The price of oil has fallen these last few weeks but energy costs remain high, and some (including myself) believe the downtrend is temporary. Before discussing how an investor can profit in alternative energy, it is important to understand the energy problem. People blame high prices on speculators, OPEC, oil companies, the weak dollar and taxes. These may all play a role but when you step back to view the forest instead of the trees it’s all about supply and demand.

The demand story is well told. For all the attention paid to China and India (and rightly so), rising demand in Saudi Arabia and across the middle east is nearly as important. Since 2004, Saudi oil consumption has increased nearly 23%. Saudi Arabia and other oil exporters will meet their own demand before they attempt to meet the world’s demand.

The supply story is seldom told, but is the crux of the problem. The bottom line: The world’s big oil fields are producing less, sometimes alarmingly so. The most striking is in Mexico where output from the country’s once-mighty Cantarell field has plunged by a third in less than a year. The depletion rate of the world’s biggest oil fields is estimated as around 4.5% to 8% per year.

Despite the potential for profit in today’s high prices, crude oil production (just crude, not natural gas liquids) topped out in May, 2005, and that may stand as the peak that Matthew Simmons, author of Twilight in the Desert, and other “peak oil” experts have predicted was imminent.

High energy prices have turned the focus to alternative energy solutions. The success of the Toyota Prius, which still can’t be produced fast enough to meet demand, demonstrates the profit potential in energy solutions. Texas oilman T. Boone Pickens is turning his focus to wind power, funding the world’s largest wind energy plant. Innovation has never been greater in wind, solar, hydrogen, and other alternative energy methods. This is the upside to high energy prices.

Investors can participate and profit in the booming alternative energy market, but picking individual companies to buy is scary. If you purchased Pets.com in the 1990s because you believed in the power of the internet, then your investment was a bust. It’s disappointing to be right on the sector and wrong on the stock.

With exchange-traded funds (ETFs), investors can buy a security that holds a basket of stocks within a particular sector. For example, if you want to invest in solar energy, you can purchase the Claymore Solar Energy ETF (ticker TAN). This ETF holds the largest publicly traded solar companies in the U.S., China, Germany, and other countries. If you want to invest in wind energy companies, you can purchase the newly traded First Trust Wind Energy ETF (ticker FAN).

A more diversified choice is the popular PowerShares Clean Energy ETF (ticker PBW). This ETF holds the leading companies involved in renewable energy and technologies that facilitate cleaner energy.

These exchange-traded funds can be bought or sold just like a stock. They allow investors to participate in the alternative energy sector, a sector that is becoming increasingly important as our country becomes more energy independent.

David Vomund
http://www.etfportfolios.net/