May 08, 2005

The Energy Problem

Over the past eighteen months, energy stocks have taken over the market. Here is a chart of the performance of the Amex Oil Index vs. the S&P 500: The image “” cannot be displayed, because it contains errors. Not coincidentally, several social indexes have lagged the S&P 500 over this period. The broad-based social indexes typically hold 1-3% of their investments in energy stocks, far less than the 7% or so held by the S&P 500. The oil sensitivity of the social indexes has not been a secret - Dan Dibartolomeo and I wrote about it in a Journal of Investing article in 1996. But in those days the energy sector was delivering indifferent performance, giving social indexes a performance boost. Today that dynamic is working in reverse. An analyst at Goldman Sachs has famously predicted that oil could reach $105 a barrel. Performance-minded investors in social indexes should hope it doesn't. But isn't that a little odd? From an environmental perspective, higher oil prices would probably be beneficial: expensive energy encourages conservation and the development of alternative fuels. This is one instance where active investors may have an advantage over passive ones. An active manager can choose to manage this risk by buying more energy stocks - an unmanaged index can't.


Blogger Jeff MacDonagh said...

True in the short run (next 1-2 yrs), but I would argues that above normal oil prices should help social investors (and the environment) in the long-run (5-10 yrs) for two reasons:

- stock price increases already reflect higher prices and the effective increase in reserves due to economic feasibility of hard-to-get oil. Otherwise, most publicly traded oil companies are facing a future of declining reserves. The Economist survey last week did a beautiful job outlining oil's difficult future.

- sustained high oil prices will act as a tax, and thus reduce equilibrium demand for energy-intensive products (chemicals, power, transportation, etc.). Social investors are categorically underinvested in these industries.

The last reason, although I'm not 100% sold here due to lack of good data, is that social investors tend to invest in more energy efficient companies within a given industry.

6:21 AM  

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