2013: Is Investing in Oil and Gas a Good Idea?

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By Michael Sterling

With the rising of renewable energy in the near future, investors are often on the fence about investing in oil and gas. There is a saying that goes “whoever has the gold, makes the rules.” Well, in the 21st century “gold” can be translated into “oil”. Oil businesses from all over the country are making billions of dollars in profits, and yes they indeed make the rules – in business and in the market.

It’s tempting to think, because of climate change and recent legislation, that clean energy (i.e. solar power and wind power) will be sweeping the market in the coming years. Because of the world’s transition into eco-friendly energy, there has been much talk about oil being a thing of the past.

The Oil Conundrum

Oil and gas has never been a dying business. The world needs oil to run, and everyone wants to cash in on the opportunities. The conundrum is how can you grow your money in an already strong industry? The numbers alone can make you want to run to buy their shares, but the truth is it’s always risky.

The oil market is super confusing, and it’s not by accident. Prices at the gas pump are fluctuating daily and that’s always going to affect it’s market value. According to research, in 2008, 85 million barrels of oil were produced each day in the world. That’s some heavy production!

The smart investor needs to do some research on how the company produces their oil and where. In 2007, they discovered new reserves in Brazil which can hold a bright future for the next few years. Fields in Mexico and the North Sea are declining rapidly. Find out where the company drills and use common sense in deciding if they will be drilling an empty rig in the coming years.

Exchange Traded Funds

The smartest way to invest in oil and gas are by ETFs. They’re investment funds that allow investors to invest directly in the prices of oil and natural gas, but also give an option to invest in the stocks of companies which produce, make or ship oil and gas. In a sense, you’re not just trading stock, but you are trading an entire market or index. By having a collection of ETFs you are increasing exposure to all of their values. They can be bought and sold the same way an individual stock share is – which makes them more enticing.

Commodity ETFs -This type of ETF invests in such commodities like agricultural goods, natural resources, precious metals, and energy (yes, that means natural gas and oil). They can hold a commodity in physical storage or can invest in future contracts without the trouble of rolling them over. As an investor, commodity ETFs will benefit you long term.

While the price of gas goes up at the pump, this ETF will be frozen to the price it was at the time you bought it. When the American dollar gets weak, the price of gas usually goes up. Commodity ETFs will protect your investment from being affected. If you want to invest long term, these are the best way to go. Just keep up to date with the company’s progress. You can sell them at anytime during the day for much more money.

Bond ETFs – These types of ETFs exclusively invest in bonds, and are a slightly new addition to the bond market. They’re almost identical to bond mutual funds, meaning they hold a portfolio of bonds and have a variety of strategies from domestic treasuries to high yields, long-term to short-term, etc. They trade just like stocks and are passively managed.

They have more liquid than a mutual fund, which means they can be easily converted to cash. Bond ETFs can be traded throughout the day in the market, however there’s usually a broker fee involved. Since it has a wide range of strategies, many investors are leaning towards these bonds – especially in the energy industry. This is a great time to use these bonds for asset collection.

Foreign Stock ETFs – These ETFs can have a lot of gain or a lot of loss. In a sense, you are investing in a whole country.When investing in countries with high oil and gas production (like the Middle East), it can be a good way to bring the success of the oil industries to your pocket book. However, Foreign ETFs don’t just depend on a country’s high production of one industry, it depends on the entire nation’s economic and political development. So don’t be fooled.

When the world is in dyer need of oil and gas, they usually tend to depend on others who have it in high quantities. This would be great times to invest in these countries. However, be smart with it. There are a lot of greedy political leaders who use their power to puncture holes in certain markets on purpose. Do your research.

Oil versus Clean Energy Returns

The difference in oil returns and clean energy returns is painfully obvious. Oil companies received almost $450 billion in cumulative energy subsidies from 1994 to 2009. Compare that to the renewable energy industry who only received $6 billion. It’s clear who the world wants to succeed.

Still, wind is the fastest growing energy source in the U.S. Across the country, state laws are increasing the production of clean energy. This is mainly because of The Production Tax Credit (PTC). The PTC generates over $15 billion of private investments to wind farms every year. However one of their downfalls is that without tax payer money, the industry is doomed to fail, since the PTC is legislated through Congress.

According to a market report from the American Wind Energy Association, last year was a record breaking year for wind power. The industry surpassed 50,000 megawatts of electric power generation capacity, and this year added another 5,000. At the end of 2012, 15 states installed 1,833 megawatts of wind power.

Clean energy can be a great investment. Why? Because oil is going to run out eventually. Everyone knows that. But let’s not forget, the idea in investing is to make money. In the current market, oil is always going to be dominating over clean energy. However, companies like Nv Energy Inc. are slowly starting to question this idea. Nv Energy has been rising in the stock market and is getting seen as a dominating force in clean energy and could be the very thing that changes the industry.

The whole thing about clean energy is to think long term. Like I’ve been saying, oil companies are making money NOW, but the trick about making money in the stock market is to buy the shares while their cheap today so they’ll be worth more tomorrow. By putting your money in clean energy, you stand a good chance of reaping the rewards in the future when it does become the world’s primary source of energy – timing is key.