While gas and oil companies may get their fair share of scrutiny from environmentalists, investors see the industry in a different way. Below are a few reasons why investors like energy firms so much.
Gas and Oil are Forever in Demand
The world’s energy needs are vast and complex. In the US alone, over 80% of energy is fossil fuel-derived, and much of that comes from gas and oil that heats homes, powers cars and produces electricity. Gas and oil are also an important part of many industrial and manufacturing applications, such as the synthesis of plastic. According to the Energy Information Agency, there’s enough oil in the ground to meet the world’s demand for the next 25 years. While it’s important to consider long-term alternatives, the current demand for oil and gas isn’t going away.
Producing a Steady Flow of Cash
Because of the world’s thirst for gas and oil, companies making such commodities not only have a steady demand for products, they can provide daily estimated operating margins. To accomplish this, companies consider market data and production costs. A company can know its break-even point, and it can determine how much profit can be made during normal operations. When prices rise, companies profit; when they fall, profits decline. However, the industry as a whole can still work on a wide profit margin.
High Entry Barriers
It is expensive to get started in gas and oil production. It requires specialized equipment and a knowledgeable, experienced team. Finding new gas and oil reserves, extracting them and refining and transporting the finished product is cost-prohibitive unless an entity has billions of dollars to invest. In addition to these barriers, local, state and federal rules make it difficult to produce oil in the US. Every country has separate regulations, and generally, they promote monopolies for states or established producers. Less competition brings higher profits, and investors look for low-risk propositions like these.
The Final Word
Gas and oil companies are an integral part of the world’s economy. Their products power almost every other industry, and they affect the daily lives of billions of people. Investors are always looking for businesses with high profit margins that are resistant to economic decline and have little competition, and the energy sector meets all of these criteria and more. Visit the Oil & Energy Investor homepage for more information on energy stocks.