Smart investment in the energy sector: what to look for

The world will always need energy; indeed, it's a fair bet that an increasing amount will be needed in the future. With the global energy market valued at around $7 trillion, providing 10% of the world's gross domestic product, it's little wonder that nine of the ten highest revenue-generating companies are energy firms.

Playing it safe or taking a risk

Two factors to consider with any investment are your risk tolerance and your investment horizon. Do you want to make a quick profit, or are you prepared to let your investment mature over several years, or even decades? Greater risks mean potentially higher profits, but you can also stand to lose everything. The first rule is to diversify your holdings, preferably with a mixture of safe and higher risk investments. The second rule is to do as much research as possible, watching the market and consulting with experts. Thorough reading is essential and there is plenty of high quality material on the market. Available from Amazon, Fisher Investments on Energy is one of the best books in this particular area, suitable for newcomers and seasoned investors alike.

The fluctuating oil market

In 2014, we saw a sharp fall in oil prices, hitting shareholders hard, and experts warn that things could get worse before they get better. If you're prepared to ride out the slump, this makes it an excellent time to buy, as rising demand — especially from China, India and the Middle East — means that prices will certainly increase in the long term, and shares will rebound eventually.

Blue chip companies like Exxon Mobil remain safe bets, and have maintained a steady dividend for investors despite downturns and drops in share value. When prices do rebound, those with shares in smaller companies will see larger growth — if those companies survive. Exploration, production and service companies are currently among those hardest hit, but they could rebound spectacularly in the long term.

Going green

With the UK government looking to have 15% of energy production from renewable sources by 2020, green energy has attracted a lot of interest from investors. However, renewable energy companies are still considered a niche market, with all of the risks inherent to smaller companies. Search the Alternative Investment Market (AIM) for green energy companies like Good Energy or Renewable Energy Generation, which develops small wind farms then sells some of them on, investing the profit back into the company. A green energy investment trust will let you spread your investments under the guidance of a professional investor.

As a rule, it's safest to invest in projects that use proven technologies with the backing of an established company, rather than start-ups using experimental technology that may never get off the ground. On the other hand, with fossil fuels due to run out within 50 years, the search for alternative energy sources has become crucial, and gambling on new technology could also pay off.

While prices may fluctuate in the short term, the big picture is that energy prices will almost certainly continue to rise steadily as demand increases. As long as you invest in a broad range of options, now is a great time to invest in the energy market. 

Section:

Pete White Pete White

Love Shrewsbury editor and chief developer at The Web Orchard, find out more on petejwhite.com

Read More from Pete White