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Three Energy Funds That Are Built to Last

If you must play the oil patch, demand a sober approach.

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Try as you might, it's been hard to avoid the specter of rising energy prices. Whether you're filling up your gas tank or paying your monthly heating bill, you're confronting the sobering reality that everyday costs aren't as cheap as they used to be.

When your costs are rising sharply, somebody else is probably making a bundle of money. In this case, it's energy firms. Here's why (in rather simplistic terms): Companies in the business of exploring, extracting, refining, and transporting oil and natural gas typically have enormous fixed costs. They can't erect oil rigs quickly or cheaply; it takes years and costs hundreds of millions of dollars. So when demand is strong--whether from higher unit volume or rising prices--energy firms are able to wring much greater profits out of their businesses, since they're spreading every new dollar of revenue over a fixed cost base. That dynamic tends to mean wider profit margins, higher returns on equity and, chances are, higher stock prices.

So with the price of a barrel of crude oil jumping nearly 30% over the course of 2004, it was no surprise that energy stocks were the top performers in the 2004 market. That, in turn, translated into plush returns for the typical natural-resources fund, which gained 27% last year.

Todd Trubey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.