Updated on March 30, 2023
Estimated reading time: 6 minutes
Oil and gas is arguably one of the most important industries in the world; still, many investors ponder the benefits of investing in oil and gas. Some of the biggest companies worldwide are oil and gas companies, with revenues in the tens of billions. These companies have infrastructure projects spread worldwide and employ millions of people.
Companies such as ExxonMobil and Royal Dutch Shell have operated in the oil and gas industry for decades. From their inception, they rode the high and low waves that come with being in an essential, albeit controversial, industry. With the recent emphasis on climate change, many investors might wonder if there are still benefits to investing in oil and gas. This article explores the subject further.
Is it still a good idea to invest in oil and gas?
Fossil fuels such as oil and natural gas have remained in high demand since the industrial revolution. This is partly because they’re usually cheaper than other heating and transportation fuels on the market. The additional advantage they have is that they have a vast infrastructure advantage over emerging clean energy solutions.
Despite this, the industry is undergoing massive shifts that investors must keep an eye on to make informed decisions about their investments.
How to invest in the oil and gas market
The oil and gas market is affected by macro and microeconomic factors, allowing investors to capitalize on price fluctuations. The majority of oil trading takes place in derivative markets through futures and options contracts.
Although these avenues might be out of reach to individual investors, there are other ways to get a piece of the pie. One of the basic ways to invest in oil is by investing in stocks of oil drilling and service companies. Investors can also gain direct access to the industry through the purchase of energy sector ETFs.
Different sector mutual funds specialize in energy-related stocks like iShares Global Energy Sector Index Fund (ticker: IXC) and energy-sector mutual funds such as T.Rowe Price New Era Fund (ticker: PRNEX).
Despite the headwinds faced, the benefits of investing in the sector still far outweigh the drawbacks, as shown below.
Here are the benefits of investing in oil and gas
The oil and gas sector is highly liquid, with investors quickly buying in and out of the industry. This is a huge benefit, especially for beginners who might not necessarily be interested in investing for the long term. This is also advantageous for those who want to add diversity to their portfolio for a period of time.
Huge profit potential
Investors continue to be attracted to the oil and gas industry because of its potential to generate massive profits. Once a company successfully discovers and drills an oil well, it oftentimes can seem like they have literally struck gold. One oil well can sustain a business for many years, earning the business massive income and generating dividends for investors.
The return on investment can be as high as ten times more than the money initially invested. Therefore, if an investor puts their money in a small oil and gas company and it discovers an oil well, the return on investment can be astronomical.
The oil and gas industry is different from others because there is an ever-growing demand for its products. In addition, despite the recent emphasis on clean energy, there isn’t yet a reliable substitute for oil and gas. Therefore the demand will continue to increase for the foreseeable future.
A key benefit of investing in the oil and gas sector is the amount of diversification it allows an investor. The industry is indirectly proportional to the entire economy. This means the economy tumbles when oil and gas prices go up due to the increased cost of living and inflation.
As a result of the high dependence on this industry, when faced with massive challenges, it affects everything. This might be a huge disadvantage for other people, but it would be a win for investors. Therefore, if economic downturns sink your investment portfolio, your investment in oil and gas can hedge and mitigate your losses.
For investors looking to risk their money in any venture, the knowledge that the industry has lots of government backing ought to be a source of confidence. Many incentives and tax advantages are awarded to encourage participation in this industry. Governments get involved in boosting the economy and might even develop infrastructure to encourage investors in the sector. These incentives go a long way in ensuring the success of any oil and gas project and thereby safeguarding investors’ money.
In conclusion, the benefits of investing in oil and gas include high-profit potential, increasing demand, diversification, and government backing. However, before you invest in the sector, be sure to conduct research to make an informed investment decision.
What are the Benefits of Investing in Oil and Gas
- High liquidity
- Huge profit potential
- Increasing Demand
- Government backing
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