Oil Stocks Investing Risk
What Will Increase the Risk When Investing in Oil?
As the world seems to constantly require more energy, most view it as sensible to invest in energy companies and in the energy sector. However, not all types of energy companies or energy commodities are equal. After all, the characteristics of companies producing windmills are very different from those producing oil. In this article it will be discussed what factors increase the risk when investing in oil stocks.
World Demand
As mentioned the demand for energy is increasing. However, some countries are trying to move away from energy sources such as oil and move towards cleaner energy sources, or energy sources where they will not depend on the supply of unstable countries. Thus, new innovations in the realm of renewable energy might start to decrease demand for oil, even though the demand for energy as a whole is increasing.
World Supply
World supply of oil is partly determined by OPEC, an organization of major oil producing countries. Their goal is, primarily, trying to keep the price of oil high by regulating oil supply. Now, imagine OPEC falling apart and every country choosing to produce as much oil as possible, this might cause the price of oil to fall drastically. If you have chosen to invest in an oil ETF, this could prove disastrous.
Geo-Political Issues
Much of the world’s oil reserves are found in what can be considered unstable regions of the world, such as the Middle East and Africa. This can be increasing the risk of certain stocks. An oil company, primarily, operating in an African country plagued by civil wars, will naturally carry more risk than if you choose to invest in the best Canadian oil stocks.
Might still be a Prudent Investment
All investments carry risk, so the fact that oil does too, in no way means it can not be a sound investment. All it means is that you have to note the risks, assess them, and determine if you feel investing in oil is for you.
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It is interesting because there are two forces that are going against each other. One is that in the future we will have to find a substitute for oil and gas and therefore reduce the demand for it. The second one is that as countries such as China and India develop and become richer, the standard of living for their people increases, and this means more cars, bigger houses, and more manufacturing, etc. All of these things increase demand for energy, and today, about 90 percent of our energy needs are satisfied by fossil fuels – oil, coal, and natural gas.
In the medium term, I am bullish on oil, but I am bearish when looking into the next 20 or 30 years.
I think the world has reached peak oil. With oil consumption skyrocketing in Asia I see demand getting squeezed. Not a bad investment at this time. Any time you can pump something out of the ground and get 80 bucks for 55 gallons you are going to make a profit.