Houston reader R.C. writes: "In one of your columns, you said you would always have part of your money in an energy fund. I teach chemistry in a Houston college.   For 10 years I have been telling my students there is a good chance the world would have a major energy crisis during their lifetime and we could run out of oil.

"I have always had 50 percent of my retirement money in Vanguard Energy, and I have never felt it was a poor investment. Do you think we are in an 'oil bubble' like   the dot-com crash? Can you think of any situation, within reason, that would result in a major setback in energy as compared to the rest of the stock market? I know that I am being somewhat foolish in not diversifying since I am about 7 years away from retirement."

Actually, I haven't "always" had money in an energy fund. The idea of regarding energy as a separate portfolio asset began just before writing "The Coming Generational Storm" (MIT Press, 2004) with economist Laurence J. Kotlikoff. In the book we lay out the liabilities our government is creating for the future with Social Security and Medicare. We suggest those liabilities will be paid for with large amounts of inflation and newly printed money.

We came to the conclusion that energy should be treated as its own asset class because the BTU (British thermal unit) is the ultimate "currency" of industrial society. The producers of paper currency are working hard to create a global oversupply, while the producers of BTUs are having difficulty meeting demand and replacing reserves.

The best new book about energy is "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy" (Wiley, $24.95, 422 pages). While others have written about the idea of "peak oil," Houston investment banker Matt Simmons tells us about our dependence on a handful of Saudi oil fields, the concentration of global production, and the danger that Saudi production has already peaked. Then, as Boone Pickens believes, we could be in a losing scramble simply to replace declining production in a world of rising demand.

There is a big difference, however, between an investment idea and actual results. Consider the past. Of the seven energy/natural resources-oriented funds that have 20-year track records, Vanguard Energy is the only one that has beaten the S&P 500 over the period. If you had invested in Vanguard Energy in June 1985 and held it through May 2005, your annualized return would have been 14.13 percent, 1.77 percent a year better than the S&P 500.

US Global Natural Resources trailed the S&P 500 over the same period by 4.14 percent, AIM Energy by 1.96 percent, Fidelity Select Energy trailed by 1.73 percent, and T. Rowe Price New Era trailed by 0.44 percent. Putnam Global Natural Resources A shares trailed by 2.63 percent and Morgan Stanley Natural Resources B shares trailed by 3.16 percent. (All these figures are from Morningstar Principia.)

In fairness, I should note that only a handful of managed funds of any kind have beaten the S&P 500 index over the same period, so it isn't a big surprise that most of the energy/natural resources funds trailed the broad index. That's one of the reasons I don't write about "5 New Funds to Make You Filthy Rich by Next Saturday."

Whatever you believe about our energy future, 50 percent is too big a commitment. Safety is in diversification, not concentration.

Unlike the Dot-com bubble, oil companies have real assets, real earnings and solid dividends, and below-market multiples of earnings, book value and cash flow. They look like a cautious, value-oriented investment--- which is why I bought shares of many energy companies to create a kind of reserves-based index.

An energy development of Internet proportions could change the prospects of oil prices. That development could be a breakthrough in efficient solar power, successful fusion power, sudden acceptance of nuclear power, or some development that would lead to a dramatic reduction in hydrocarbon demand.

Is it likely? I hope so, but I'm not holding my breath.

On the web:

Tuesday, July 17, 2001: Unannounced but Real: An Energy Crisis

Sunday, July 15, 2001: The Twenty Year Green Monday (part 1)

Sunday, August 15, 2004: Engineer Knows the Drill

Archive of Matthew Simmons speeches, including "An Energy Tsunami Ahead"

A popular energy blog