Oil makes the world go round, and there’s no sign of that changing any time soon. Petroleum remains in high demand, as it is an efficient way to generate both BTUs (British Thermal Units, a measure of energy) and kilowatt hours. Petroleum also has a multitude of uses in industry, as it can be used as a lubricant and is a key component in the creation of plastics.
Natural gas, for its part, is a popular source of heating and cooking energy. It can also be converted into diesel fuel and electricity, and is essential in the creation of chemical fertilizers.
While crude oil prices and gasoline prices are relatively high compared to historic norms, when adjusted for inflation, natural gas prices are currently near a 10-year low, as of early 2012. This creates a natural possible buying point if demand for natural gas should increase – or if supply should fall – resulting in a price increase.
We approach oil and gas investing in a number of different ways. By considering the industry a collection of companies providing products or services to consumers, as well as to other players in the oil and gas industry itself.
We also approach the industry as a commodity, and seek to profit from changes in the prices of crude oil, gasoline, diesel, and other products.
iii. Futures Contracts We purchase derivatives such as oil and gasoline futures contracts.
iii. Tax Advantages. There are some tax advantages to oil and gas investing. For instance, the IRS allows companies to deduct for depletion – an allowance similar to that for depreciation in rental real estate, which is a way of accounting for the gradual exhaustion of mineral supplies in a given plot of hand. If you buy shares in a publicly traded stock, this benefit will be largely invisible to you, since publicly traded stocks are C-corporations and don’t pass their gains and losses to shareholder tax returns. However, if you buy a membership in a limited partnership, this could be a very important consideration. Depletion could be the difference between a property that’s cash flow positive and one that loses money.