Top Risks for Investing in Oil and Natural Gas

Every investment opportunity has its share of risks. Whether you’re putting your money in real estate, buying and selling gold, or trading stocks, you are bound to face, not only general management risks but industry-specific threats. In the following post, we will take a look at investing in oil and natural gas, to see what you are putting on the line while investing in this specific industry.

Politics

If you are at all interested in oil and natural gas, you’ve probably read quite a bit about government regulations on this investing industry.

All oil and natural gas companies are limited by governmental regulations, concerning the locations, times, and processes for oil and gas extractions.

These regulations typically vary from state to state and are known for increasing considerably with governing oil and natural gas deposits outside of the country.

In an ideal investing world, oil and natural gas companies would mine exclusively from politically stable nations, which would adhere to long-term leases.

Unfortunately, oil and gas is a limited resource, and those looking to invest in either or both must often deal with the politics of less structured nations.

This is where the bulk of politic risk stems from, as these unstable countries often have shifting governmental structures and unenforced regulations.

Many American oil and natural gas companies find the deals they agree to with foreign companies ending prematurely.

Foreign countries’ governments may choose to disregard initial capital investment for their own greater profits.

This is generally the case of countries with dictators, newfound nationalization, and corrupt domestic corporations.

These risks are best avoided by creating effective relationships with international partners, which are built on trust, understanding, and sustainability.

Geology

As an investor, you should look for investing in things that are generally high in demand, low in supply, and difficult to acquire.

As you can probably tell by today’s rising gas prices, we’ve just about tapped out our resource of easily obtainable gas and oil.

We’ve used up most of what we have easy access to, and now we are forced to investigate more treacherous drilling zones (like the middle of the ocean) and unconventional oil extractions (using complex combustion, steam, and carbonation techniques).

The geological risk you face as an investor is directly affected by the difficulty of the oil or gas extraction. With more complex extractions, there is a high potential that reserves will produce less oil and natural gas than originally estimated.

These risks are best avoided by working with oil and gas geologists who test frequently and will give you the most accurate level of “proven,” “probable,” and “possible,” when discussing their geological estimates.

Supply and Demand

Due to the complicated nature of extracting oil and natural gas, oil and natural gas prices are known for being particularly volatile.

Drilling and other complicated extraction methods require enormous investments of time and capital, which can easily result in huge losses.

In addition to these direct risks, the prices of oil and natural gas fluctuate with changing economic factors.

Unfortunately, there is no planning for supply and demand risks, but this is true of most investing. Your best bet is to be extra careful with investing during times of economic uncertainty.

Capital Costs

As previously mentioned, drilling and complicated extraction processes require huge start-up costs.

These costs are multiplied by the difficulty of the extraction, the quality of the drill, the level of political regulation, and the price for qualified, trustworthy workers.

The oil and natural gas industry is notoriously a capital-intensive industry. This should be the key determinant factor in whether or not to invest in this industry.

In our current economic recession, very few can actually afford to invest in oil and natural gases. Like they say in Vegas, to win big, you must play big.

But as many of you risk-takers already know, playing big can also mean losing bigger.

Investing in oil and natural gas comes with a pretty sizeable learning curve, so you’ll want to do as much research as possible before investing the huge amounts of capital required to get started.

You will be faced with evaluating different companies for their experiences, success rates, and their fits with your needs.

In turn, these companies will want to get a lot of information about you to assess your suitability. You will need to work with a lawyer because this weight of investment requires a considerable amount of regulation and compliance.

For novice oil and natural gas investors, an investment advisor can assist you in developing a “risk control model” to best diversify these different potential areas of risk.

These advisors can also direct you to the best companies and industry partners with the best records of low-risk capitals.

Yes, there are many risks associated with oil and natural gas investing, but fortunately, by reading this article, you are already well on your way to making smart investments.

I was reading a report the other day. The world has enough gasoline to sustain us till an alternative fuel is discovered.

While we are waiting for green fuel to be cheaper than gasoline, we would probably not lose money investing in oil and natural gas in a time horizon of 10 years, give or take a few.

What’s your take on oil and natural gas sector as an investment option?