The energy industry is a crucial sector in many modern economies. Growing demand, technological innovations, high competition and effective supply chains will continue shaping the energy sector. Energy companies will need to keep up with these changes to stay ahead.
It’s is a category of stocks that relate to producing or supplying energy. The energy industry or industry includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, and refining. The energy industry also includes integrated power utility companies such as renewable energy and coal.
UNDERSTANDING OF ENERGY INDUSTRY
The energy industry is a large and all-encompassing term that describes a complex and interrelated network of companies, directly and indirectly, involved in the production and distribution of energy needed to power the economy and facilitate the means of production and transportation.
Companies within the energy industry are involved in various types of energy. For the most part, energy companies are categorized based on how the energy that they produce is sourced and will typically fall into one of two categories:
- 1
Nonrenewable: petroleum products and oil, natural gas, gasoline, diesel fuel, heating oil, nuclear, coal
- 2
Renewable: Clean energy has gained traction and investment dollars over the years and is likely to be a growing part of the energy sector in the future. Hydro power, wind power, solar power, bio fuels, hydro electric
CHALLENGES
Economic activity: The energy industry’s ability to earn revenue is tethered to the business cycle. Economic activity significantly impacts energy demand. Factors such as employment, industrial production, housing, disposable income and gross domestic product (GDP) drive the business cycle. During periods of economic expansion, energy production increases, which raises the price of commodities. In recession periods, demand and commodity prices drop. When the price of energy commodities decreases, energy companies earn less profits.
Cost reductions for renewable energy: The cost of electricity from renewable energy is much cheaper than fossil fuel plants. Since electricity consumption is increasing, renewable energy is the most cost-effective way to meet the high demand. This investment in renewable energy means power companies in the nonrenewable sector will have to face fierce competition in a saturated market.
Geopolitics: Political events influence the energy industry by making products less available or changing the cost of commodities.
Asset management: Energy businesses have high capital expenditures since they own large amounts of fixed assets, including processing equipment, land for reserves and facilities and transportation infrastructure.
Weather conditions: The weather impacts the energy industry through severe conditions and natural disasters. These circumstances can damage the infrastructures that support the sector and disrupt business. Commodity prices also tend to increase in seasons with pleasant conditions.
Research and development: Many energy companies invest in research and development to update their methods to the most efficient ones. This practice also helps companies, and the energy industry as a whole, adapt to changing environmental policies.
