Serena ChenThe energy sector is a group of securities that have something to do with making or selling energy. Companies that look for and develop oil or gas reserves, drill oil and gas wells, and refine energy are all part of the energy sector or industry. Integrated power supply companies, such as renewables and coal, are also part of the energy industry.
In a Nutshell
- A complex and interconnected network of businesses that are directly and indirectly involved in the production and distribution of the energy required to power the economy and provide the means of production and transportation is referred to as the energy sector.
- Oil, gas, and consumable fuels and energy equipment and services are the two industries that make up the energy industry.
- Over the past century, the energy industry has played a significant role in driving industrial expansion by supplying the fuel for the rest of the economy.
- Companies in the energy sector are divided into two categories: renewable, such as solar energy, and non renewable, such as fossil fuels.
- While utilities concentrate on providing their customers with power, water, and other services, the energy sector primarily consists of businesses involved in extracting, refining, or manufacturing energy sources.
Understanding the Energy Sector
The energy sector is a broad and all encompassing term that describes a complex and interrelated network of companies, directly and indirectly involved in the production and distribution of the energy needed to power the economy and provide the means of production and transportation.
I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.
Thomas A. Edison
Companies in the energy sector are engaged in various types of energy. For the most part, energy companies are classified according to the origin of the energy they produce and usually fall into one of two categories:
Non Renewable
- Petroleum products and petroleum
- Natural gas
- Gasoline
- Diesel fuel
- Heating oil
- Nuclear
- Carbon
Renewable
- Hydropower
- Biofuels such as ethanol
- Wind energy
- Solar energy
- Hydroelectric
The energy industry also includes secondary sources such as electricity. Energy prices, as well as producers’ profits, depend to a large extent on global supply and demand.Oil and gas producers tend to perform well during periods of high oil and gas prices. However, energy companies earn less when the price of energy commodities falls. Oil refiners, on the other hand, benefit from the falling cost of raw materials to produce petroleum products such as gasoline when crude oil prices fall. In addition, the energy industry is sensitive to political events, which historically have caused volatility or wild fluctuations in the price of oil.
Some of the largest companies in the U.S. energy sector are Exxon Mobil (XOM) and Chevron (CVX), both integrated international oil majors. In 2020, Peabody Energy (BTU) was the largest U.S. coal producer measured by tons of production.In 2021, oil (36%) was the most consumed energy source in the United States, followed by natural gas (32%), renewables (12%), coal (11%) and nuclear electric power (8%).
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Types of Companies in the Energy Sector
Some of the types of companies in the energy sector are listed below. Each plays a different role in supplying energy to businesses and consumers.
Oil and Gas Drilling and Production
These are companies that drill, pump and produce oil and natural gas. Production usually consists of extracting oil from underground.
Pipelines and Refineries
Oil and natural gas must be transported from the production site to a refinery to be refined into a final product such as gasoline. Companies in this part of the energy sector are called intermediate suppliers.
Mining Companies
Coal companies could be classified as energy companies, as coal is used to fuel power plants, including nuclear power plants.
Renewable Energies
Clean energies have been gaining popularity and investment over the years and are likely to be a growing part of the energy sector in the future. Examples of renewable energies are wind and solar.
Chemicals
Some companies specialize in refining oil and gas into specialty chemicals, although many large oil producers, such as Exxon Mobil, are integrated energy producers, meaning they produce multiple types of energy and control the entire process.The Infrastructure Investment and Jobs Act of 2021 will provide support for parts of the energy industry. Specifically, part of the $550 billion in funding will go toward electric grid infrastructure and power lines, as well as expanding clean energy.
Examples of Investments in the Energy Sector
Investors have numerous options in the energy sector, such as shares of energy companies, mutual funds and ETFs, as well as the possibility of buying 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 selected and managed by a manager.
There are a number of energy related ETFs that can offer retail investors exposure to the energy sector. Investors can choose which part of the value chain they want with any number of funds. Below are some examples of energy ETFs:
- The Energy Select Sector SPDR ETF (XLE) is a broad based ETF that offers exposure to energy companies across the sector. Oil producers such as Exxon Mobil and Chevron are in the XLE, as well as technology providers such as Schlumberger (SLB).
- The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) offers investors exposure to oil and gas exploration companies.
- The Invesco Solar ETF (TAN) offers investors access to alternative energy investments.
.How investors choose to invest in the energy sector is likely to depend on their specific preferences and views on the growth and earnings prospects of individual companies. The energy sector is broader and more diversified than just the oil and gas industry. Many investors believe that renewable and alternative energy sources will play an important role in the future, especially as demand for electric cars continues to grow.
What is the Energy Sector Responsible for?
The energy sector plays a crucial role in the economy. In addition to powering homes, transportation, and factories, energy sources are also components of many of the products we use every day.
What 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”. Below are several subsectors:
- Oil and gas drilling
- Oil and gas equipment and services
- Integrated oil and gas
- Oil and gas exploration and production
- Oil and gas refining and marketing
- Oil and gas storage and transportation
- Coal and consumable fuels
What is the difference between the Energy Sector and the Utilities Sector?
The energy sector consists mainly of companies engaged in extracting, refining, or producing energy sources. Utilities, on the other hand, focus on supplying their customers with electricity, water, and other utilities. Both sectors provide electricity to their customers. The energy sector parts, on the other hand, are in charge of supplying the energy that utilities then sell to the public.
Wrap Up
The energy sector is a complex and constantly evolving industry. It is in charge of giving the economy the energy it needs and giving people the tools they need to make things and get around. Companies in the energy sector work with many different types of energy, from non renewable sources like oil and natural gas to renewable sources like wind and solar.
Investors have numerous options in the energy sector, such as energy company stocks, mutual funds and ETFs, as well as the ability to purchase commodities. The Infrastructure Investment and Jobs Act of 2021 will provide support for parts of the energy industry, specifically grid infrastructure and power lines, as well as the expansion of clean energy.
FAQs
Companies involved in the production and sale of energy, including oil and gas, electricity, and renewable energy sources, fall within the wide category of the energy industry. It covers businesses involved in the development of novel energy technology as well as those engaged in the exploration, extraction, refinement, and distribution of energy products.
The three primary categories of energy sources are nuclear energy, renewable energy sources, and fossil fuels (coal, oil, and natural gas) (solar, wind, geothermal, hydro and biomass).
Renewable energy sources are abundant, clean, and long lasting. They may be used to produce power without releasing greenhouse gases and do not harm the air or water. Additionally, traditional energy sources and renewable energy sources are becoming more and more cost competitive.
The expense of the technology and infrastructure required to support renewable energy sources is the biggest obstacle to the switch to them. Renewable energy sources are also sporadic, which means that they are not always accessible when needed.
By developing laws and regulations that encourage the development and use of renewable energy sources, the government plays a significant role in the energy sector. The government also offers subsidies and incentives to promote the use of renewable energy sources.
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- MSCI – Global Industry Classification Standard (GICS)
- U.S. Energy Information Administration. U.S. Energy Facts Explained
- U.S. Energy Information Administration – Table 10. Major U.S. Coal Producers, 2020
- State Street Global Advisors – The Energy Select Sector SPDR Fund (XLE)
- Invesco – Invesco Solar ETF (TAN)
- MSCI – The Global Industry Classification Standard (GICS)
- S&P – GICS: Global Industry Classification Standard
