As the world's population continues to grow and expand, its energy demands continue to rise exponentially, as well. With some analysts and policy makers predicting that global energy use will jump by 53% or more by 2035, investments in the energy sector have become popular choices for investors. Funds like the First Trust Energy AlphaDEX ETF (NYSE:FXN) have become portfolio staples, as investors capitalize on this trend. Most investor attention is focused on crude oil, coal and natural gas demand growth. However, one former "dirty" fuel source is seeing its star shine throughout the emerging world and could be an interesting side bet in the energy sector.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.


The "Go-To" Fuel
While diesel fuel maintains a poor reputation here in the United States, the rest of the world is going gaga for the energy. According to a report by the International Energy Agency (IEA), global consumption of the fuel type increased by 23% from 2000 to 2008. This trend is expected to continue, as emerging market economies are among the heaviest users of diesel and distillate fuels, with diesel fuel becoming the preferred transportation energy source in these countries. Nations like China and India are seeing car ownership jump and Latin America continues to import more of the fuel.

In addition, diesel is finding its place as an electricity generator. Israel's use of diesel fuel for electricity production nearly doubled during the first eight months of the year, versus the same period a year ago. Similarily, Indian diesel demand surged this past summer, as government subsidies made it cheaper to burn in power plants and factories. Analysts estimate that power shortages throughout China could add as much as 300,000 barrels per day to the nation's diesel demand.

It's not just the emerging world that is embracing the fuel source; developed nations have been shifting towards using more diesel, as well. Europe continues to import more low sulfur diesel, and in the United States distillate fuel is seeing a renaissance. The Corporate Average Fuel Economy (CAFE) rules require auto makers to design more fuel efficient vehicles, however the standard doesn't mandate how they improve that mileage. While hybrids and PHEV are estimated to be a bigger part of the pie, diesel engines, which can go about 25% farther per tank than their gasoline rivals, are expected to contribute as well. Analysts expect the CAFE rules will help grow the diesel engine market share to 8% by 2025.

Running a Portfolio on Diesel
With global consumption of gasoline only increasing by 7% during the 2000 to 2008 period, the shift has been made. For investors, the overlooked diesel market may offer an interesting side play in the energy sector. Unlike fuels such as natural gas, which have a variety of funds tracking it, like the United States Natural Gas (NYSE:UNG), diesel investors aren't so lucky. However, there are a few ways to play the shift, here are a few picks.

Recent refinery spin-off Marathon Petroleum (NYSE:MPC) could be a good bet for the growth in diesel fuel. In 2009, the company completed a $3.9 billion expansion of its Garyville, La., refinery and is now better equipped to produce diesel fuel. The firm's operations are in a prime location for export to South America. Marathon trades for a forward P/E of five and yields 2.5%. In addition, other refiners, including Valero (NYSE:VLO) and Shell (NYSE:RDS.A), are expanding their diesel export capacity and the pair could make interesting buys, as well.

The manufacturers of diesel engines will continue to benefit, as the shift towards the fuel source continues. Industrial firms Cummins (NYSE:CMI) and Caterpillar (NYSE:CAT) offer investors a way to play both the engine side, as well as the power generation side, of diesel. In addition, Parker Hannifin (NYSE:PH) offers a variety of filters and products for on-highway diesel engines.

The Bottom Line
As the world's energy demands continue to grow, investors have embraced the trend. However, much of that attention has gone towards natural gas, coal and crude oil growth. An opportunity exists in the global shift from gasoline to diesel fuel. The previous stocks along with mega-diesel exporter Exxon Mobil (NYSE:XOM) make ideal selections to play the shift. (For additional reading, see A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  8. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  9. Stock Analysis

    The Top 5 Platinum Penny Stocks for 2016 (PLG, XPL)

    Examine five penny stocks in the platinum mining business that investors may wish to consider adding to their investment portfolios for 2016.
  10. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center