How can you profit from the energy crisis?

President Putin seems to be enjoying himself at the G8 summit - and little wonder. With Russia occupying a pivotal position in the global energy market, he can afford to throw his weight around. But how can ordinary investors protect themselves from the burgeoning energy crisis?

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Energy is one of the most important issues on the global economic agenda at the moment. And unfortunately for those in the West, all the cards seem to be held by capricious or downright hostile powers.

The risks of our reliance on the Middle East for oil become more and more obvious with each passing day. Israel and Lebanon are not important in terms of oil production, but the conflict could easily spread through the region, which could certainly mean oil spiking above $100 a barrel.

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And as President Putin swaggers around the G8 summit, throwing admittedly pithy insults at his peers in the US and UK you can read the details below - the problems of relying on Russia for a stable gas supply are also becoming more apparent.

It's not the most comfortable position for UK consumers to be in. But although individual investors can't do much about geopolitical instability, you can take steps to protect your wealth from an energy crisis or even profit from it. Here's how...

President Putin seems to have been enjoying himself at the G8 summit, responding to other leaders' criticisms of his regime with some cutting comments of his own.

The Times reports that when George Bush suggested that US citizens wanted Russia to "promote the sort of democratic institutions that exist in Iraq" Mr Putin responded: "To be honest, we certainly would not want to have the same sort of democracy as they have in Iraq."

He also had a dig at Tony Blair, mentioning Lord Levy and the fight against corruption when asked about the UK's concerns over Russian democracy.

There's good reason for Mr Putin to feel confident. As Alex Brummer pointed out in the Daily Mail last week, he "literally has the world over a barrel." Russian gas giant Gazprom owns one-third of the world's proven and probable gas reserves and provides nearly a third of all gas used in Europe. The country is also sitting on vast oil reserves.

And with no prospect of falling energy prices in sight, Russia can afford to ignore its critics. Even The Sunday Times's David Smith, who has consistently predicted a fall in oil prices, sounds a lot less sure of his forecast these days. "Whether oil drops to $40 a barrel, as I still (perhaps heroically) expect, it is hard to envisage another era of cheap oil."

Russia's new-found importance can be seen in reactions to the flotation of state-owned oil giant Rosneft on the London Stock Exchange, due later this week. There are serious legal concerns over the listing - not to mention the fact that it's somewhat over-priced (you can read more about this in our recent piece: Is Rosneft too risky to invest in or just too expensive?).

But despite these concerns, UK heavyweight BP has confirmed it will invest $1bn in the company. And both China's National Petroleum Corp and Malaysian group Petronas bought into the group too.

"This has everything to do with securing future supplies from a Russian administration that is as willing to use the oil weapon as Opec is," says Mr Brummer.

The shift in the power balance to resource-rich countries comes as the UK is losing its energy self-sufficiency. In May, we imported more oil than we exported. And as David Smith points out, in the next 25 years, "North Sea oil and gas production, equivalent to 4.5m barrels a day as recently as 1999, will wither away, possibly to just 500,000 barrels a day."

By 2020, the UK "will be importing between 80% and 90% of our gas, much of it from less-than-reliable Russiawhether lights stay on will depend on supplies outside of our control."

So should you be looking to invest in Russia's oil and gas sector? Not necessarily. We published a piece from On Target's Martin Spring on Gazprom yesterday, pointing out the risks and rewards of buying into the company - if you missed it, you can read it here: Two energy stocks to invest in now

The trouble with both Rosneft and Gazprom is that they are ultimately in the hands of the Kremlin. So the interests of foreign shareholders are not a priority. And political interference is bad news for other reasons too - state-run companies tend to be inefficient.

Buying into FTSE 100 oil majors BP or Royal Dutch Shell is a much simpler and less risky way of playing the rising oil price.

You should also be looking to companies best-placed to benefit from the quest for alternatives to oil. Coal is increasingly in demand, particularly from China, while other alternatives include ethanol - you can read more about these here: What will be the fuel of the future?

And even if nuclear power doesn't make a return to the UK, plenty of other countries are committed to building new plants, including India and China. Subscribers can find out more on which companies will do well out of this trend in the current issue of MoneyWeek or by clicking here: Return to nuclear fuel will boost uranium prices

And if you're not a subscriber yet, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.

Turning to the wider markets...

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The FTSE 100 fell again, losing 6 points to close at 5,701 as mining shares slid on falling metal prices. Xstrata shed 4% to £19.86 while India's Vedanta Resources shed 4% to £12.78. For a full market report, see: London market close

Over in continental Europe, the Paris Cac-40 fell 30 points to close at 4,750. The German Dax-30 was down 5 points at 5,416.

Across the Atlantic, US stocks were mixed as the tension in the Middle East remained at the forefront of investors' minds. The Dow Jones Industrial Average climbed 8 points to 10,747. The S&P 500 shed 1 point to end at 1,234, while the tech-heavy Nasdaq was flat at 2,037.

Asian markets slumped as fears over the impact of high oil prices on the global economy took their toll. Japan's Nikkei 225 dived 408 points to 14,437.

Oil was a little lower in New York this morning, easing back to around $75.20 a barrel. Brent crude was higher, rising to around $75.90.

Meanwhile, spot gold fell back as far as $641.60 an ounce before clawing back ground to trade at around $648 an ounce. Silver was also lower, trading at around $11.10 an ounce.

And in the UK this morning, shares in online gambling firms have slumped after David Carruthers, chief executive of Betonsports was arrested in the US as part of a crackdown on internet gambling.

And our two recommended articles for today...

How capital gains tax encourages bad investment decisions

- Tax returns are time-consuming and often incomprehensible but the most annoying thing of all, says Tom Bulford for the Daily Reckoning, is the absurdity of the rules governing capital gains tax. To find out why CGT rules encourage us all to be long-term investors to the detriment of the markets, and the economy see: How capital gains tax encourages bad investment decisions

Is a global recession on the way?

- There is a growing consensus that 2007 will be a period of recession in the US. If that's true, then investors should be concerned about asset prices now, say Andrew Selsby and John Robson of RH Asset Management. What's more, their review of four major bear market warning signs from the impending debt crisis to the sickly state of the US housing market suggests that a stockmarket decline is almost ce rtainly on the way. To find out what it all means for your investments, read: Is a global recession on the way?

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.