Investing In Oil And Its Benefits
While the world is making a concerted effort to wean ourselves off fossil fuels, we still rely on oil to power the world. We need oil to keep our power plants producing electricity. We use oil for the vast majority of the transport sector. As you can appreciate, modern-day life is not possible without oil and gas.
This also means that investing in oil wells is a profitable business. Even when you take risks such as price volatility and oil spills into consideration, there are significant gains from getting involved in the oil sector. There are many ways you can get involved in investing in oil wells, including:
Buying Mineral Right To Your Land
You can buy the right to ownership of the minerals (in this case, oil) beneath your land. In theory, you could build your own oil extraction operation. However, this is exceedingly complex and expensive, if not impossible. Instead, most mineral rights holders opt to lease or sell their rights to companies that specialize in oil extraction.
Theoretically, you could invest in oil wells via purchasing mineral rights. You could also buy a piece of land and its mineral rights where developing oil wells is possible and invest in oil well this way.
Direct Participation In Oil Wells
Direct participation programs (DPP) are a more straightforward means of investing in oil wells is through direct participation programs (DPP). A DPP is a program that pools investor money, form a limited partnership, and uses the funds for oil extraction projects. When participating in a DPP, you become a partial owner of the limited partnership company’s oil wells.
DPPs usually last anywhere from 5 to 10 years, a period in which you receive cash flow in the form of dividends from the limited partnership. Additionally, you receive tax breaks based on the percentage of ownership in the partnership.
The Advantages Of Investing In Oil Wells
Investing in oil wells is popular among sophisticated investors, and for good reasons. There are numerous benefits you accrue when you’re an investor in oil wells. Such benefits include:
#1. It’s Potentially A Profitable Venture/ High ROI
One of the main reasons to invest in any business is to earn a high return on investment. For oil and gas, there is potential to make a high ROI. In fact, the vast majority of investors in the oil and gas sector are interested in earning a high return profit. In case the drilling of the oil well you’re investing in is shallow, the cost of establishing the well is relatively low. The lower the initial cost, the higher the potential to earn a high return on investment. You can accrue plenty of dividends from your well for years at a relatively low cost.
However, it’s important to note that investing in the oil sector is slightly riskier than other sectors, keeping in mind oil price does fluctuate.
#2. Diversify Your Portfolio
Diversifying your portfolio entails investing across different sectors and industries—financial advisors advise investors to invest in various sectors to protect their investment from economic shock. If one of the industries you’ve invested in experiences economic upheaval, your investments in other industries protect your overall wealth. Diversifying your portfolio negates damage to your wealth.
Investing in the oil sector is an excellent way to protect your portfolio from too grave of damage. For instance, when oil prices increase, the economic output from other sectors tends to slow down, which affects your other industries. However, the income from your oil well investments will cushion your portfolio from being too badly damaged.
#3. Big Tax Breaks
Investing in oil wells comes with the added benefit of significant tax breaks. In many instances, sophisticated investors and the wealthy opt to invest in oil wells for the sole reason of the tax benefits such investment come with. Whether the tax benefits are used alone or together with other tax incentives, you can use the tax break to reduce your overall tax liabilities, protect your wealth and portfolio, and build your wealth.
Some of the well-known tax breaks you will receive by investing in an oil well include small producer tax exception (otherwise known as depletion allowance), intangible drilling costs (which are 100% deductible), tangible drilling costs (also 100% deductible), and working interest.
#4. Strong Cash Flow For Several Years
The profits generated from investing in an oil well is spread across several years or decades. Consequently, your investment in oil wells will earn you profits for several years. You’ll earn a passive income for years, which can secure your financial freedom.
All things considered, investing in oil wells can be a profitable venture. However, you should weigh up your option. As with any other kind of investing, investing in oil wells comes with its own set of risks. You should be careful and, if need be, consult experts in the oil well sector.