A Guide to Starting Your Hedge Fund

Chapter 3What Are Energy Commodities?

Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.

David Ricardo

Introduction

This chapter focuses on addressing two very fundamental questions for those interested in energy commodities:

1. What are energy commodities?
2. Why are energy commodities attractive for investors?

Though multiple books could be written about various aspects of energy commodities, we have distilled what we feel to be the key, practical nuggets of knowledge necessary to understand the major energy commodities. The latter half of the chapter builds on that base by looking at why this sector might be attractive for investors.

What Are Energy Commodities?

In the aggregate, oil, coal, and natural gas (i.e., the ‘Big Three’) remain the principal energy sources used by individuals and companies globally to fuel vehicles, provide electricity, and warm homes during the winter and cool them in the summer. Ancillary sources of energy include hydroelectricity, nuclear power, and renewable energy sources.

Oil

Owing to recent conflicts in the Middle East and catastrophic oil spills over the last few years, oil may evoke the most negative emotional response of all the energy sources. That said, oil has been a globally traded energy commodity for decades. In fact, until recently it was ...