Industry and Sector Analysis: Energy

Estimated read time: 4 minutes

Have you ever looked at your energy bill and thought, "Can I be making money off all these electricity bills people pay every month?"

From heating your home, to charging your phone, to powering your car, it's hard to escape energy needs. That makes it a lucrative industry – one worth investigating as an investor. If you're considering investing in energy this year, here are a few things to keep in mind.

Overall Outlook

Overall, there is definitely opportunity to be seized in the energy sector, but it won't necessarily be easy to make the most of it. The problem is that the energy sector includes a wide array of companies, some radically different from others. With all those pieces in motion, the key to investing in energy is carefully choosing an investment strategy then researching to find the area that best fits it.

2018 was a rough year for energy. Stocks across all sectors ended the year on a down note, but the energy sector was especially susceptible to the downturn. Up until recently, the energy sector was a synonym for the oil industry. Carbon-based fuels like oil and coal have struggled in recent years, as economies around the world adjust their long-term energy plan to account for renewable fuels. If this trend continues, investors looking for the best long-term strategy may begin moving to solar, wind, and hydroelectric power.

However, there are signs 2019 may be a better year for "traditional" energy companies. Many analysts believe we're still decades away from renewable energy having the capacity to replace carbon-based fuels as a primary energy source. Perhaps due to being a relatively cleaner carbon-based option, natural gas has managed to maintain price growth despite production spikes. Some expect oil prices to make a sustained comeback this year, too.

For those interested in renewable energy, there are opportunities to become an early investor in several developing areas. Of course, the investment is also fraught with unknowns. In many cases, major growth depends on technology that is just speculative at this point. One emerging trend is a shift away from hydroelectric, and toward solar and wind power.

External Influencers

The energy sector is extremely vulnerable to shifts in public policy, demand and organizational decisions. Standing on the precipice of this larger shift toward cleaner fuel only adds to the volatility.

As an example of how public policy could affect investments, China has recently imposed stricter air pollution rules. That reduces fuel consumption and industry growth. Fuel consumption also falls when trade slows. We saw that throughout 2018, as trade tensions between China and the U.S. spiked. If those public policy trends continue, fuel sectors may take more of a hit.

We've seen rapid electric car demand growth in recent yecompaniesars. Car companies have responded by expanding the number of electric cars on the market, and auxiliary have profited off the spread of charging stations. The trend also changes the type of energy that's in demand. Instead of gas like a traditional car, electric cars use whatever the utility company feeds to the charging station. Depending on the part of the country you're in, utility companies could use oil, coal, natural gas, renewables or a mix.

Organizational decisions also play a large role for businesses in the energy sector, especially oil. When companies decide to drill, oil prices fall on the expectation that supply will rise. The opposite is also true, and the oil industry may soon enjoy the benefits of that. OPEC, a major coalition of oil-producing entities, recently decided to scale back production. That should help buoy oil prices, but it's important to remember that oil producers exist outside of OPEC. While OPEC certainly has an influence on the oil industry, it's not the only factor on prices.

Technology and Associated Risk

As a relatively new industry, renewable energy is especially susceptible to changes in technology. A major issue for renewable companies is storage; batteries can't store fuel as efficiently as oil or coal. Developing technology to store renewable energy will be a key step toward making it realistic on a larger scale.

As utility companies look to solve the issue of energy storage, individual consumers who want a cleaner fuel source may look to rooftop panels. We've seen that trend help push companies to produce cheaper solar panels. If technological developments make solar panels more realistic for individual home and small business owners, the companies behind the progress could enjoy robust growth.

How to Invest in Energy

There's no shortage of options for energy investors, but it's important to learn the difference between your options. Within the oil and gas industry alone, companies are usually separated into three categories: upstream, midstream, and downstream. Upstream companies search for fuel, usually by mining, drilling, fracking, etc. Downstream companies take the raw fuel, such as crude oil, and refine it into a product that can be pumped into cars and sent to utility companies. Midstream companies specialize in connecting the other two types of companies, through pipelines for example.

Renewable industries haven't been categorized into such succinct roles, but there are plenty of opportunities to invest. The Renewable Energy Group (ticker: REGI), for example, focuses on biofuels. Pattern Energy Group (ticker: PEGI), on the other hand, focuses on wind and solar projects.

There are also ETFs that allow you to easily add exposure to your investment portfolio. You can pick an ETF that specializes in the type of energy you're interested in. For example, SPDR S&P Oil & Gas Exploration & Production ETF (ticker: XOP) is all about fossil fuels. If you're betting on oil this year, XOP might be the ETF for you. If you believe clean energy is a safe bet for the future, check out iShares Global Clean Energy ETF (ticker: ICLN), which holds stake in solar, wind, and other eco-friendly ventures around the world.

As you can see, there's no shortage of ways to become involved in energy investing. Just pick your strategy, research some investment options, and then order the shares! And remember, investments should never be made in lieu of a savings account contribution, so remember to save throughout 2019 as well!