How Oil Price Affects Utility Stocks

Oil and utilities are different things.

Oil and utilities are different things.

It's reasonable to think oil prices might have an impact on utility stock values, considering that both have a hand in the energy business. In reality, the direct correlation between oil prices and utility stocks is minimal. Oil is a very small part of the mix of fuels used for electric generation. At the same time, utilities are frequently able to pass on increasing energy costs to consumers through higher rates, limiting the impact of higher prices of any commodity.

Energy for Utilities

U.S. utilities use very little oil as a part of their overall generation mix. According to 2011 data reported by the Environmental Protection Agency, only 0.4 percent of electricity in the U.S. was generated by burning oil. By comparison, coal generated 42.3 percent of electricity, natural gas generated 24.7 percent and nuclear power generated 19.3 percent. Oil was also outranked by hydroelectric power, wind power, biomass and even geothermal power.

Actual Performance Data

Looking at the performance of the Dow Jones Utilities index relative to two exchange-traded funds that track the price of oil -- the United States Oil Fund LP and United States 12 Month Oil Fund LP -- indicates relatively little correlation between the value of utility stocks and the price of oil. While both dropped along with the broader market in the latter part of the first decade of the 21st century, the U.S. Oil Fund spent most of the time from mid-2009 to late 2013 bouncing around a tight band, as did the 12-Month Fund. The Dow Jones Utilities Index, on the other hand, steadily grew in value.

Utility Stock Stability

Oil prices can fluctuate based on a range of economic and political concerns. Utility stocks, on the other hand, are typically very stable. They enjoy their stability in large part because they are regulated to provide healthy and secure growth. This unique aspect of the industry helps utilities weather the tough economic times that can make oil prices drop. At the same time, the model also prevents utilities from benefiting from the boom times that may make oil prices go up.

Other Energy Sources and Utilities

While oil prices have little impact on utility stocks, the prices of natural gas or coal can have some impact. For example, when prices are lower, it reduces a utility's cost of buying and storing these commodities. This in turn can increase the utility's margins and profits, which might help its stock price move higher.

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