Fuel and similar sources of energy are fundamental in almost all facets of life. They power the production of commodities, transport, lighting, and all the appliances people rely on every day. It, therefore, makes perfect sense to think of investing in the oil industry given the high demand for its products.
Like all industries, the oil sector has its ups and downs. Are you likely to make a profit? Certainly, but challenges in the industry and the nature of your investment will play a role in how successful your venture is. As such, it is best to go in with your eyes wide open. Here are some key issues you may want to weigh before you pull out your checkbook.
The Nature of Your Investment
There are different ways through which you can invest in the oil sector. It depends on how much risk you are willing to take on, your expertise, and the resources you have. If you are just starting, investing in oil stocks may be the easiest and most affordable way to get in the game. The best part is, even if you are not particularly savvy on trading or oil, you can engage an investment firm to do it on your behalf. Do, however, do your due diligence on the firm.
If this is your area of expertise and you have the funds for it, oil exploration could be a viable option for you, even more so now that countries such as India and Iran are inviting foreign investors to invest in their oil industries. The challenge with this type of investment is that while it can be incredibly profitable, it is equally complex to set up. You will need to register a firm and navigate the foreign business regulations of the country where you choose to set up. It is, nevertheless, doable and could pay off in the end.
International and Regional Conflict
The oil industry was worth about $2.4 trillion in 2019. It is a highly lucrative business and involves a highly depletable resource. Oil reserves are also more prevalent in some countries than they are in others.
A conflation of these factors has often caused oil-producing regions to be prone to conflict. As an investor, you would notice that every time this happens oil prices are impacted thereby affecting your investment revenues. This is a risk factor worth keeping in mind as you choose where to invest. The UAE, for instance, is not as prone to conflict as Sudan and South Sudan, or Venezuela.
Demand and Supply and Fluctuations
Oil prices are determined by forces of supply and demand. When supply is higher than demand, the price of a barrel of oil goes down. Inversely, if there is a shortage of oil, the prices go up. As an investor, the higher the prices, the more your profits. If you have stocks, you would gain by selling some during shortage periods when stock prices have increased due to the higher value and demand for oil.
The takeaway here is that you would need to stay informed on these factors if you are to prosper in the oil sector. They would tell you when to cash out or double-down on your investment. Observing such trends could also inform you as to which oil subsectors are worth investing in based on the stability of their supply and demand forces. A volatile market is bad for business.
The Price of Admission
The amount of money you will need to start investing will depend entirely on your chosen area of investment. Remember, the oil industry is vast so you do not necessarily have to deal in heavy investments like exploration. Downstream ventures like a gas station could be more manageable and profitable. The costs would still be higher than trading stocks but the gains would likely be stable.
Further, as you weigh your investment options, be thorough about your due diligence. For stocks, make a shortlist of investment firms, their track record, and the fees they charge. For oil-related businesses like a fuel station, identify where to set up and get estimates of the costs involved. Such initiative will save you from getting blind-sided by costs and learning you bit off more than you could chew.
Safety Issues
All oil and gas products are highly flammable and there is, therefore, a high level of risk involved in handling them. Unsafe rigs are notorious for accidents that could literally burn an oil company to the ground leaving your investment at risk. This is especially pertinent if you plan to venture into the business as an exploring company, a fuel distributor, or a gas station proprietor. It can, nevertheless, still indirectly affect you as a shareholder in any oil venture.
As an entrepreneur in the oil business, invest heavily in safety. Bring in experts to install and inspect your pipelines. Be diligent about research as well and compare suppliers of inputs like pipelines and valves. You may find that a China ball valve manufacturer offers valves with better, safer ratings than your local dealers. It would be better to explore such options than rolling the dice with sub-par products to save on costs.
Conclusion
“No risk, no gain”, is a common mantra used in the investment world. It does, however, leave out the fact that it is best to be aware of the risk you are taking. Such risk could, after all, cost you money if it is not well-managed. Now that you know what lies ahead, choose your oil ventures wisely.
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