When you think of the oil and gas industry, you might remember The Beverly Hillbillies or Dallas TV shows, or perhaps think of images you’ve seen of drilling rigs. Those associations aside, you may never have considered investing in oil and gas and its place among the myriad of “hot” sectors to invest in, such as technology and medicine. Or at least, investing in oil and gas probably isn’t the first thing that comes to mind.
But here’s a secret: Oil and gas can bring a wealth of untapped potential to the table. Don’t let it pass you by. We’ll give you five reasons why investing in oil and gas makes sense.
Despite advancements in renewable energy, such as wind and solar power, fossil fuels are in demand—so much so that OPEC analysts estimate our need will reach 110 million barrels of oil per day by 2045. Oil and gas power our world and will continue to do so for the foreseeable future.
Oil and gas continue to be the primary sources of energy worldwide. That’s because they power transportation and manufacturing and are needed for everything from heating oil for furnaces to plastics to jet fuel. On top of this, oil and gas account for a substantial amount of residential consumption, and products derived from oil and gas are found in an array of consumer products in every home, including yours!
But oil and gas are also finite resources, so balancing supply and demand will always be challenging—especially when conditions are out of our control. Case in point: Remember when the war in Ukraine in 2022 made prices jump because of supply concerns?
Renewable energy might be the new(er) kid on the block, but the oil and gas industry produces proven commodities that are ingrained in our society and will continue to serve as the core energy source for our world.
Investing in oil and gas fields today will be necessary to meet future demand. Field productivity declines over time, meaning that current fields will supply less and less of our future needs over the coming years. So new fields must be found to deliver the 10 million barrels per day of additional oil needed between 2030-2050 to sustain global oil demand.
On any given day, most investments either go up or down, and this can accelerate depending on the whims of the market. Oil and gas investments are no exception. However, because energy is a fundamental component of every global economy, there is a high degree of assurance that oil and gas will always return to a favorable position in the market. Further, oil and gas have been shown to have a low correlation to the broader market, meaning that the value of oil and gas investments may surge when other market sectors are faltering, essentially smoothing some of the volatility that may exist in a portfolio.
Oil and gas investments can provide significant income-generating opportunities and, in certain cases, some nice tax perks.
Direct investments in oil and gas assets can provide low-cost, continuing revenue for many years. Alternatively, investing in shares of publicly traded energy companies can provide both price appreciation and long-term dividend payments, some of which have shown remarkable resilience in both up and down markets.
Certain oil and gas investments can also take advantage of favorable U.S. tax treatments established decades ago to encourage more drilling. For one thing, 15 percent of oil and gas properties’ gross income is tax-free through the percentage depletion deduction. Further, investing directly in drilling programs may allow investors to deduct intangible drilling costs (IDCs) in the year incurred, which can amount to a majority of the upfront investment. These can be nice perks for investors looking for tax-advantaged investments.
As the saying goes, “You shouldn’t put all your eggs in one basket.” Luckily, investing in oil and gas helps add diversification to a well-balanced investment portfolio and can even temper the effects of inflation.
Too risky? Not so much. Because oil and gas can be uncorrelated to the broader market, investing in oil and gas can serve as a portfolio diversifier, both mitigating risk and enhancing overall returns.
Inflation isn’t always a bad thing. In fact, companies directly involved in extracting oil and gas benefit when prices increase — and so do investors. Consider this: The U.S. Consumer Price Index increased 8.5 percent year over year in March 2022 — while the energy category in particular increased 32 percent driven by a combination of gasoline, diesel fuel, and electricity — leading to rising profits for producers and larger distributions to investors.
Modern technology has improved the efficiency and profitability of oil and gas operations in recent years—so much so that not only have advancements reduced costs, but they have also reduced risks to producers.
Cloud computing, augmented reality, drones, blockchain, and more have all factored into oil and gas. These advancements have helped optimize complex processes, track down sources of loss and inefficiency, find and address methane emissions, give value to stranded natural gas, and even provide rapid response for operational disruptions.
For upstream companies, tech has captured significant value worth more than $5 per barrel of oil equivalent thanks to things such as tech-enabled exploration and drilling and condition-based maintenance. Plus, downstream companies have saved the equivalent of more than $1 per barrel and lifted their profitability with end-to-end hydrocarbon optimization, supply chain digitization, and more.
Certain oil and gas investments can also take advantage of favorable U.S. tax treatments established decades ago to encourage more drilling. For one thing, 15 percent of oil and gas properties’ gross income is tax-free. Further, investing directly in drilling programs may allow investors to deduct intangible drilling costs (IDCs), which can amount to a majority of the upfront investment. These can be nice perks for investors looking for tax-advantaged investments.
You have your pick of investments to add to your portfolio, but which are worth your while? Investing in oil and gas should be at the top of your list because the industry has been both essential and profitable for over a century, and indications are that it stands to remain that way.
Five States is an investment firm that issues funds for qualified investors to make direct investments in real oil and gas assets. If you want to learn more, please get in touch with us. In the meantime, keep an eye on our blog to stay in the loop about the oil and gas industry.