(FORTUNE Magazine) – AS OIL PRICES CONTINUE THEIR seemingly inexorable rise toward $60 a barrel, Wall Street strategists and ordinary investors alike are grappling with the same question: When will stocks begin to feel the heat? After all, crude is in uncharted territory (crossing $57 a barrel as FORTUNE went to press). And few experts expect energy costs to ease substantially anytime soon. To make matters worse, the usual models the pros rely on to gauge the economic impact of surging oil prices aren't really working--in fact, most observers doubted oil would ever get this high.

No one knows exactly where the tipping point lies, but some observers, like Merrill Lynch's Rich Bernstein, believe we've already passed it. He notes that companies that depend on discretionary spending by consumers are already among the market's worst performers, citing the sharp drop of stocks like eBay and Home Depot this year. "The consumer is responsible for 70% of the economy, and every additional penny at the pump takes $1.5 billion out of people's pockets," he says. "Gasoline futures have risen 32 cents in March alone, which equals a $48 billion tax increase." Indeed, sales of gas-guzzling SUVs and large pickups have been slowing in recent months. And the announcement of a huge earnings shortfall by GM in mid-March only underscores the effect on consumers.

Combine all that with a Federal Reserve that's steadily raising interest rates, says Bernstein, and you have a recipe for a drop in consumer spending that will keep a lid on stocks. "The consumer won't implode, but this will be the year he disappoints," Bernstein predicts. Speaking of interest rates, other strategists, including Morgan Stanley's Byron Wien, say higher crude prices are one suspect in the 40-basis-point rise in bond yields over the past month. Typically a spike in oil prices pushes up manufacturing costs, which leads to higher prices for consumer goods and eventually, of course, to rising inflation. The Fed in turn tries to control inflation by raising interest rates. That puts additional pressure on stocks, especially banks and other interest-rate-sensitive sectors.

This time around, the economy and the stock market have been slower than usual to exhibit the usual symptoms of increased energy costs. While crude prices rocketed more than 60% over the past 12 months, the S&P 500 rose a respectable 6%. That's mainly because we're not as dependent on oil as we were during previous price shocks in 1974 and 1979. Standard & Poor's chief economist, David Wyss, notes that the average household now spends roughly 5% of its income on energy, vs. 8% in 1979. The shrinking manufacturing sector and the growth of the service economy mean that energy costs now total just 7% of GDP, half what they equaled two decades ago. For higher oil prices to have the impact today that they had back then, argues Wyss, crude would have to surge past the $100-a-barrel mark.

Some observers even suggest that higher oil prices have been a healthy headwind for the strengthening economy, allowing the Fed to be less aggressive and more measured in its rate hikes. None of this means, however, that our economy has become immune to the deleterious effects of $50 oil. Even an optimist like Wyss concedes that if oil prices don't retreat soon, he'll have to shave half a percentage point off his estimate for GDP growth this year and reduce his projected gain in the S&P 500 from 8% to 4%.

For investors, figuring out how to handle this kind of environment is tricky, because there are few parallels with past markets. During the oil shocks of 1979 and 1990, notes Petroleum Industry Research Foundation president Larry Goldstein, the economy was already weakening, and spiking energy prices merely tipped it further into recession. Coming on the heels of a recovery, the run-up of the past year has dampened growth rather than choked it off. But with oil prices now approaching what even bulls like Wyss consider a turning point, investors should think about weatherproofing their portfolios for an environment in which oil prices stay above $50 a barrel.

That doesn't mean simply buying shares of a few big oil companies and maybe an energy-oriented mutual fund. Oil stocks have already had a stunning run: The benchmark oil index rose 28% last year and is up another 20% so far this year. Most of the easy money has already been made. And oil analysts like Fred Leuffer of Bear Stearns say even a modest pullback in oil prices would hammer energy shares in the short term. A better bet would be to identify energy companies that will prosper in the long term even if crude prices moderate. At the same time, says Citigroup Smith Barney strategist Tobias Levkovich, investors should lighten up in sectors that tend to perform poorly when oil prices are high.

Echoing Merrill's Bernstein, Levkovich says retailers are one group for investors to avoid (for more on the sector's outlook, see "King of the Retail Jungle"). "Instead of spending their money at store X," he says, "consumers will be spending it at gas station Y." This phenomenon is more pronounced at lower-end chains like Wal-Mart, which is down 10% over the past 12 months. Airlines are an obvious victim, but financials are another segment that could suffer if oil prices don't drop and inflation fears grow, forcing the Fed to become more aggressive on rates.

In the energy sector itself, investors should look for companies that are boosting their annual production, since that helps earnings even if prices fall. This is harder than it sounds, because existing fields in Alaska, Texas, and the North Sea are getting tired, and many new prospects tend to be either state-controlled or in remote, hard-to-drill sites. Among the industry giants, BP (BP, $65) has had the most success in pumping fresh oil and gas, thanks to assets in Russia and the deep-water Gulf of Mexico. The British giant's production should jump 5.5% this year, compared with 4% for Exxon Mobil and 1% for ChevronTexaco. In addition, CEO John Browne has said he intends to return excess cash to shareholders, so BP is buying back $8 billion of stock a year and recently increased its dividend by 26%. BP now offers a yield of 3.2%, compared with 1.79% for Exxon. That's a nice cushion if oil prices do end up pulling back.

Among the smaller names, Leuffer favors Murphy Oil (MUR, $103) and Unocal (UCL, $62). Based in Arkansas, Murphy Oil is hardly a well-known name (unless one is mistaking it for the wood-cleaning product). But Murphy has had tremendous success finding offshore oil in Malyasia, and it boasts the fastest production growth--12% to 15% this year--of any company that Leuffer follows. Unocal has been in the news lately as a possible takeover target for one of China's emerging oil giants. That has helped push its shares up 44% already this year. But Unocal still has a trailing price/earnings ratio of less than 15 and projected annual production growth of 7%. Its strong position in natural gas only adds to its appeal.

There are plenty of potential buyers with very deep pockets who might consider an acquisition of Murphy or Unocal. Between them, says Leuffer, Exxon Mobil and ChevronTexaco have enough buying power to snap up virtually all of the publicly traded, independent U.S. oil exploration and production companies. Exxon alone has $23 billion in cash on hand. "Oil companies have so much money, they don't know what to with it," says Leuffer. "For many of them, it's cheaper to buy than to explore."

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