In most cases, the price of crude oil has little effect on utility stocks because petroleum is not a major source of fuel for electrical generation in the U.S. Utilities will often pass on the changes in fuel prices to their consumers, making them some of the most consistently profitable and conservative stocks for investors. Changes in oil prices can impact other sectors of the economy and the stock market, including the transportation industry.
U.S. Electrical Generation
Only a small fraction of the U.S. electric grid is powered by crude oil, according to the U.S. Energy Information Administration. Most U.S. electricity is generated by coal, which produces 37 percent; another 30 percent comes from natural gas. Crude oil only accounts for 1 percent of electricity generation in the U.S.
Fuel Costs and Utility Stocks
The fossil fuels most likely to affect utility prices are coal and natural gas. The prices of these fuels fluctuate, and most states, excepting such states as Washington, Oregon and Missouri, allow utilities to pass on the price changes to their consumers. Utility stocks in these exception states face higher exposure to changes in their fuel costs. Because some utilities have subsidiaries that produce natural gas and other fossil fuels, they may profit from higher prices of and increased demand for fossil fuels, according to Value Line.
Utility Stocks' Conservative Outlook
Utility stocks are among the most conservative investments. Their consistent dividends and steady price make utility stocks an ideal investment for retirement. According to USA Today, while the Dow Jones Industrial Average sank 7.9 percent in 2011, the Dow Jones Utility Average rose 5.6 percent over the same period. Utilities are popular investments because their dividend rates increase over time. But utilities can be forced to pay for expensive upgrades -- such as for adding renewable sources of energy -- that can hurt the bottom line.
Choosing Utility Stocks
While the steady dividends of utility stocks are attractive to investors, they can be overpriced, according to USA Today. Investors evaluate a stock’s value with the price-to-earnings ratio, with the higher the ratio indicating more expensive stock. But Forbes reports that when investors overvalue the yields they can gain from dividends, this can often drive up the price of utility stocks. Rising interest rates can also impact the performance of utility stocks, as the higher cost of borrowing can make upgrades and infrastructure maintenance more expensive for utility companies.
Video of the Day
- USA Today: Investing - Look beyond utilities for dividends
- USA Today: Investing - Utilities May Ease Some Stock Shock
- Value Line: The Effect of Natural Gas Prices on Utilities
- U.S. Energy Information Administration: What Is U.S. Electricity Generation by Energy Source?
- Institute for Energy Research: Petroleum
- Forbes: Don't Run Into Utility ETFs Seeking Safety
- Digital Vision./Photodisc/Getty Images