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Oil and gas are naturally occurring chemicals made up of two elements – carbon and hydrogen – in a class of chemicals called hydrocarbons. While oil is generally in a liquid form of varying textures, natural gas is a fossil fuel, meaning it comes from the remains of plants and animals from millions of years ago and is gaseous. Gas is lighter than air and made up of the chemical compound methane. Both oil and gas have have been main source of energy around the world for many years, with many countries relying on them to fuel vehicles, heat homes and cook food.
How is oil and gas mined?
Accessing oil and gas within rock can be difficult due to a lack of interconnected pore spaces or pore spaces that are too small. However, hydraulic fracturing solves this by creating fractures in the rock by drilling a well and pumping water into it. The water is treated with chemicals and thickeners that allow it to carry grains of frac sand into the fractures.
If this is done incorrectly, you run the risk of contaminating the groundwater supply surrounding it. The most common method of retrieving natural gas from underground is through hydraulic fracturing, more commonly known as fracking, which is a controversial method that is often criticized by environmentalists.
Oil and gas deposits can also be found underwater, which are even more difficult to mine than those found on land. Companies are required to build offshore platforms to hold rigs, a technology that began in 1897 in California and has since evolved. The first mobile oil platform for drilling on wetlands was introduced by an American oilman in 1928, according to How Stuff Works and while it was essentially a barge with a drilling outfit mounted on top, it paved the way for decades of advancements.
What is oil investing?
Anyone who has been watching the oil space knows that the commodity’s price environment has been volatile since it reached up past $140 per barrel in 2008. Since then it has crashed all the way down to $40 and then began to recover in 2015, when it started to hover in the $50 to $60 per barrel range. The reason behind the drop have been put down to a few main factors. According to Fundamental Research analyst Sid Rajeev, the main factors include the production exceeding consumption in 2014, which continued into 2105, the appreciation of the US dollar and last but definitely not least, was the Organization of the Petroleum Exporting Countries’ (OPEC) decision not to cut back on production.
All of these factors have affected the price in a negative way, but what goes up, must come down and Rajeev believes all these negative factors will eventually result in the price going back up.For example, the US shale oil boom is already beginning to digress and the consumption of oil will also likely increase considering the low prices. Then there are the OPEC countries who heavily rely on oil to support their GDP.
Conversely, the demand for oil may decrease in coming years as the world looks to lessen its carbon footprint and switch over to cleaner and renewable forms of energy.For example, China has been making a major push to grow its stake in the uranium market and has 26 reactors being built, with more planned. That said, the demand for oil isn’t likely to disappear overnight and while it remains to be seen where the price will go in the future, many analysts remain positive on its future.
What is gas investing?
Besides being directly affected by the rise and fall of the oil price, the price of natural gas is affected by a variety of other factors – from geopolitical issues all the way down to weather – which can make it difficult to predict. What’s more, retail gasoline prices at the pump vary between markets and even within the same city. According to Suncor (TSX:SU,NYSE:SU), “[w]hile retail prices follow changes in crude and wholesale commodity prices, both up and down, they are also heavily influenced by local conditions. Factors such as market size, the level of competition, taxes, and retailing and distribution efficiencies can lead to situations where prices vary considerably between communities or change dramatically within a short period of time.”
In terms of supply, the US, which is the top dry natural gas producer, is expected to shift from being a net importer to a net exporter by the year 2017. The second highest producer of natural gas is Russia, which also came in as the second-highest consumer and also hold the highest proven reserves.
Investing in oil and gas
When looking to invest in the oil and gas space, it is important to note that it is dominated by huge companies, which means there is a lack of competition within the industry. When these companies make big deals with each other it rocks the market and some feel that it worsens this lack of competition. This has led some countries to take action, with organizations like Manufacturing Australia, a CEO-led coalition of Australia’s largest manufacturers, creating action plans for gas market reform.
Oil and natural gas are fundamentally different than other investments as most of the world’s large producers develop their resources through a state-owned energy company that forms partnerships with multinationals. Additionally, producing countries and their state-owned oil & gas companies are disinclined to share data. Third, much of the world’s large producers are unstable or politically unpleasant countries.