Though there is evidence that oil had been used for medicinal purposes since the early 1400’s, the first commercial well was not drilled until 1859 when oil was struck in North Pennsylvania, USA. The Drake Well at Titusville was able to produce around 20 barrels of oil a day, and kick started an industry that is now worth trillions of dollars. Three of the world’s largest ten companies by market capitalization are oil companies, with two others narrowly missing inclusion. Because of its size and importance to the world economy, the oil sector is one which general portfolio managers and individual investors should not ignore. There are several ways to invest in oil, but before we look at these, here are a few reasons why investment in the so-called ‘black gold’ represents good value over the long term.
Oil is a Finite Resource
Though now produced in millions of barrels per day, it is widely understood that oil, as a natural resource, is in finite supply. At some time, oil production will dry up. This is cbd capsules canada one reason why so many existing and new energy companies are seeking alternative energy supplies and methods. Of course, new oil fields are being discovered, and current oil fields drilled more deeply, as demand for oil grows and makes these more expensive oil discoveries financially viable. As the oil price increases, more expensive oil production becomes worthwhile to oil explorers and producers. In this way, the oil price is like a self-regulating tap: if it is economically sensible to do so, oil companies will drill for oil and increase supply. If it isn’t, they won’t, and if they don’t supply will fall and the price of oil will rise.
Demand Keeps Growing For Oil
At the start of the 20th century, the world population was estimated at a little over 1 billion. It now stands at over 7 billion. These extra mouths energy to keep warm in the winter and cool in the summer. They need energy to help cultivate and harvest crops for food, and then to transport food, goods, and services. On top of this, many Asian countries are undergoing industrial expansion similar to that seen in the west during the industrial revolution. China and India, with nearly a third of the world’s population between them are seeing rapid growth in their industrial bases. Oil is needed for fuel, heating, and transportation, as well as being used directly in many manufacturing processes.
Political turmoil around the world, particularly in the Middle East, will raise oil prices. This rise in prices makes other oil discoveries financially viable to extract. Even in times of relative political harmony, oil prices have risen due to demand, economic growth, or the maintenance of levels of supply.
Another quality of oil from an investment viewpoint is that, unlike gold or cash, for example, it cannot be confiscated or destroyed at will by extremist governments. Though such governments can cut off supply to the outside world, they often rely on oil revenue to support their spending and more targeted sanctions are often enforced for limited periods of time.