Investing in the energy sector is a fairly broad subject and requires a good amount of due diligence. While oil is one of the most important energy resources globally, the energy sector also includes natural gas, renewable energy sources, coal, etc. However, oil remains the most attractive option when it comes to investment in the energy sector. Like most other investments, investing in oil is also fraught with risks and rewards. Various experts such as Clark Weeks recognize risks investing in oil. Moreover, oil prices have always been highly volatile, making it even more important to study the risks before taking the plunge.
Understanding the Risks Involved
Geographical
Most oil and natural gas exploration and extraction are based on geographical predictions. It is only once the drilling process begins that one can truly estimate the costs involved. Some terrains can prove extremely difficult to drill. Therefore, before investing, make sure that you do exhaustive research on geologist reports, especially if you are investing in active drilling projects. Geologists often use open-ended words like ‘probable’ or ‘possible’ in their reports. So, look out for such phrases and words and know what you are getting into.
Political
Exploration within regions that are replete with political instability can increase the risk involved for the investors. Politics has been a strong regulatory force in energy sector investments. While most oil and natural gas companies aim to invest in political regions, this is not the norm. Moreover, erratic political changes or severe modifications in the policies of the ruling government can prove to be detrimental for exploration and refining projects if they are not in the sector’s favor.
Market Related
Such political, economic, and geographical factors have always ensured that the oil sector’s market prices remain volatile and difficult to predict. In recent times, we have witnessed how political instability in the middle eastern region has led to fluctuations in oil prices globally. Therefore, it is important to study the company’s projects before making an investment. You can align your investments better if you know the company’s future plans.
Reaping the Rewards
Returns
The energy sector attracts one of the largest investments globally in spite of the risks due to its excellent returns. Additionally, with advancements in modern-day technologies, both drilling and excavation have successfully curtailed the amount of risk involved. Additionally, even though oil fields remain for decades altogether, as an investor, you can see returns on your investment within a year.
Tax Advantages
Most of the income earned by investing in the oil and natural gas sector comes under tax benefit schemes. Due to the high risks involved, governments offer rebates to attract more investors. If you have done your research and invested in this sector, then you are highly likely to reap profits as well as tax benefits.
Portfolio Diversification
It is interesting to notice that the oil stock prices are usually somewhat counter cyclical. Unlike most other stocks that are aligned to the economic situation, the oil sector allows you a tool for investment portfolio diversification.
A financial advisor, Clark Weeks says there are risks investing in oil, but that investing in oil wells can be a good thing to do for certain qualified investors.
