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Energy mutual funds are one of the most popular investment options for a reason. It doesn’t take a genius to realize that energy is an absolute necessity and the demand will only increase over time. As demand increases and the world’s oil reserves decrease, the price for gasoline and electricity will continue a steady climb. Many people like to blame politics or a specific political party, but the reality is energy is a finite resource and as the reserves get smaller, the price will get higher. There are a few reasons for this:
New Economies: As previously third world countries begin their revolutions into the current century, the need for energy increases dramatically. Many of the energy mutual funds are set to take advantage of this trend. As manufacturing ramps up, so does the need for energy. The combination of manufacturing and even shipping globally put a massive strain on the worlds daily oil output.
Automobiles: As labor conditions improve in heavily populated countries, more people are beginning to purchase cars. In the past, only the ultra-rich were able to afford to have an automobile. However, this trend is shifting to more of a United States model. Having a car is considered a sign of wealth and stature, for this reason many people are looking to own an automobile in China, India, and elsewhere. In addition, people now have to commute further to get to and from work. This makes having a car kind of a necessity in countries where it wasn’t even a though just 20 years ago.
Regional Conflicts: As governments get destabilized and regional wars breakout, the supply of oil decreases. For the most part, the US purchases most of their oil from Canada and several South America countries, but the price is largely determined by the oil cartels in the Middle East. Many of the energy mutual funds make a living off of buying and selling based on the mood of the Middle East. When tempers flare, oil prices are never too far behind.
Peak Production: At some point soon, the seemingly endless oil finds will begin to dry up. When this happens companies will have to find oil elsewhere. Of course, there are still many untouched reserves throughout the world. However, it takes money and time to find these reserves. In addition, it also takes a lot more resources to take advantage of these new finds. Companies will have to drill deeper, go more remote, and basically have to spend a fortune to claim their oil finds.
There are also some funds that focus solely on renewable energy sources, but this industry is a long way from maturing. It could take decades before the industry is able to stand on its own in a global marketplace. The industry gets by now due to government subsidies and incentives to purchase the renewable energy sources. However, this cannot last forever so in my opinion these renewable energy mutual funds are overpriced. A shift in a large government’s policy from anywhere in the world could have a dramatic ripple effect throughout the entire industry. Germany is making some large investments in renewable energy. If more countries joined the cause, private business will quickly become more interested.
Before you purchase an energy mutual fund, you should definitely research the fund manager’s mandate. Consider exactly what the fund invests in and what are the criteria that will be met to make the fund manager change course. As with any investment, there is a lot of risk in the energy sector right now and there is little chance of this changing. All in all, the energy mutual funds are excellent investments, but you should still do your homework and purchase the fund with the best chance of taking advantage of the current market conditions.
