The Risks of Investing in Oil and Gas

The volatility of oil prices alone can cause your investment value to crash overnight. If you’re interested in investing in this undoubtedly highly lucrative industry, here are two angles to consider

Very little words are as synonymous to wealth as “Oil and Gas.” There is a certain power that comes with saying that you work in Oil and Gas, so you can only imagine what it means to have shares and be recognized as a part-owner in an Oil and Gas firm.

Investing in Oil and Gas is amazing. It carries the same potential for wealth as any business in the same industry and long term investments in it can be extremely profitable. However, there is no gainsaying the fact that this industry is riddled with its own risks.

Its potential for high returns is punctuated by high risk owing to price volatility and this could be a result of environmental issues like oil spills or just issues of demand and supply resulting from the discovery of oil in another nation thereby reducing price.

The volatility of oil prices alone can cause your investment value to crash overnight. If you’re interested in investing in this undoubtedly highly lucrative industry, here are two angles to consider: The risks and the rewards. In this article, we will consider only the risks. While there are many risk factors that plague or threaten the oil and gas market, here are the commonest ones:

Can be Complex

Oil and Gas investments are not for everybody. This is primarily because there are different peculiarities specific only to the industry. One of such is its taxes. Taxes levied on companies can be as high as 75% depending on the kind of business and so on. Consequently, there might be differences when you try to sell your shares or when you have to pay capital gain taxes.

Price Volatility

As previously stated, this industry is prone to high volatility. Price swings could be really high and if you are investing in the smaller oil and gas companies, this is even truer. Asides the risk that you can lose everything in a short period of time, there is also the panic that you will need to deal with as a result of the changing trajectory of your investment performance.

A core reason for this volatility is the change in the supply of crude oil and natural gas and stock prices tend to take a direct hit from it.

Dividend Cuts

There is a general ideology that oil and gas companies pay good dividends and it isn’t untrue. On one hand, this helps pacify investors who are encouraged to hang on because they receive consistent income from their investments. However, this too is not promised as companies are known to slash dividends especially during periods of low commodity prices. This is only logical as if they have less revenue, they need to cut their expenses and dividend payment generally takes one of the first few hits.

Environmental Challenges

The environmental challenges that plague companies in this industry can also be a lot. Oil spills could threaten the companies for extensive periods. The company could face litigation issues from safety hazards, and insurgency could send share prices into a free fall.

To make these risks worth taking, there are various benefits that come with investing in the industry. We’ll consider them in the next article.

Written by Lawretta Egba.