Pros and Cons of Investing in Gas and Oil

by

Investing in gas and oil is one way to ensure the growth of your wealth. This is because gas and oil demand never flatlines: all countries still primarily rely on gas and oil to run businesses, transportation, manufacturing and multiple other industries. Gas and oil powers every activity each person does. Cooking appliances, electronics and gadgets, cars, the lights people use at home and in the office… all these are basic necessities to everyday living, and all of these items run on gas and oil. But not all types of investments in gas and oil have positive effects. Like other investments, gas and oil prices are controlled by a lot of factors.

Advantages of Gas and Oil Investment

Profit margins always skyrocket when deep well exploration hits an abundant oil reserve. It is known that the return of investment could be five to ten times larger than the initial capital. The wells are able to pay off, and a rich well can last for years. An abundant oil reserve also starts to gain profit after 2 to 3 months of discovery.

A diverse portfolio that relies on multiple investments alongside oil will also be able to maintain a balance when stocks stumble. This is because economies and gas and oil market prices are usually indirectly proportional to the other. When the price of oil hits high, which it does sporadically, you will be able to bear the economic slowdown.

Investors of oil and gas also gain tax advantages, especially if they invest in limited partnerships. Around 15% of your share can become tax-sheltered income. When the stock suffers due to depletion of resources, private investors will accrue allowances and keep cash flow relatively controlled. Investors can also benefit from what is called Intangible Drilling Costs, where a percentage of their income in the first year is written off to cover for incidental expenses.

Disadvantages of Gas and Oil Investment

Despite the huge and fast return of investment and multiple tax advantages, investing in oil is not without its risks. For one thing, the market price of oil is always fluctuating. The profitability of an investment depends on a lot of local and international factors that are often beyond the investor’s control. The percent of loss varies, but losing 100% of the project is not rare, especially on small, exploratory ventures. Dry hole drilling is also another lose-all venture. But you can still accrue tax benefits for this.

Buying into a limited partnership or private company, where the gains are bigger, also means having to pay commissions that are higher than standard stockbroker fees. In addition, investing in smaller companies may mean that your share is less liquid than in larger or public companies. The income of the investor is also subject to operating and maintenance costs such as fees and production expenses.

Scams are not uncommon in gas and oil investing. A lot of companies can cheat investor’s money out of their pockets by deception. They could mask the real condition of the exploration, and lie about the interests or even the existence of a well.

Tips When Making an Investment

Before parting with your money, it is important to know about the company you’re investing in and understand their terms and the content of all contracts. It is also important for the investor to weigh in the risks and the benefits of a venture. Speculative projects are highly risky, but they can also yield greater ROI. But conservative or novice investors should stick to what they know until they have a security blanket to fall back to in case of losses.