There are many reasons to invest in energy and all its related sectors and companies. Energy is always in demand; its use is expected to grow; and investing in energy gives you opportunities to shape the future while earning income. But what, specifically, makes energy a fertile market for investment? The following list provides some insight.
The size of the energy market
Valued at around $7 trillion globally, energy is the most valuable market segment on earth. Delivery of usable forms of energy to the world's seven billion people is responsible for 10% of the world's annual gross domestic product.
A look at the ten worldwide companies that earn the highest annual revenue reveals that nine out of ten of them operate in the energy industry. That's because energy is so pervasive. It's required for every human endeavor. Because energy generates more revenue than any other industry, it is a prime place to stash your investment dollars.
According to the International Energy Agency, global energy demand will grow by more than 30% by 2035. China, India, and the Middle East will account for two-thirds of that growth. By then, global oil demand will be around 100 million barrels per day (mb/d) — up from 89 mb/d in 2012 — as the number of cars on the road will double to 1.7 billion. What's more, oil prices are expected to rise to $125 per barrel by then. Demand for electricity is forecast to grow twice as fast as total energy consumption, leading prices to rise 15% by 2035.
To meet rising energy demands, the world must invest $37 trillion in related production and supply infrastructure across all sectors of the energy industry over the next two decades. Over half of that total — $19 trillion — will be required by the oil and gas sector for exploration, transportation, and production increases. The remainder will go toward the electricity sector, with $17 trillion slated to be invested in upgraded natural gas and renewable generation, and an upgraded transmission and distribution network that maximizes efficiency.
As a result of constantly rising demand and prices, energy investments have returned above-average results for decades. For example, look at ExxonMobil (NYSE: XOM): Between 2003 and 2013, Exxon returned 140% compared to the Dow Jones' 40%. The same holds true between 1993 and 2013, with Exxon delivering 472% and the Dow returning 324%.
And it's not just Exxon. Over the last 15 years, The Energy Select SPDR ETF (NYSE: XLE), which holds a broad ranges of energy companies, outpaced the Dow Jones Industrial average by over 220%.
What do you think of when energy is mentioned? Oil perhaps? Electricity? Solar power? Wind? The fact is the energy market is so big that it encompasses a diverse array of market sectors. Oil, gas, coal, and nuclear energy only scratch the surface of the industry's offerings.
Biofuels require input crops, so energy investing is also agriculture investing. Most electricity plants, no matter the energy source, need water to be cooled, so energy investing is also water investing. And in the case of solar and other clean technologies, investments and revenue more resemble the semiconductor market, so energy investing is also technology investing.
Income and growth
Aside from diversified companies, energy investing allows you to pursue various investment goals. You also have blue chip value plays, growth companies, income opportunities, and the chance to hit it big with start-ups and exploration companies.
You'll need to determine the strategy that is most appropriate for your economic situation. But once you do, energy investing can help you accomplish it. Integrated oil and gas companies provide value and dividends, pipeline operators and master limited partnerships offer steady income payments, and immature oil and gas explorers can deliver hefty returns to the investor willing to take on a bit more risk.
Somewhere someone is always asking why gas prices are increasing. You never have to be that person if you invest in energy and follow it closely. You'll know that gas prices are about to tick up a few pennies when you see crude oil futures head higher. Or you'll know that when refiners switch off their summer blend, gas will be a bit cheaper in the fall.
When you're invested in something, you take notice and pay attention to what affects it. With energy, you'll know how the market is impacting your day-to-day life.
If you invest your money using a certain set of principles, energy investing can be a great tool. In the era of global warming and climate change, many individuals are seeking out investments that are good for their portfolios as well as the planet.
In energy, you can do that by investing in companies that promote energy efficiency or produce electricity with few emissions. There are smart grid companies; solar, wind, and biofuel companies; and funds that specialize in each.
With the advent of exchange-traded funds (ETFs), many investment strategies are now available to the retail investor. The ability to buy an entire sector with one fund, profit from commodity prices, and employ leverage and shorting can be effectively accomplished with ETFs in the energy sector.
You can buy a coal ETF, for example, to gain broad exposure to the global coal market without betting on one company. Or you can buy a leveraged fund that returns two or three times the daily price of a specific commodity.
Everything requires energy
Try flying a plane without energy. Or building a car. Or turning on the lights and computers at a bank. Hardly anything we do can be done without exerting energy. It's a requirement. So unlike some sectors that are dependent on consumer discretionary spending or others that have short-lived trends, energy is in constant demand. And while it's not entirely immune to swings and recessions, energy is certainly a safe and stable place to invest.