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NEW YORK (CNN/Money) - ChevronTexaco has reached an agreement for the $18 billion acquisition of Unocal, a large slow-growing independent that has exceptionally big reserves of oil and natural gas. Both the terms and the timing of the deal provide useful bellwethers for key price trends in the energy industry.

The price of crude briefly topped $58 a barrel on Monday. All indications are that it will spike higher but that further increases will take oil to overvalued levels and set the stage for a price decline further down the line.

For investors, who should include energy stocks in their portfolios as inflation hedges, the question is how to respond to further volatility in oil prices. To answer that question, I'll take a look at the factors that could move the oil price higher and those that could take it lower. While there's no way to predict the timing or the magnitude of price swings, it is possible to outline a rational investing strategy.

Let's start by examining the proposed acquisition of Unocal by ChevronTexaco. Chevron wants to do the deal because it has not been able to build its reserves fast enough at a reasonable cost. That pretty much sums up the quandary faced by the oil industry as a whole.

Chevron is willing to pay $18 billion, a full price but not a crazy one, because it is actually cheaper right now to buy known reserves by acquiring companies than to explore for new sources of energy.

The acquisition will increase Chevron's total reserves 15 percent and will boost annual production a little faster. It will also give Chevron some great opportunities for international expansion.

Unocal is willing to do the deal because the company isn't big enough to compete on an international stage and knows it will have to sell out sooner or later. Unocal also suspects that today's high oil prices won't last, making this an opportunity to get out at a good price.

There's no way of quantifying a market that is spiking, but we can at least set some benchmarks. A price of $30 to $35 a barrel is needed to make exploration profitable. And so arguably that's where the price would be in a stable market. Saudi Arabia has said that a price between $40 and $50 a barrel would be comfortable.

So why then is the oil price in the high $50s? Strong demand and not enough supply. In 2004, demand grew at its fastest rate in 28 years and the oil-service equipment needed for rapid exploration is old and inadequate.

The result, experts say, could easily be a period of protracted high prices with spikes up to $70 a barrel -- or even briefly $100 by some extreme estimates.

Such a period of high prices would likely lead, however, to a collapse at some point. Once additional production comes on line -- and that has already started -- it doesn't shut down when demand slackens. That could occur either because supply expands too fast or because of a recession in the U.S. or overseas, especially in China.

Moreover, high prices encourage alternative forms of energy and conservation. Chevron itself has just joined a Spanish oil company in a project that will convert Venezuela's tar-laden heavy crude into normal petroleum. And high gasoline prices will only speed automotive hybrid technology that enables cars to get more than 40 miles per gallon.

Once a downturn starts, prices can easily overshoot on the downside, just as they spiked too high on the upside. So if the clearing price is between $35 and $45 a barrel, say, oil could temporarily fall as low as $20 to $25.

Given such a scenario, what is your most rational strategy as an investor. Basically, it doesn't make sense to buy energy stocks when the oil price is above $50 a barrel.

There's no reason to rush to sell energy stocks, but with oil prices at these levels, it does make sense to slowly reduce your energy holdings. Oil stocks would certainly qualify as sources of funds to buy other stocks that look like compelling opportunities.

The event to wait for is a major selloff in energy stocks that could still be months away. If the oil price does drop sharply -- especially if it gets back down into the $20s -- that will be the time to watch energy stocks closely. Share prices may not bottom at exactly the same moment at the oil price itself, but somewhere in there, oil stocks will become amazing bargains.

You won't be able to take full advantage of that buying opportunity unless you trimmed back your energy holdings when prices were spiking. So do that now. Then be patient and wait for the kind of buying opportunity that only comes once a decade.

Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.