TIAA Global Asset Management

What does a transformed energy market mean for U.S. investors?

Brett Hammond, Senior Economist

Brett HammondThe world’s energy market is being transformed, as production surges in the United States and demand rises in developing countries. The transformation is playing out against the backdrop of oil prices hovering at a high enough level to stimulate pursuit of alternative forms of energy. Although the sector is vulnerable to external shocks that can trigger significant price volatility, we believe that energy is an attractive sector for investors, given the rising demand in emerging markets.

An historic change
Among the most noteworthy developments in the energy market is the U.S.’s emergence as a net exporter of energy for the first time in 62 years, according to the Wall Street Journal. The transformation has occurred rather rapidly. Just six years ago, U.S. imports of petroleum products exceeded exports by 900 million barrels.

There are three interrelated factors behind the U.S. export boom in energy products. First, with oil prices hovering around $100 per barrel, energy companies are incentivized to pursue alternative forms of energy. Second, U.S. public policy has encouraged energy exploration. Third, developing countries have an increased appetite for energy, while demand in the U.S. has been declining amid the economic slowdown.

In an otherwise-sluggish U.S. economy, energy was a strong performer. And oil-producing states are benefiting from the supply increases. North Dakota, for example, has a lower unemployment rate than any other state. This is thanks, in part, to a surge of employment connected to oil production, which totaled more than 464,000 barrels in September – up from less than 114,000 barrels five years earlier, according to the Wall Street Journal

On the horizon
Looking ahead, the long-term trend is for prices to continue rising for non-renewable energy sources – particularly once global economic growth accelerates and demand for oil increases in developed markets. The price increases will be driven by developing economies in particular, given their increasing consumption. Among the biggest markets for U.S. energy exports is Mexico and Brazil.

But just as higher energy prices can reflect stronger economic growth, they can also depress it. As Ben Bernanke, the Federal Reserve chairman, observed earlier this year, “sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored.” Given this dynamic, TIAA’s energy investments include a focus on oil and gas leases, and the underlying real assets associated with energy.

For investors, the surge in energy production has helped to make natural resources an attractive investment, particularly the land on which energy is produced. Energy companies have also performed well recently, particularly those specializing in new sources of traditional energy like oil and gas.

But investors in energy need to monitor the sector closely, given its exposure to developments in public policy, as well as court decisions, both of which can have a swift and severe impact. The ongoing controversy over the Keystone oil pipeline, which runs from Canada to multiple destinations in the U.S., is emblematic of how the energy sector can be targeted for opposition, and is a reminder of the potential for high volatility.