At less than $70, the price of a barrel of crude oil might seem like a bargain when compared with last summer's $140 price tag. But go back to 2001, when oil was trading at about $30 a barrel, and it is easy to identify the trend.
No matter how you drill, mine or harness it, energy isn't getting cheaper. That immutable fact is supported by the basic principles of supply and demand, which includes a gloomy but pragmatic combination of reduced production and depleted resources combined with increasing demand from China, India and other fast-growing nations.
According to the Department of Energy's Energy Information Administration, demand for energy from 1965 to 2007 almost tripled, while the world's population doubled. EIA projections out to 2030 show the world's population growing by 78 million, or 1% annually, to reach 8.4 billion people.
Energy demand during the period is expected to grow 1.6% a year.
“The theme is growing demand for energy, in general, and oil alone can't meet that demand,” said Craig Callahan, president of Icon Advisers Inc., a $2.5 billion asset management firm in Greenwood Village, Colo.
The reality that oil alone won't be enough to support the booming growth already unfolding would seem to bode well for sources of energy now thought of as alternatives. The same growth factors, moreover, bode well for investments in traditional energy sources too.
According to an Icon research report, global demand for crude oil has grown by 37% during the past 20 years while oil refining capacity has grown by just 16.5%. Natural gas consumption is projected to increase at annual rate of 1.8%, which would deplete natural-gas resources within 40 years, according to Icon.
The $500 million Icon Energy Fund (ICENX), which employs a quantitative industry rotation strategy within the energy sector, is positioned for all the long-term trends.
The 12-year-old fund, which has a five-star rating from Morningstar Inc. in Chicago, is leaning heavily on traditional energy companies.
Year-to-date through Thursday, the fund had gained 10.3%, compared with an 8% gain by the Standard & Poor's 500 stock index and a 24.5% average return for Morningstar's equity energy category. The fund's lagging performance relative to the category is due largely to its domestic-only focus; other funds in the category are global, with less than 50% of their portfolios allocated to U.S. stocks.
The integrated oil and gas industry, at more than 50% of the portfolio, is the largest of the energy sector industries represented in the Icon fund. But, as Mr. Callahan explained, the door is being left open for migration into non-energy sectors that might hold gems of future energy.
Wind, solar, hydro-electric, as well as alternative fuels such as ethanol, all present potential longer-term opportunities, and these areas are likely to redefine and expand the energy sector. Mr. Callahan pointed out that many of the companies now considered to be in the alternative space are outside the traditional energy sector.
For example, San Jose, Calif.-based SunPower Corp. (SPWRA), a designer and manufacturer of solar electric power technology, is in the industrial goods sector. First Solar Inc. (FSLR), a Tempe, Ariz.-based manufacturer of solar electric power modules, is in the technology sector.
According to a 2008 report by Clean Edge Inc. in Oakland, Calif., total revenue from biofuels companies is projected to grow by 219% over the next 10 years, while total revenue from wind power, solar power, and fuel cell companies will grow by 177%, 265%, and 967%, respectively.
The report further projected that total annual revenue from such “clean energy” sources will reach $254 billion by 2017, from about $77 billion in 2007.
Beyond supply and demand, the broader energy category will also be affected by political and regulatory actions, including the controversial cap-and-trade legislation, which aims to limit corporate carbon emissions through taxation.
Ultimately, as Icon's research details, the continued development of non-fossil fuels is inevitable, but the growth of enterprises and technology linked to such non-traditional energy sources still is affected by the extreme volatility in oil and gas prices.
Regardless of the longer-term prospects for traditional energy, the handwriting is on the wall, pointing toward a much broader definition of what is now considered energy investing.
A new Investment Insights -column appears every Monday on InvestmentNews.com. E-mail Jeff Benjamin at [email protected].
