Investing in the energy sector: What to know now

An electric car being charged.

Investing in both traditional and renewable energy sources could be an important move for your portfolio in years to come. Here's why.

The coronavirus pandemic fueled a historic drop in demand for energy resulting in the first-ever negative prices for oil. As the economy has rebounded so have energy prices.

As the Biden administration turns its attention to infrastructure, including a focus on renewable energy, the question in many investors’ minds is should I invest in fossil fuels or alternative energy sources? John LaForge, head of real asset strategy at Wells Fargo Investment Institute, shares his perspective on the opportunities the energy sector could provide for investors.

Don’t overlook traditional energy sources

Though LaForge sees a strong future for renewables, he says they’re unlikely to overtake fossil fuels for decades because we’re still so heavily dependent on the latter. Around half of U.S. energy investment is still in fossil fuel supply, according to the International Energy Agency.1

“If you dig into the research — and frankly, if you just look around your house — everything in the room that you’re in right now was probably processed with oil and natural gas,” he says.

With that information in mind, LaForge says investors could consider focusing on large, integrated energy companies with reliable revenue in the fossil fuel industry — businesses with operations that span the entire supply chain from creation to customer. Infrastructure companies that provide services to developers but whose customers aren’t end users also may be worth a closer look.

If you do your homework and select a mix of these types of traditional energy companies  it may help cover your bases in terms of much of the creation and distribution process, as well as crucial infrastructure. The result could be a reliable stream of price gains and dividends, LaForge says.

Consider a longer view on renewables

One area in particular is driving rapid growth in renewables: Moving automobiles away from petroleum as a fuel source.

Electric cars are increasingly gaining attention as more auto manufacturers announce plans to build new fleets of vehicles that don’t rely on fossil fuels.

Though news about electric cars is driving headlines, other alternatives are also being developed, such as hydrogen as an energy source. These technologies may also be worth a closer look for investors, LaForge says. For example, the global hydrogen-powered transport market is expected to reach $20 billion by 2025, according to Research and Markets.2 And Saudi Arabia is building a $5 billion hydrogen plant that will be powered by wind and solar farms.3 It plans to produce hydrogen beginning in 2025.

Consider investing in both types of energy sources

“The examples above are why we recommend maintaining a diversified portfolio of renewable energy, and perhaps not committing to just one energy type — or car brand,” LaForge says.

For example, in the shorter term, fossil fuels and traditional energy companies could help produce a strong dividend and cash flow component in your investment portfolio. In the longer term, renewables and alternative energy are likely to experience growth as more widespread adoption takes place.

“The move to renewables is already on its way,” La Forge says. “New government policies could accelerate that transition. That said, traditional energy companies will still be around for decades. Having a portfolio with a broad basket of assets that combines both traditional energy and renewables can be a good long-term strategy.”

 

Footnotes


1 World Energy Investment 2020 Key Findings, International Energy Agency, May 2020.
2 Worldwide Hydrogen Powered Transport Industry to 2030 – Featuring Honda, Toyota and Hyundai Among Others, Research and Markets report, March 19, 2021.
3 Saudi Arabia’s Bold Plan to Rule the $700 Billion Hydrogen Market, Bloomberg, March 6, 2021.