Investing in Energy

Investing in Energy

Energy is vital for the well-being of the global population and a necessity for economic growth. More importantly, it is absolutely essential to our daily lives. We’re reliant on energy to power our vehicles, heat and cool our homes and offices, wash our clothes, manufacture goods, etc.

As the global population grows, so too will the demand for more abundant energy. Which is why investing in the energy sector could be an important move for your portfolio in years to come.

What is the Energy Market?

The energy market is composed of a large group of companies that produce and/or supply energy. It includes drillers, refiners, producers, companies providing equipment & services, as well as exploration companies in the oil & natural gas sector. Think of the Exxon Mobils (XOM) and Chevrons (CVX) of the world.

However, this sector also includes integrated power utility companies such as those in the renewable energy sector.

Investing in non-renewable energy provides exposure to natural gas, petroleum, and coal. Uses included heating and electricity generation, fuel for transportation, feedstocks for chemicals/plastics/synthetic materials.

The major advantages of non-renewable energy are its reliability and ease of extraction, given that it is not weather-dependent, and can be accessed through drilling (onshore and offshore), mining, and fracking (hydraulic fracturing). Currently, about 85% of the world’s energy comes from nonrenewable fossil fuels—oil, natural gas, coal.

Renewable energy offers exposure to solar, wind, biofuels, geothermal energy, and hydropower. In the United States, renewable energy sources currently provide for 12% of total U.S. energy consumption and about 20% of electricity generation. These percentages are expected to grow significantly as public and private sectors shift away from fossil fuels.

Why Invest In Energy?

Presently there are 7.9 billion people inhabiting the world and it’s projected that number will reach 9 billion by 2037. Which is why it’s no surprise that in 2018 the U.S. Energy Information Administration (EIA) released a report that projected that global energy consumption will grow by nearly 50% by 2050 (1).

The EIA also predicts that the share of renewables in the U.S. electricity generation mix will increase from 21% in 2020 to 42% in 2050 (2). Solar and wind generation are responsible for most of that growth. Solar power is forecast to account for almost 80% of the increase in the US’s renewable electricity generation through 2050 (3).

According to Global Market Insights, the global wind energy market should grow by more than 69% from 2021-2027 (4).

You might think that because of these impressive growth forecasts for renewable energy that the non-renewable energy market will begin to shrink but that’s not the case. The transition away from non-renewable energy will not happen overnight, and will be measured in decades, not years.

This is attributed to technological advancements that make oil and natural gas cost-competitive to extract, a lack of infrastructure to support complete green energy deployment, and the fact that a significant portion of end-use demand for oil has limited alternatives.

The EIA is forecasting oil prices to be 25% higher by 2030 and 86% higher by 2040 (5). They also predict that the natural gas share of the U.S. electricity generation mix will remain at about one-third of total generation from 2020 to 2050.

How To Participate In Energy Investing?

Picking individual stocks in the energy sector can be tempting with the potential for high returns for early investors. However, diversification is the superior strategy, as not all energy stocks will be winners.

Therefore, the best solution is gaining exposure to the sector through energy-focused ETFs and mutual funds. A simple search on an AI investing app like Magnifi indicates numerous ways for investors to access energy funds with low fees.

References:

1. “Today In Energy”, October 7, 2021, EIA.gov, https://www.eia.gov/todayinenergy/detail.php?id=49876
2. “Today In Energy”, October 7, 2021, EIA.gov, https://www.eia.gov/todayinenergy/detail.php?id=49876
3. “Today In Energy”, October 7, 2021, EIA.gov, https://www.eia.gov/todayinenergy/detail.php?id=49876
4. “Wind Energy Market Share”, April 2021, gminsights.com, https://www.gminsights.com/industry-analysis/wind-energy-market
5. “Today In Energy”, October 7, 2021, EIA.gov, https://www.eia.gov/todayinenergy/detail.php?id=49876

Disclosures:

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare, and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of May 10, 2023 unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry, or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness, or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.

Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political, and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.