Profiting On the Rocky Road to Energy Independence

Meryl is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The United States will be the world's largest oil producer by 2020, according to the IEA, the International Energy Agency, and the world’s largest gas producer by 2015. 

It is about time.

The world’s first oil well began pumping in Pennsylvania in 1859. Over 100 years later, 1970, the U.S. became a net oil importer. Texas oil wells reduced output as cheap oil flooded the country.  Today Saudi Arabia is the world’s largest oil producer and Russia the world’s largest gas producer.

The first Arab oil embargo occurred in 1973, initiated as a protest against U.S. support of Israel during the Yom Kippur War. The same year Republican President Nixon introduced “Project Independence,” designed to break America’s dependence on foreign oil. Nixon announced, “We will lay the foundation for our future capacity to meet America’s energy needs from America’s own resources.” Congressional oil interests shot down any significant energy legislation.

Every President since Nixon talked about American energy independence, but the rhetoric rarely produced real progress.

President Reagan stated, “Energy independence is the best preparation America can make for the future.”

The first President Bush declared that, “…Congress...should…enact measures to increase domestic energy production and energy conservation – in order to reduce dependence on foreign oil.”

President Clinton recommended tax cuts and initiatives encouraging energy conservation and the development of new energy sources.

The recent boom in domestic energy production can be summed up in one word: fracking. Fracking is a process used to extract gas and oil from underground shale rock. There is a lot of controversy over the environmental impact of fracking, and the debate will not end soon. But the amount of gas and oil produced grows yearly.

The U.S. currently imports about 20% of its energy needs. Domestically produced energy reduces imports, decreases the amount of American dollars flowing overseas, and diminishes the influence energy imports play in geopolitics.

How can investors benefit from the move towards energy independence?

Pioneering industries attract large companies determined to get a piece of the action as well as new companies eager to get in on the ground floor and reap the rewards of a growing industry. Investors need to tread carefully when investing in individual firms engaged in a new, young industry. Larger companies are a safer play, but the fledgling industry is often a small part of the company’s total business. 

There are two ways to invest in alternative energy with the objective of making money while minimizing risk. One possibility is an ETF (exchange traded fund) holding a basket of companies working in the latest industries and technologies. The second is the purchase a large energy company investing in alternative energy.

There are currently over twenty alternative energy ETFs. Many limited to one type of alternative energy floundered over the past few years.

A more promising outlay would be an ETF invested in a broad range of alternative energy companies, such as the Market Vectors Alternative Energy ETF (NYSEMKT: GEX), the PowerShares Global Clean Energy Portfolio (NYSEMKT: PBD), or the iShares S&P Global Clean Energy Index Fund (NASDAQ: ICLN).

The following chart illustrates the similar price path the three funds traveled over the past five years. Should the economy continue to improve, investment and production in the alternative energy field will increase. That bodes well for the companies and the ETFs tracking them.

GEX data by YCharts

A new ETF, opened early 2012, concentrates on companies involved in the fracking industry. The Market Vectors Unconventional Oil and Gas ETF contains about 44 companies, three-quarters of them U.S. companies and the remainder Canadian and Australian corporations.

Government alternative energy initiatives encouraged corporate investment over the past few years. Alternative energy encompasses a variety of businesses, including solar, wind, smart grid, fuel alternatives, efficiency and environmental. A lot of publicity followed the bankruptcy of a number of companies in the energy field receiving government seed money, the most infamous Solyndra. Statistics, however, indicate the Department of Energy funded over 1,300 renewable energy-related companies. Less than 1% went bankrupt.

A number of large energy companies invest in alternative energy, including BP (NYSE: BP) and Chevron (NYSE: CVX). The BP Deepwater Horizon disaster in the Gulf of Mexico continues to haunt the company environmentally. The U.S. government on Nov. 28 suspended BP from new government contracts.

Chevron, although recently added to the Nasdaq Global Sustainability Index, has its own mixed environmental history, including a complicated lawsuit by Ecuador against the company. Chevron, however, has made many positive energy initiatives and is the world’s largest geothermal energy producer. It is working on additional energy sources including solar, wind, and biofuel, but the company remains a fossil fuel behemoth.

GE invests in wind technology, but wind is a very minor business sector. GE is also involved in fracking. Halliburton is a major supplier to companies involved in the hydraulic fracking business.

Alternative energy is currently a confusing, chaotic but important growing industry. Investors need to weigh the political arguments over the cause and/or existence of global warming, the environmental dangers (or not) of fracking, and other issues. Each investor must decide where he or she stands on these questions and invest accordingly. 


Fool Contributor MerCyn owns one stock mentioned in the article, Chevron. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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