View from the Observation Deck

1. The chart shows that the optimal industries to have owned in the energy sector over the past five years were distribution and storage. We did not include natural gas because its price fell approximately 67% over the period.
2. Crude oil prices rose from $61.79 to $106.55 (11.5% compounded avg.) over the same five-year span. Its supply/demand relationship is much different than natural gas. The U.S. can simply tap North American reserves  for its natural gas needs.
3. Obviously, the wars in Iraq and Afghanistan, as well as the potential for instability from strategic oil producers such as Iran, have helped elevate the price of oil beyond the normal supply/demand dynamic.
4. Global oil demand has not increased significantly (year-over-year) due to the slowdown in the global economy in 2011. Since the credit crisis in 2008, Americans cut their driving by billions of miles due to high gas prices and high unemployment.
5. But recent economic indicators reflect improvement in consumer confidence, auto sales and job creation, so demand could potentially turn higher.
6. Higher crude prices usually translates into more capital spending by the oil companies. It only makes sense that they would look to ramp up production to sell at current price levels.
7. The Barclays Capital "Original E&P Spending Survey" estimates that worldwide E&P expenditures will increase by about 10% to $598 billion in 2012. That estimate, however, was made using an average price of around $87.
8. Energy is garnering a lot of media attention. Investors have a multitude of investment vehicles (mutual funds/ETFs/Closed-End funds etc.) to choose from to potentially exploit this sector.
9. The first question can be the following: Do I want to own distribution and storage companies or focus on the companies that are involved in the process of extracting the oil? Perhaps the answer is both.