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Investing in oil; is it a good idea as the price of oil is hitting an historical high of $135 per barrel? How about that black staple of American energy production; coal? What about investing in energy sources for the future, such as alternative energy funds? As oil prices continue to rise, investing in alternatives may make sense. Oil could price itself out of a job somewhat if it keeps going up. Maybe some of these new technologies will step in to fill the gap. The problem is that oil provides little of our electrical energy. In addition, oil is still pretty cheap, relatively speaking, and there are few alternatives for many of the non-energy uses for oil. You can't pave a road or build consumer products from the sun, but you sure can with petrochemicals.

Is there a more or less direct relationship between the returns generated by alternative energy funds and the price of crude oil? It seemed like something that would bear checking into, so I did a little digging into the returns generated by some of the top alternative energy funds vs. the price of crude oil over the last few years to see if there were any correlations to be found.

As the price of oil goes higher it will make the price of power generated by conventional, oil fired generating plants commensurately more expensive. Oil is used to generate only about 2% of the power in the United States, so the price of oil should have only a slight relationship to the price of electricity on a national scale. Coal, on the other hand, is used to generate about half of the electricity consumed by your new big screen, so the price of coal may have a larger effect on alternative energy funds. I'll check both to see if this is the case.

The price of coal is exploding at a rate that is about on par with the rise in oil prices. If you're investing in oil, and want more commodity investments in the energy sector, it certainly bears looking into as another energy investment alternative. Appalachian coal sat at about $45 per short ton in September of 2007. Want to venture a guess as to where the price is now? Coal form the same region is now over $100 per short ton. Coal from other regions is also rising fast, but not at quite the same rate. For example Illinois basin sourced coal is now at about $57, where 9 months ago it fetched only $32. Maybe coal futures would have been a great bet last summer. Oh well, 20/20 hindsight.

Here is a look at light crude prices for the last 2 years:
2007 NYMEX Light Crude Oil Prices:

2008 NYMEX Light Crude Oil Prices:

As you can see, except for a dip in the first 45 days of this year, crude oil prices have exhibited a rather steady rise for the last 18 months.

Coal Prices since May of 2005

It's pretty hard to miss the rather dramatic spike in short ton coal prices over the last 9 months, as seen here, although it followed a roughly 30% drop in prices shown in the prior 9 months. Notice that Uinta Basic coal was falling, even as Appalachian coal was rising.

Now here are prices for some of the leading alternative energy funds. It's probably not a large enough sample to be truly representative, but it gives investors an idea. The first thing to note is their volatility. The next thing is that they seem to not be correlated to the relatively steady rise in oil prices exhibited over the last 2 years, except over the last 60-90 days, when the ones I looked have shown impressive gains (on the order of 20%). In fact, alternative energy funds have shown rather mediocre returns with the exception of this period, and could have been bested in a number of sectors.

I would have expected the rise in oil and to a greater extent, coal prices to have spurred investment in alternatives to these rapidly rising energy supply sources, and to have precipitated a rise in their prices. Some of the individual stocks have done fairly well, but as a whole the funds themselves have been underwhelming.

Here are pricing trends for a few alternative energy funds -

Guiness Atkinson Alternative Energy

New Alternatives Fund 

Powershares WilderhillClean Energy (PBW) - ETF 

You'll note that there seems to be a correlation between each other, but that's because they contain some of the same issues.

So, it looks like the price of alternative energy funds is not going to track with the price of crude oil, although both have experienced gains in the last few months. Perhaps this is the start of a trend, but then again, it may be an anomaly. They have shown a closer correlation with coal prices, but again, not a direct link. Thought this look at oil investing vs. investing in companies that make future energy sources would prove interesting.