Should You Invest In Oil and Gas?
Petroleum, also known as Crude Oil, has always been considered a good long-term investment because of the multiple industries in which petroleum is used and is not substitutable. The use of petroleum spans from car or jet fuel to being used for heating or the production of asphalt, plastics, and synthetics materials [1]. Oil and gas are commodities, meaning that they are goods that are interchangeable with other goods of the same type (as buying oil from seller A or seller B does not make a difference), and are often used as inputs in the production of goods (in the case of oil and gas, fuel, heating and plastics). Differently from other commodities, oil and gas are considered to be finite, and thus are expected to run out at a certain point in time. However, the demand for all fossil fuels (oil, gas, coal) is expected to keep increasing over the next 30 years [2].
The field today
But what are the risks involved with investing in oil and gas?
Traditionally three main risks have been identified in the industry:
price volatility,
dividends cut, and
environmental disasters.
Price volatility is a reflection of how much a price of a stock changes over time. Oil and gas stocks have always been characterized by price volatility, often due to geopolitical forces at play. Consumers can easily see this by looking at the gasoline prices. Volatility of the oil prices has another effect on shareholders, other than changing the value of their investment. Oil and gas companies often pay dividends to shareholders, allowing them to make an income out of their investment. However it’s customary for organizations in the industry to use dividends cut if they don’t earn enough revenues.The last risk traditionally associated with investing in oil and gas has been represented by environmental disasters, often identified in oil spills. British Petroleum (BP) has seen, for example, its stock prices fall by 55% in 2010 in the wake of the Deepwater Horizon disaster [3].
However, it is important to understand that oil and gas create multiple problems for the environment, not only with oil spills. There are general issues such as the impact of the toxic compounds that make up petroleum on human and animal health and habitat, and presence of microplastics in the environment. There are also more local and regional problems, like exhaust emissions from gas venting and flaring during the extraction process, the increase in acid rains from the combination of by-products of oil combustion, oil spills, and the waste oil poisoning the soil and drinking water. Ultimately, the oil and gas industry has a global impact in climate change, caused by the increased level of carbon dioxide in the environment which results in temperature increasing and ocean acidification [4].
Many oil and gas companies’ are increasingly investing in renewables, in what seems to be an effort to change their business to adapt to the changing environment and increased pressure from investors and policymakers. However, these investments are oftentimes only a small percentage of their overall investments as these companies keep investing in major oil drilling projects across the globe, as it’s possible to see in the published companies’ strategy reports.
How to decide then whether to invest in oil and gas?
Understand what are the risks involved, and whether you are comfortable with them (for example, are you comfortable with seeing big changes in your investment?)
Understand how much companies are investing in their low-carbon strategy, and how much they are still investing in traditional projects. This can be found on the companies’ websites, usually in the investor or sustainability sections
Reach out to the companies you want to learn more about through their investors relationship contact and ask the questions you care about
Ultimately, it is your personal choice whether to invest in oil and gas. For sure, some companies are doing more than others in order to be part of the energy transition and reduce the carbon emissions and problems they cause to the environment. This can also be possibly interpreted as them having a longer-term vision and being a safer and more remunerative investment [5]. However, most of them are still investing in fossil fuels, so ultimately it’s a decision on whether this is something you are comfortable with.
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[1] EIA. What are petroleum products, and what is petroleum used for? Source: https://www.eia.gov/tools/faqs/faq.php?id=41&t=6
[2] EIA. 2020. Annual Energy Outlook. Source: https://www.eia.gov/outlooks/aeo/pdf/AEO2020%20Full%20Report.pdf
[3] Investopedia. Should You Invest in Oil and Gas Companies? Consider These 3 Risks. Source: https://www.investopedia.com/articles/investing/102815/should-you-invest-oil-and-gas-consider-these-3-risks.asp
[4] Wikipedia. Environmental impact of the petroleum industry. Source: https://en.wikipedia.org/wiki/Environmental_impact_of_the_petroleum_industry
[5] Eccles & Klimenko. HBR May–June 2019 Issue. The investors revolution. Source: https://hbr.org/2019/05/the-investor-revolution