Oil and Gas Investing in 2013
If you are considering making an oil well investment, you need to consider the advantages and the disadvantages of this type of investing before you make the move. The United States is incredibly reliant on the oil industry, so there is potential for oil business investments to outperform other stocks. Before you dive in and invest all of your money into a single financial vehicle, however, you need to know about the myths and truths to oil well investing—including the truths behind some dangerous assumptions that many investors are making today.
Writing off Your Investment
When you invest in oil wells, you are given preferential treatment by the Federal government. Unlike your stock investments, you are given an opportunity to write off, or deduct, a portion of the investment you have made when you file your taxes. If you are trying to reduce your tax obligations and you want an opportunity to earn capital gains on your investment, oil wells are very practical options.
You Have More Buying Power
You might think that it is smarter to invest in stocks for leading oil companies like Exxon. While there is room to profit, you have to consider all of the overhead that goes behind managing the company, and how this overhead can affect your profits. If can take a lot of upward movement for an oil stock to make a large profit. Some investors are comfortable with this; others are not.
Investing in an oil well is referred to as “Direct Participation”. This means that your investment is focused on production, and not all of the politics that go on behind-the-scenes in a corporation. Because the investment is more focused towards one aspect of the oil industry, you will have more buying power and growth potential.
The Type of Drilling is Important
When you are comparing various oil well investment opportunities, one very important factor to consider is what methods the company will use to drill. There are two very different types of drilling to consider: wildcatting, and developmental drilling. Wildcatting is where the company will start to drill in areas where there is no known production. Developmental drilling, on the other hand, is drilling close to existing wells and fields. As a result, developmental drilling is often much more successful than wildcatting. If you want to reduce risk, developmental drilling projects are ideal.
Oil Wells Have a Long Lifespan
You might be concerned that oil wells do not have long lifespans and this is nothing to worry about. While wells are known to start with high production when the drilling starts, production will slow down as the pressure is released from under the earth’s surface. While the production will slow, it will continue to produce oil for 20 to 50 years under its own pressure. After this period, the oil well can still be useful if the operator starts to push the well. So, while production is high at the beginning, it will be steady for a long period of time.
If you are looking for a good investment opportunity, investing in drilling could be the right answer. All of the interest you have gained can be sold and your investment will be liquid. You’ll also benefit from tax deductions and increased buying power. Research your investment opportunities, choose the right projects, and add to your investment portfolio.
Ozzie Greer has long championed oil and gas investments through his work with US Emerald Energy.