Investing in the American energy renaissance

Every once in a while, you see something you've never seen before, such as a spiny bandicoot or a Canadian militant. But here's something you really haven't seen before: A period of seething Middle Eastern unrest — and falling energy prices.

West Texas Intermediate crude oil prices fell from an average of $106 a barrel in June to $104 a barrel in July, despite record levels of U.S. demand for crude oil, says the U.S. Energy Information Agency. The price of unleaded gasoline has fallen to $3.44 a gallon from $3.70 in April, and from nearly $4 three years ago.

At the same time, unrest in the Middle East has hit new highs, and turmoil in the Ukraine has raised fears that Russia might squeeze European natural gas supplies. Why aren't we eyeing $150 a barrel for oil? In large part, because of the revolution in U.S. oil production — and this has big significance for both the economy and investors.

The price of oil — and energy in general — is always important, but it's particularly important in this economy, where pay raises are harder to find than perpetual motion machines. When the price of driving to work or heating your home rises, you have little choice but to cut back on spending elsewhere: vacations, clothing or parts for that monster you've been building in the basement.

The good news is that oil prices are unlikely to soar in the next year or so, in large part because of increased supply in the U.S. The bad news is that prices are unlikely to drop terribly far, either. While fracking is producing lots of oil, it's an expensive way to get oil out of the ground, says Chris Faulkner, CEO of Breitling Energy. The EIA expects Brent crude — the predominant oil benchmark — to fall from an average $108 a barrel in 2014 to an average $105 a barrel in 2015.

With so much drilling activity, investing in oil services companies makes sense. The U.S. has 2,314 oil rigs operating both on- and offshore, up from 2,149 a year ago and 587 in 1999, says Baker Hughes. All those wells need equipment and servicing.

And, at the moment, it's relatively easy to start a new well — something that might not be true a few years in the future, if environmental fears about fracking grow. "Two years from now, that practice might be restricted," says Derek Rollingson, manager of the ICON Energy Fund. "There's some sense of urgency to get wells in production while there's still a favorable regulatory environment."

David Ginther, manager of the Ivy Energy Fund, likes the two giants in the field: Schlumberger and Halliburton. Schlumberger (ticker: SLB) is the leader in global oil services, and should benefit as fracking technology spreads worldwide. Halliburton (HAL) is the U.S. leader.

Companies that explore for oil and natural gas — and produce it — are logical beneficiaries of what Ginther calls the American energy renaissance. Two favorites: EOG Resources (EOG), a low-cost leader in energy production, and Continental Resources (CLR), which has big exposure to the Bakken Shale formation, a rich oil and gas field in Montana, North Dakota, Saskatchewan and Manitoba.

The big rise in U.S. production has three other incredibly important ramifications for investors and the economy:

• All that energy isn't going to move itself. "One of the largest gas fields in the U.S. is in the Northeast," says Ginther. "That means we have to build pipelines." Energy master limited partnerships, cherished by investors for yield, will also have good growth prospects, Ginther says. "Growth and yield — that's hard to find if you're in the U.S." Railroads, too, will benefit from the need to move newfound oil. Canadian Pacific (CP) will benefit from production in the Canadian tar sands, Ginther says.

• Lower energy prices mean lower costs for energy-intensive industries, such as petrochemicals and aluminum, says Ted Davis, manager of Fidelity Select Natural Gas Portfolio. "We've seen approvals for several new petrochemical plants on the Gulf Coast designed to export ethylene, primarily to the Asian market." Ethylene is used to make plastics. "The U.S. has become the low-cost producer of ethylene," he says.

• Although the U.S. is not energy independent, energy imports are less than half what they were a decade ago, and most of those imports are from Canada and Mexico, not the Middle East. "Our Mideast dependence is vastly diminished, and that has impacts on national security and our trade balances. It's practically immeasurable," Davis says.

Over the long-term, "the U.S. will be the greatest beneficiary of the energy renaissance," Ivy's Ginther says. But there's plenty that could go wrong in the short-term with major oil suppliers such as Russia, Iraq, Iran, Libya and Nigeria. "Supply and demand are very tight right now," he says. "I'm very nervous."