Investments in oil and gas present enormous opportunity for accredited investors, but many investors who are curious about investments in oil have a number of questions. Here, we will try to answer several of the most common questions about investments in oil and gas.
Where Does Oil and Gas Come From?
Fossil fuels are actually the remains of prehistoric animals and plants that have been compressed into hydrocarbons like oil, natural gas, and coal. The energy released from the burning of these hydrocarbons can produce electricity when properly harnessed. In addition to being processed for use as fuel in vehicles, fossil fuels supply electricity, heat for homes, and can be used for producing many of the products we use on a daily basis.
Oil and gas are formed from organic remains of mostly sea organisms. Over millions of years, the pressure and heat placed on the layer of sea organism sediment creates reservoirs of oil and natural gas within layers of rock which can be extracted with special equipment. While it can be expensive and time consuming to develop wells, oil and gas is often referred to as liquid gold because it is so valuable, making investments in oil highly profitable when successful.
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Why Should I Consider Investments in Oil and Gas?
Investments in oil and gas should be considered by any sophisticated investor seeking to protect wealth, stabilize a portfolio, or diversify. The declining global supply combined with the increasing global demand makes it an opportune time to consider investments in oil and gas. Petroleum based products are used for more than just making fuel for automobiles; everything from toothpaste to refrigerators rely on petroleum for their manufacture. As countries industrialize, not only does their demand for energy increase but so does their demand for manufactured goods, all of which drive demand – and therefore prices – higher.
Who Can Consider Investments in Oil or Gas?
Only well-qualified, sophisticated or accredited investors can consider investments in oil or gas. These investors are required to demonstrate adequate solvency. Accredited investors must have a net worth of more than $1,000,000 or an annual income of more than $200,000 ($300,000 for couples). Sophisticated investors must demonstrate a level of wealth sufficient that investments in oil will not exceed approximately 20% of net worth. These requirements are in place to ensure that you can withstand losses on the investment and that the investor will benefit from tax benefits available on the investments in oil.
Are There Risks Involved with Investments in Oil?
Any kind of investment has risk associated with in, and investments in oil are no different. There is a risk that an investor will lose all or part of his or her investment; there is the risk that the investor will choose to invest with an unethical company or be at risk for being victimized by a scam. However, losses can be offset to some degree with tax deductions, and risk can be minimized by performing due diligence prior to considering investments in oil or gas.