Energy Sector
The energy sector is a sector, which comprises all industries that imply the production and sale of energy. The sector usually has organizations and firms that explore and develop gas and oil reserves, their drilling, their refining. Also, this sector includes integrated utility companies, for instance, companies specialized in renewable energy and coal. Throughout the last century, this sector was an economic driver, providing fuel for growth.
Categories of energy in the Energy Sector
The definition of the energy sector refers to the set of companies, firms and organizations, which help to support the economy and ease the process of production transportation. These companies are able to handle the task since they are deeply connected with energy production.
The companies, firms and organizations in the energy sector may create and use different kinds of energy. These companies are divided into categories according to the origin of the produced energy. It’s usually two types, the first is renewable energy, the second is non-renewable energy:
Renewable energy. This category comprises solar energy, wind energy, hydro energy, tidal energy, geothermal energy, biomass energy, etc.
Non-renewable energy. This one includes fossil fuels, nuclear energy, petroleum, natural gas, etc.
Electricity may also be counted as a source, but it’s considered as a secondary source. All over the world in most cases supply and demand define how much money should be paid for energy and how much money energy will bring to its producers.
For different sides in the energy sector different situations are advantageous. For instance, for producers, it’s good when gas and oil prices increase, but when prices fall, it’s usual for them to get smaller profit, while for oil refiners it’s better when feedstock prices decline. It’s worth noticing that the energy sector is highly responsive to what’s happening in politics, thus, it may lead to price volatility or fluctuations.
Companies in the Energy Sector
There are distinct kinds of companies in the energy sector, each one is important and has a crucial role in business and consumers’ lives.
Oil and gas companies. These companies are deeply connected to all the processes that the oil and gas industry requires. They not only produce oil and gas, but also drill and pump it. In other words, they pull oil out of the ground.
Pipeline and Refining. Oil and gas aren’t final products, thus, they need to be refined to become something that can be delivered. Such companies usually are described as midstream companies.
Mining companies. For example, since coal is utilized in power plants, coal companies are energy companies as well.
Renewable Energy. This kind of energy is extremely popular lately, moreover it attracts investors. It’s prone to become a part of a future energy sector.
Chemical companies. The main speciality of these companies is to refine oil and gas into chemicals. However, there are companies, which can combine exploration and production, they are called integrated energy producers.
Advantages of the Energy Sector for investors
Investing in the energy sector may be advantageous for the following reasons:
- Increased Diversification. An investor may purchase an ETF, and it will be more beneficial than buying individual stocks since individual stocks may be more volatile.
- Big companies. Companies in the energy sector are large and solid, many of them have been existing for an exceedingly long time. Thus, they aren’t likely to collapse, however, nobody can be sure.
- Constant demand. It’s believed that demand for the companies in the energy sector will be maintained for a long period since these companies are highly adaptable to the changes in the economic environment.
Disadvantages of the Energy Sector for investors
However, investing in the energy sector also implies some disadvantages:
- Overconcentration. In case an investor’s portfolio consists only of the energy sector stocks it can't give a whole picture.
- Industry risks. The government may establish regulations that will complicate controlling, thus, it may cause an increase in expenses. Also, lately policymakers encourage people to purchase electric cars, however, the industry is facing several problems that cause interrupting production.
Investing in the Energy Sector
Energy sector provides a wide range of investment opportunities, it may be energy companies’ stocks, mutual funds, ETFs, etc. For instance, exchange-traded funds or ETFs are pooled investment security similar to mutual funds, but unlike mutual funds, ETFs may be sold or purchased just like any security on a stock exchange. The other difference is that investments in mutual funds are chosen by a manager.
Here are examples of energy sector ETFs:
- The First Trust Nasdaq Oil & Gas ETF (FTXN).
- Vanguard Energy ETF (VDE).
- SPDR S&P Oil & Gas Equipment & Svcs ETF (XES).
However, investing choices should be totally the investor's decision, which is made thoroughly and carefully. Also, investors should take into account collateral events and other important information that may have an impact on stock indices. There are many different energy sources, not only gas and oil. Some believe in future power of renewable and alternative energy sources.
