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What Is the Energy Sector?
The energy sector encompasses a vast network of companies involved in producing and distributing energy essential for the economy. From extraction to distribution, these companies ensure the availability of energy sources like oil, gas, and renewable resources, powering homes, transportation, and industries.
The energy sector is a category of stocks that relate to producing or supplying energy.
Key Takeaways
- The energy sector encompasses companies involved in the production and distribution of energy, from fossil fuels to renewables.
- Companies in the sector are classified based on their energy source, such as non-renewable (e.g., oil, natural gas) or renewable (e.g., solar, wind).
- The sector is critical to industrial growth and varies considerably due to fluctuating energy prices driven by global supply and demand.
- Investment opportunities in the energy sector include stocks, mutual funds, and ETFs, appealing to diverse investor preferences.
Navigating the Complexities of the Energy Sector
The energy sector is a large and all-encompassing term that describes a complex and interrelated network of companies, directly and indirectly, involved in the production and distribution of energy needed to power the economy and facilitate the means of production and transportation.
Companies within the energy sector are involved in various types of energy. For the most part, energy companies are categorized based on how the energy that they produce is sourced and will typically fall into one of two categories:
Exploring Non-Renewable Energy Sources
- Petroleum products and oil
- Natural gas
- Gasoline
- Diesel fuel
- Heating oil
- Nuclear
- Coal
Harnessing Renewable Energy Sources
- Hydropower
- Biofuels, such as ethanol
- Wind power
- Solar power
- Hydroelectric
The energy industry also includes secondary sources such as electricity. Energy prices—along with the earnings performance of energy producers—are largely driven by the supply and demand for worldwide energy.
Oil and gas producers usually perform well when oil and gas prices are high. But energy companies earn less when energy commodity prices drop. Oil refiners benefit from lower feedstock costs when crude oil prices drop, allowing them to produce petroleum products like gasoline more cheaply. Furthermore, the energy industry is sensitive to political events, which historically have led to volatility—wild fluctuations—in the price of oil.
Major U.S. energy companies include Exxon Mobil (XOM) and Chevron (CVX), which are both large international oil firms. In 2020, Peabody Energy (BTU) was America’s largest coal producer measured by tons of output.
Fast Fact
In 2021, petroleum (36%) was the most consumed energy source in the U.S., followed by natural gas (32%), renewable energy (12%), coal (11%), and nuclear electric power (8%).
Key Players in the Energy Industry
Below are some of the types of companies found in the energy industry. Each has a distinct role to play in bringing energy to businesses and consumers.
Leaders in Oil and Gas Exploration and Production
These are the companies that drill, pump, and produce oil and natural gas. Production typically involves pulling oil out of the ground.
The Pipeline to Refining: Midstream Operations
Oil and natural gas must be delivered from the production site to a refinery to be refined into a final product, such as gasoline. Companies within this portion of the energy sector are called midstream providers.
The Role of Mining in Energy Production
Coal companies can be classified as energy companies since coal is used to power plants, including nuclear.
Investment Opportunities in Renewable Energy
Clean energy has attracted more investments over the years and is likely to grow in the energy sector. Examples of renewable energy include wind and solar.
Chemical Innovations in Energy Production
Some companies specialize in refining oil and gas into specialty chemicals, although many larger oil producers such as Exxon Mobil are integrated energy producers, meaning they produce multiple types of energy and control the entire process.
Important
The 2021 Infrastructure Investment and Jobs Act supports parts of the energy industry. In particular, part of the $550 billion in funding will be allocated to electric grid infrastructure and power lines, as well as expanding clean energy.
Strategic Investments in the Energy Sector
Investors have numerous choices in the energy industry, including equities of energy companies, mutual funds, and ETFs, as well as the ability to buy the commodities.
Exchange-traded funds (ETFs) are a basket of investments, such as stocks, that track an underlying index. Mutual funds, on the other hand, are a portfolio of stocks or investments that are selected and managed by a portfolio manager.
There are a number of energy-related ETFs that can give retail investors exposure to the energy industry. Investors can choose which part of the value chain they want with any number of funds. Below are a few examples of energy ETFs:
- The Energy Select Sector SPDR ETF (XLE) is a broad-based ETF that provides exposure to energy companies across the sector. Oil producers like Exxon Mobil and Chevron are in the XLE as well as technology suppliers like Schlumberger (SLB).
- The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) provides investors with exposure to oil and gas exploration companies.
- The Invesco Solar ETF (TAN) provides investors access to alternative energy investments.
How investors choose to invest in the energy sector will likely depend on their preferences and specific views about the growth and earnings prospects of the various companies. The energy industry is more extensive and diversified than merely the oil and gas industry. Many investors believe renewable and alternative energy sources will play an important role in the future, especially as the demand for electric cars continues to grow.
What Is the Energy Sector Responsible for?
The energy sector plays a crucial role in the economy. Aside from powering homes, transportation, and factories, energy sources are also a component in many of the products we use on a daily basis.
Which Are the Main Energy Sectors?
The Global Industry Classification Standard (GICS) breaks down the energy sector into two industries: “energy equipment and services” and “oil, gas, and consumable fuels.” There are then various sub-sectors:
- Oil and gas drilling
- Oil and gas equipment & services
- Integrated oil and gas
- Oil and gas exploration & production
- Oil and gas refining & marketing
- Oil and gas storage & transportation
- Coal and consumable fuels
What Is the Difference Between the Energy Sector and the Utility Sector?
The energy sector primarily consists of companies that play a role in extracting, refining, or producing sources of energy. Utility companies, on the other hand, focus on providing their customers with electricity, water, and other public utilities. Both of these sectors offer customers electricity in some way. However, their roles are different, with the components of the energy sector responsible for providing the energy that utility companies then sell to the public.
The Bottom Line
The energy sector encompasses a wide range of companies that are key players in the extraction, production, and delivery of energy products like natural gas, petroleum, coal, electricity, and renewables. While companies within this sector may vary in scope and specialization, they all share the fundamental goal of bringing energy to the market. The sector is crucial for powering the economy and facilitating industrial growth, and it is highly influenced by global energy prices and political events.
As renewable energy sources like solar and wind power gain prominence, they present new investment opportunities and require an evolving skill set focused on advanced technical and environmental knowledge.
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