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From the Ground
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Although energy can be harvested from myriad sources—coal, nuclear, hydroelectric, wind, solar—nothing can come close to challenging the dominance of oil and gas as a source of energy. Roughly two-thirds of the "world's energy needs are supplied by oil and gas—not only to propel our cars and heat our homes, but also to fuel a large and growing number of electric power plants. It's no coincidence that the biggest companies in the energy sector are oil companies, such as ExxonMobil and BP.

From the Ground

Most of the energy we use starts out under the ground, locked up in the hy­drocarbons of dead plants and animals. Finding and mining this oil and gas, known as exploration and production, is how energy companies create a great deal of value.

In oil and gas, a large percentage of the world's resources are under countries that are members of the Organization of Petroleum Exporting Countries (OPEC) cartel, primarily in the Middle East . While this creates plenty of political issues, OPEC's existence is also a large benefit to the companies digging up the oil. OPEC's goal is to maintain industrywide profitability by keeping commodity prices artificially high, achieved by coordinating and limiting supply Though OPEC's members often cheat on their quotas, the cartel is extremely successful at manipulating commodity markets for the industry's benefit.

While the BPs and ExxonMobils of the "world (the so-called major integrated energy companies) are involved in pumping oil and gas from the ground, some companies focus specifically on this activity, which is usually called exploration and production or the upstream portion of the industry Although OPEC's production limits help these firms as well, they don't have the diverse assets of the major integrated firms. As a result, the volatility of commodity prices against the backdrop of a largely fixed cost structure makes profits wildly variable from one year to the next for firms that focus on exploration and production.

One question that inevitably pops into every energy investor's head is, "Will we run out?" Although there is indeed a finite amount of oil and gas on the planet, it will not be depleted in our lifetimes and probably not the life­times of our grandchildren, either. Technology has done an excellent job of making oil available that was previously thought to be inaccessible, such as deep under the ocean. Though some established areas, such as the Alaskan North Slope and the North Sea , are today starting to see diminished production, new finds and improved technologies continue to add to proven reserves at a faster rate than production is depleting them.

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