Thomas Kivisto Shares Eight Reasons Why Oil and Gas is a High-Risk Industry
While some inexperienced investors may believe that the oil and gas sectors are low-risk and stand to profit no matter how the rest of the economy behaves, this assertion is far from the truth. The oil and gas industry is high-risk due to several factors. It is affected by geopolitical events, inherently dependent upon supply and demand, and carries a certain level of environmental risk.
Thomas Kivisto, an oil and gas expert from San Clemente, CA, explains why this industry is high-risk and how it can fit into a sensible investment portfolio.
The Worldwide Importance of Oil and Gas
There has been a great deal of talk about renewable energy like solar and wind power, but the fact remains that most of the world’s energy still comes from fossil fuels. If the oil and gas industry were to shut down tomorrow, cars and trucks would stop running, and the lights would go out. The oil and gas industry is one of today’s global economic pillars.
Many nations’ economies depend upon oil and gas as one of their primary sources of revenue. These countries include Canada, Russia, China, and the United States.
Oil and gas are not only used as a vehicle fuel and in electrical generation; they also fuel manufacturing interests making plastics and other essential goods. The oil and gas industry is an inescapable part of today’s global economy.
Risk Factors in Oil and Gas
The sheer size of the global oil and gas industry makes it seem invincible, but in fact, many major risk factors could affect its success. Here are eight of the top risk factors that have a major effect on the industry’s prices and profitability in today’s market:
1. Volatile Prices
Volatile oil and gas prices are often caused by the low responsiveness of supply and demand to the changes in short-term prices in the market. The capacity of production equipment is more or less unchangeable, and sometimes demand outpaces supply. In the case of the early months of the Covid pandemic, worldwide oil prices plummeted due to decreased demand and the reduction in mobility of the world’s population. Thomas Kivisto encourages investors to keep a close eye on prices in the global industry.
2. Regulatory Issues
Regulatory issues cause volatility as well. In the United States, in particular, there is no centralized national oil and gas company. Instead, many private corporations are regulated on federal and state levels. Businesses that want to drill for oil and gas must get permits, and the permitting process can be difficult and involve public opposition.
As the oil and gas industry matures, it has become more difficult to explore new regions for deposits of these materials. Drilling has moved farther and farther offshore, meaning that there is a higher expense for exploration and retrieval of oil. In addition, drilling has been forbidden by the Biden administration in certain natural areas in the United States, with potentially more restrictions to come.
4. Natural Disasters
Natural disasters such as hurricanes and the 2021 Texas cold snap restrict the oil and gas supply, increasing prices. This could have a beneficial effect on oil and gas profits in the short term, but in the long term, these profits must be used to repair damaged equipment and return to full production capabilities.
5. Operational Hazards
Oil and gas is a risky business. Workers are exposed to many hazards on the job, both in the retrieval and refining of oil and gas. Sadly, dangerous accidents in drilling and refining are more common than they should be. Oil and gas companies must compensate their workers for these accidents while covering the increased costs associated with them.
Competition is a major factor in the profitability of oil and gas. Even when times are good for the oil and gas industry, various companies may have price wars. The oil and gas prices are generally set by the countries that provide the products, particularly the Middle Eastern nations in OPEC. Still, there is room for competition at the national level.
7. Decrease in Demand
Thanks to renewable energy sources, there has already been a dip in demand for fossil fuels like oil and gas. As more car companies commit to all-electric fleets by the mid-2030s, there are significant challenges that the oil and gas industry must face. Oil and gas industries need to find a way to remain relevant during a period of major industrial and social change.
8. Shortages in Personnel
There is a shortage of trained workers in the oil and gas industry, even though oil and gas pay very well compared to other industries. Some workers are unwilling to relocate to remote areas to participate in pipeline construction and exploration. The Covid pandemic has caused even more restrictions to the number of staff available.
Investing in Oil and Gas
Oil and gas investments are volatile for these reasons, among many others. Understanding how the market works can go a long way toward educating investors and other business owners on incorporating oil and gas investments into their financial pictures.
Thomas Kivisto maintains that oil and gas stocks and futures can be important in investors’ portfolios. They should be considered higher-risk and should not form an individual’s entire portfolio but should be used to balance the portfolio’s overall risk profile.