Source: Chuck Coker via flickr.com.
There isn't a more basic commodity than energy. Even things such as food, minerals, and materials all require energy before we can consume them. It is the building block of life, civilization, and for some investors, their portfolios. With companies and individuals spending trillions of dollars every year on energy, it is a great place for investors who like to put their money in for the long term and check back once every couple of years without a care in the world. Let's take a quick look at the energy industry and why investors should definitely consider making energy a part of his or her portfolio.
What is energy?
Think of energy like the lyrics to 80s power ballad "Don't Know What You Got Till Its Gone." We use energy all the time in our everyday lives, but we barely notice. If it were to suddenly disappear, though, there is a good chance our lives would look like something out of a Mad Max film.
Lots of people associate energy with either electricity or the gasoline that goes in your car, but there is so much more than that. Today, we produce and consume energy in a multitude of ways. Securing the sources of energy are so critical for economic development that energy has been -- and will likely always will be -- a major influencing force in geopolitics. In fact, many of the conflicts around the world have been related to the securing of energy sources.
What is the history of energy?
Using energy to benefit our lives dates almost as far back as humans do. We started using energy for the simple task of using fire to cook food. Since then, we have found more and more ways to harness energy to make our lives easier or more comfortable. The biggest fundamental changes in the way we use energy came during the industrial revolution and the advent of the steam powered engine and the first successful oil well that was tapped in 1859. These technological changes not only changed the way we produce and consume energy, it has set off a whirlwind of change in human energy use ever since.
Source: US Energy Information Administration
How many ways are there to invest in energy?
It can be extremely hard to comprehend the sheer size, scale, and diversity of the energy industry. According to the U.S. department of Commerce, energy is the third largest industry in the U.S., and 15 of the largest 25 companies in the world by revenue are in the energy industry. One part of the industry alone, oil and gas production, generates several trillion dollars of revenue annually.
Oil and gas are only a part of the larger industry, though. There are several sub-industries within energy that contain hundreds of different companies, some of which are hundred-billion-dollar businesses by themselves. Energy is generally divided into these main sector categories:
- Oil & gas
- Coal
- Renewable fuels (example: corn ethanol)
- Renewable energy (example: solar energy)
- Nuclear
- Electricity production (also known as utilities)
- Energy efficiency and grid optimization
With so many different industries and companies within each sector, there is something for almost any type of investor. If you are looking for stable income investments that will send you a quarterly check like clockwork, energy has them. Or if you are looking for some high-flying growth companies looking to break the molds, energy has those, too.
Why invest in energy?
Investing in energy is like investing in any other essential commodity. We depend on it to go about our daily lives, and economies depend on it to maintain growth. The U.S. Energy Information Administration estimates that global energy demand will more than double by 2040 as developing nations grow, which means there is certainly no shortage of demand for energy. This makes the broader energy sector a pretty stable one that normally indicates general economic health. That being said, there are certainly parts of the industry that are very cyclical, and investments in the sector can be much more risky as you start to look at very specific segments within the industry.
One of the most interesting parts of the energy sector in the future will be how we source that energy. Somehow, we will need to be able to meet those ballooning demands for energy while finding ways to mitigate the impacts that fossil fuel production and consumption have on the environment. This could be an immense opportunity for some companies while a major threat to many others.
