What is the Energy Sector, and How Does It Work?
The energy sector refers to stocks that produce or supply energy. The energy sector, or industry, includes companies involved with the exploration, development, drilling, and refining of oil and natural gas. The energy industry includes integrated power utilities such as coal, renewable energy, and cogeneration.
Understanding the Energy Sector
The energy sector is a broad and comprehensive term that refers to a network of interrelated companies that are directly and indirectly involved or involved in the production and delivery of energy.
There are many types of energy that companies in the energy sector can be involved with. Energy companies are generally classified according to the source of the energy they produce. This will usually fall within one of two categories.
Non-renewable
Petroleum products and petroleum oil
Natural gas
Gasoline
Diesel fuel
Heating oil
Nuclear
Coal
Renewable
Hydropower
Biofuels such ethanol
Wind power
Solar power
Hydroelectric
Secondary sources, such as electricity, are also part and parcel of the energy industry. The global demand and supply for energy determines the prices of energy –, as well the earnings performance -.
Oil and gas producers generally perform well when oil and gasoline prices are high. However, energy companies lose more when the price for energy commodities drops. When crude oil prices fall, oil refiners are able to benefit from the lower cost of fuelstock, which allows them to produce petroleum products like petrol. The energy industry is sensitive because of political events that have historically caused volatility and wild fluctuations in oil prices.
Exxon Mobil’s (XOM), Chevron’s (CVX), which are both large integrated international oil companies, are some of America’s largest companies in this sector. Peabody Energy’s (BTU) America’s largest coal producer was measured in tons of output in 2020.
Types and types of Energy-Sector Businesses
These are some examples from the many types of companies in the industry. Each type of company plays a different role in bringing the energy to businesses and consumers.
Drilling and production of oil & gas
These are companies that drill for, pump and make natural gas. The process of producing oil is usually done by extracting the ground.
Pipeline and refinement
Oil and natural gases must be moved from the site of production to a refinery, where they can be refined into gasoline. This sector is known as the midstream provider.
Mining companies
Coal companies might be classified as energy firms since coal is used in power plants including nuclear.
Renewable energy
Clean energy has attracted investment dollars and gained momentum over the years. In the future, it is likely to become a larger part of the sector. Wind and solar are examples of renewable power.
Chemicals
While some companies focus on refining oil or gas into specialty chemical, Exxon Mobil is one of the largest oil producers. They are integrated energy producers and can produce multiple types, as well as control the entire process.
Examples of Energy-Sector Investments
Investors have many options in the energy market, including the equities and mutual funds of energy companies, ETFs, and ETFs as well the ability to purchase the commodities.
ETFs (exchange-traded funds) are a collection of investments like stocks that track an underpinned index. Mutual funds, however, are a collection of investments or stocks that have been selected by a manager.
Many ETFs that are energy-related can provide retail investors with exposure to the energy market. Any number funds allow investors to pick the right part of this value chain. Below are some examples for energy ETFs.
The Energy Select Sector SPDR ETF XLE (XLE) offers exposure to companies in the energy sector. Exxon Mobil (Oil Producers) and Chevron (Oil Suppliers) are both included in the XLE, as is Schlumberger(SLB).
The SPDR S&P Oil & Gas Exploration & Production ETF XOP provides investors exposure to companies involved in oil and gas exploration.
Investors can access alternative energy investments with the Invesco ETF (TAN).
How investors invest in the energy industry will depend on their personal preferences and views about the growth potential and earnings prospects. The energy industry has a much broader and more diverse scope than that of oil and gas. Many investors believe that renewable energy and alternative sources of energy will play an important role in future, especially as electric car demand grows.
What is the Energy Sector Responsible?
The vital role of the energy sector is crucial to the economic success. Apart from powering homes and transport, energy sources also play an important role in many of the products that we use daily.
What are the major energy sectors?
Global Industry Classification Standard – GICS breaks down the sector of energy into two industries: oil, gas, and fuels. There are several sub-sectors.
Oil and gas drilling
Oil and gas equipment & services
Integrated oil & gas
Exploration and production for oil and natural gas
Marketing and refining oil and gas
Transportation and storage of oil & gas
Consumable fuels, coal and petroleum
What is the difference in the Energy Sector from the Utility Sector
The largest part of the energy industry is made up of companies involved in producing, refining, and extracting energy. Utility companies focus on providing utilities such as electricity and water to customers. Both of these industries offer electricity in some capacity. But their roles differ, with different components of the energy industry responsible for providing the electricity that utility companies sell to customers.
The Bottom Line
The energy industry is large. It covers many different energy sources like natural gas, electricity, coal, and renewables.
This means that the prospects of companies belonging to the energy industry can be quite different. The only thing that connects them all is that they are involved in bringing energy to market.
