, and supply issues continue
Couple a return to oil market sanity with some OPEC production cuts, and just like that, you have oil prices back at $68/barrel. More importantly, prices have generally stayed above $60/barrel for about 16 weeks now. That's the kind of pricing stability that oil producers need to justify investing in riskier projects. With capital spending budgets typically set at the beginning of the year, you can't expect purse strings to loosen a lot right away, but the foundations are being put in place for it.

And the way things look, producers will have no choice but to keep their purse strings loose over the long haul if supply is going to have any chance at meeting demand. An IEA study of the world's 800 largest oil fields estimated that production at the average field was declining at a 5.1% annual rate from peak levels. Having supply meet demand in the coming decades will require a ton of investment from oil companies in developing new fields, as well as in expanding existing ones. These investments are going to mean a lot of new business for oil services and equipment firms.

Prospects are brighter, but valuations remain low
Though they've rebounded from their lows during the crash, oil services and equipment stocks are still at historically low valuations. A recent Morgan Stanley report put the industry's price/book and price/sales ratios about 25% below their averages over the last 12 years. Of course, that same report notes that consensus estimates for 2010 forecast little to no revenue growth for the industry. Mr. Market is predicting a slow recovery, and if he's proven wrong, chances are that both earnings estimates and stock prices will be moving higher.

If you're trying to find compelling bargains in this space, one good approach would be to look at companies whose enterprise values are at a low multiple relative to their 2008 earnings. That gives you a decent idea of how cheap (or expensive) a company's shares might look at current prices when business picks up. On that basis, equipment giant National Oilwell looks appealing, trading at an enterprise value of around 7 times its 2008 earnings. Oil States International (NYSE:OIS), trading near an 8-times multiple, is another one to look at. So is Baker Hughes (NYSE:BHI), which is trading at a 7-times multiple, along with acquisition target BJ Services (NYSE:BJS) just under 9-times multiple, and should benefit from cost savings related to the merger.

Investing in a cyclical industry in the middle of a downturn is never without risks. But valuations and long-term trends being what they are, there are probably riskier ones to invest in than the industry that revolves around keeping the world's oil fields going.

Eric Jhonsa thinks the Beverly Hillbillies should've driven a harder bargain for their oil field. He has no position in any of the companies mentioned. National Oilwell Varco is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.