Oil and Gas Investing: How to Profit from High Oil Prices

“Fill’er up.” Those three words hurt a lot more than they used to. Gas prices are near their highest levels ever, and real gas prices – those adjusted for inflation – have reached levels not seen since the Iranian Hostage Crisis, back in 1979. And with conflict looming between the United States and Iran, gas prices could go a lot higher.

High gas prices can spill over into the rest of the economy. Companies with large truck fleets, for example, can feel the pinch at the pump, and respond with layoffs, workers respond to greater insecurity by spending less – manufacturers, already stung by higher energy costs at the factory, cut back on production as demand suffers, laying off more workers, and the cycle begins anew. Indeed, oil shocks have contributed to several recessions over the years, including 1991, 1981-1982, and the deep recession of 1974-1975, which came on the heels of an OPEC boycott.

So what’s an investor to do?

One way to protect your portfolio, and hedge yourself against higher oil prices, is to invest in the oil and gas itself. Or more precisely, an investor may take a position in companies that engage in prospecting, drilling, and extracting of oil or natural gas, or in the real estate speculators believe may contain it.

Oil and gas investments come in four basic varieties: 

• Exploratory drilling – the speculative search for oil and gas reserves in wholly unproven areas.

• Development – companies which seek to expand available reserves by exploring near previously successful oil wells.

• Income – companies which invest in extracting known reserves of oil or gas in areas which have already been successfully drilled.

• Diviersified – companies which engage in all of the above activities.