Global energy demand is forecast to expand by 36 percent over the next 25 years … that’s the official forecast from the International Energy Agency (IEA) released late last year.¹

Not surprisingly, fast-growth developing nations account for fully 93 percent of the projected increase.²

China energy demand alone is set to surge by 75 percent over that period. And other emerging nations, including India and Brazil comprise almost ALL of the remaining increase in global energy demand, while developed nations like the US, Europe and Japan account for only a small fraction of the increase.³

The trouble is, global energy supplies simply aren’t keeping up with demand. It’s no wonder gas prices at the pump are well above $3 a gallon again … and perhaps climbing much higher. But this also leads us to a compelling investment opportunity we see ahead.

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In last week’s issue (Banyan Market Letter #4), we told you that one of our favorite long-term investment themes is agriculture — a sector driven by increased global demand — mainly due to changing diets in emerging markets.

We’re convinced that energy is another key investment theme that can endure over the long run too … and many of the same dynamics are driving it.

In a few minutes, we’ll share some specific ideas for how you can play the energy sector, but first let’s take a closer look at the underlying supply-demand dynamics.

Oil Demand Fizzles in US, Europe, Japan ... but Sizzles in Emerging Market Nations

World crude oil and liquid fuel consumption grew by about 2.4 million barrels a day in 2010 to 86.7 million barrels per day. That was the second largest annual increase in the last 30 years, more than offsetting the decline in energy demand over the last two years in the aftermath of the financial crisis and global recession.⁴

But it’s the details behind these numbers that illustrate striking differences in the two-speed global recovery that’s underway.

Energy demand in developed countries like the US has basically flat-lined for the past 18 months … still 8 percent below peak levels in 2007.⁵

Meanwhile, almost ALL of the expected 3.1 million barrel a day increase in crude oil demand this year and next comes from developing nations, where oil consumption has already surged to new post-crisis highs. Just take a look at the graph above.⁶

Confronted with this fundamental driver of demand for energy, global supplies simply aren’t keeping up.

Today, the developed world is more focused on energy conservation, as well as finding alternative sources, than it has been in the past. And in the aftermath of the financial crisis, the US, Europe and Japan are mature economies with slower growth trends that don’t require a sharp increase in energy consumption.

Emerging markets, on the other hand, are a whole different ballgame. With rapid economic growth and large population increases, the emerging world has a growing thirst for energy.

And there’s another factor you may not think of right off the bat, but it’s just as important in driving energy demand in developing markets: widespread fuel subsidies.

Subsidies Fueling Conspicuous Over-Consumption in Developing Countries

As we pointed out last week, the average emerging market consumer shells out a much greater share of income for the necessities of life, including food and fuel, than he ever has in the past.

Emerging market governments, keen to avoid civil unrest due to soaring food and fuel prices, spend a lot of money holding down those costs in the form of subsidies on everything from gasoline to electricity.

To keep energy prices artificially low, government subsidies amounted to an estimated $312 billion worldwide in 2009 — with the vast majority spent in developing countries, which accounted for 93 percent of increased demand growth.⁷

Of course, artificially low energy prices can lead to bad behavior for emerging market consumers who don’t feel the urge to conserve and have become insensitive to rising fuel costs.

All of these factors may point to higher energy prices over the long run. Fortunately, there are also some investment ideas available that may help you take advantage. And one of the areas of energy we’re focusing on is natural gas.

Contrarian Pick: Natural Gas

While crude oil prices hit a two-year high today thanks to unrest in Libya, natural gas prices have been in the doldrums lately, mainly due to a supply glut here in the US.

But looking longer term, natural gas could play a key role in meeting the world’s energy needs over the next few decades.

In fact, the International Energy Agency expects demand for natural gas to jump by 44 percent over the next 25 years — even faster than crude oil demand!⁸

One company we believe is well positioned is US blue chip Conoco Phillips (NYSE: COP), a leading global oil and natural gas producer that also yields an attractive dividend ... nearly twice that of the S&P 500 Index, in fact.⁹

Another diversified investment focused on prospects for natural gas is the First Trust Natural Gas Index ETF (NYSEArca: FCG). In the portfolio of this ETF, you’ll find 31 leading energy companies, including Conoco Phillips, Chesapeake Energy, Devon Energy and other large-cap firms that stand to benefit from the long run increase in energy prices.¹⁰

Keep in mind these are long-term investment themes that won’t necessarily hand you quick profits overnight. And as always, you’ll need to find out whether they might be suitable for your personal risk profile and investment goals.

But at Banyan Partners, energy is an important investment theme we’re keeping a very close eye on, and we expect the global energy sector to offer plenty of opportunities for patient investors.

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

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All opinions expressed herein are subject to change without notice. Banyan Partners and the advisory accounts that we manage may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. This report is not a complete analysis of every material fact with respect to any company, industry or security mentioned in this report. Please contact us for additional information.

The securities mentioned in this report may not be suitable for all investors. You must make your own decisions based on your specific investment objectives, risk tolerance, and financial circumstances and should always obtain current information and perform due diligence before you invest. Every security carries risk and the value of the stocks mentioned in this report may be adversely affected by commodities prices, exchange rates, interest rates or other factors. Past performance is no guarantee of future results.

This material has been prepared solely for information purposes and is not a solicitation or an offer to buy a security or instrument or to participate in any trading strategy.

Please contact us to receive our disclosure document, ADV Part II, for a full description of our services, including fees and expenses.

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¹ International Energy Agency: World Energy Outlook 2010: 11/9/10
² Ibid.
³ Ibid.
⁴ Energy Information Admin: Short-Term Energy Outlook, Feb. 2011
⁵ US Global Investors: Investor Alert, 12/3/10
⁶ Energy Information Admin: Short-Term Energy Outlook, Feb. 2011
⁷ International Energy Agency: World Energy Outlook 2010: 11/9/10
⁸ Ibid.
⁹ Bloomberg market data, 2/23/11
¹⁰ Ibid.