Located in San Clemente, CA, Thomas Kivisto has been in the oil business for over 42 years. During his career, he has seen multiple sides to the industry. After decades of experience, he has identified new market trends and created 15 different companies from his industry knowledge.
What to Know About the Oil and Gas Industry
The oil and gas industry is one of the largest sectors on earth. Oil is a necessity for every country, and because it can be found in multiple locations, there are many different opportunities available. Since oil is crucial for the economy, investors are often eager to understand exactly how this industry works.
To understand the financial benefits, three main segments must first be outlined. The following three segments can create a variety of benefits depending on the time of investment:
• Upstream
Upstream businesses have companies that produce oil and gas. These companies search on a global scale for reservoirs and raw resources. The upstream segment requires high investment capital and can take a significant amount of time. Almost all income statement line items relate to oil and gas production.
• Midstream
Midstream businesses are primarily focused on transportation. This includes extracting resources for refineries. These companies understand shipping, pipelines, trucking, and storage. This segment is highly regulated and has a low capital risk. If the upstream part is not successful, the midstream segment will suffer.
• Downstream
The downstream businesses are the refineries and processing of raw hydrocarbons and the wholesale and retail distribution of finished products. Thomas Kivisto describes these companies as vital. They are responsible for removing impurities and producing consumable products. Downstream industries convert oil and gas into jet fuel, asphalt, heating oil, and gasoline.
Considerations for Investing in Fossil Fuels
Investing in fossil fuels can be risky compared to other stock market sectors, as prices are controlled by large oligopolies. Even Thomas Kivisto, who knows the industry segments well, understands outside factors to consider:
• Oil and gas are cyclical investments.
There is likely to be a time when investors experience both decreases and increases in success. Sometimes this can happen in a concise amount of time. Since the price valuations are volatile, this can drastically shift the worth of stock.
• If oil or gas prices are low, the stocks tend to flounder.
This is where politics comes into play. In the early ‘70s, Iran played a price war on oil that tripled prices. In March of 2020, Saudi Arabia and Russia began a price war that collapsed prices. These are just two examples how oligopolies have injected their direct sovereign needs to impact price shocks on a global.
• The environmental issues are well documented by now.
Fossil fuels are known to emit greenhouse gasses during the production, transportation, and downstream sectors. Because this industry contributes CO2 emissions to the atmosphere, governments have stepped into this space adding great costs to the energy sector. This has added a new layer of risk to prices.
• Accounting for outside factors reduces the risk of investment.
For those who have an experience like Thomas Kivisto, this can be managed. For investors who are less aware of the process, these factors can pose significant difficulties.
• Future oil and gas contracts are increasingly valuable for investors willing to take on high risks.
If oil and gas prices increase, the investors who bought contracts will earn income. This can produce a significant amount of money in a short period if the oil and gas prices do not drop. Regardless of the outcome, the investor will still need to honor a contract. A low-risk way to invest in oil and gas is to buy shares in mutual funds. This is one way to gain exposure to the industry without jumping in all at once.
The Oil and Gas Industry Benefits Are Clear
Some investors might wonder if investing in oil and gas is worth it. While there are definite risks, the following benefits can be huge:
• Natural gas used in the production of electricity is safe and cheap.
It is the second safest and cheapest source of electrical production in the world, outside of nuclear production.
• Oil and gas stocks can significantly increase capital gains.
An investor can earn enormous cash through share price appreciation and positive dividend income as crude oil prices rise. This allows additional drilling to increase oil and gas production as an oil company.
• Investing in oil and gas can diversify a portfolio.
The global economy tends to slow as soon as the oil and gas prices increase. Oil and gas stocks can protect an individual from a negative economic impact by having a diverse portfolio.
Why Invest in the Oil and Gas Industry?
These investments can provide a stable and passive income. Depending on experience and the type of segment, this can lead to decades of high financial returns. Although outside risks can occur, technological advancements have substantially lowered them. In addition, renewable energy substitutes to oil and gas demand still need heavy subsidies to survive (wind and solar) and electrical demand continues to grow. Without a solid nuclear program in the U.S., natural gas will remain the cheapest and cleanest source for electricity generation.
In addition to profit, another common reason for investing in oil and gas is its tax incentives. There are several ways to make the most out of taxes with specialized deductions. Intangible Drilling Cost deductions can potentially provide 80% of reasonable expenses. This does not include the property’s gross tax, which is 15% free. This type of investment can both earn and save money.
The Future of Investing
Oil and gas production is essential for the global economy. Unlike investing in real estate, this is an ongoing necessity for countries worldwide. Thomas Kivisto believes the industry can provide financial wealth for qualified investors. With experience and a broad understanding of the global economy, oil and gas investments can produce a high return on investment.
