There are a lot of great ways in which to invest oil industry, from retail investments and oil investment companies to drilling programs. Before you get involved with oil gas investing it is important to know what these different vehicles are and what the pros and cons of each include.

Stocks in Oil Companies

One of the easiest oil investments is in petroleum stocks. All you have to do is call up a broker and invest in shares of an oil company such as BP, Exxon Mobile or XTO. Oftentimes these dividend yields are low (3 – 6%) accompanied by a small growth rate, disaster risk and even a political risk too. However, you won’t have to do anything but buy the stock.

Working Interest Partner in a Drilling Program

There’s a great risk to becoming a working interest partner in a group of oil wells since you could lose your whole investment. On the flip side however, you could also make a killing. Unfortunately, you won’t know until you invest or rather take on this gamble. Whenever you do get involved with this type of investment oil you’ll be at risk of lawsuits and cost overruns that you’ll have to pay. However, you could also make 8 — 12% return on your investment.

Working Interest in a Lease

Something that’s less risky than becoming a partner in a drilling program is buying a working interest in one that’s already producing oil or gas because there’s a lot less potential for unexpected expenditures to pop up. Usually you’ll be able to watch as you make money, as much as a 10 — 20% return. However, you’re still at risk for lawsuits and you’ll also need some technical knowledge.

Stock in Royalty Trusts

You can purchase stock in royalty trusts, which is quite different from purchasing shares in an oil company. These trusts are established with big assets, overriding interests and no business operations. All they do is receive cash flow from royalties. In fact, they will typically distribute at least 95% of their cash income as dividends. There’s no risk of lawsuits here and you’ll get between 7 — 9% return over the long term. These investments are easy to find since they’re offered on the NYSE.

Oil and Gas Royalties Directly From Mineral Owners

You can also purchase royalties from private owners. There are a lot of advantages here, including large returns (12 — 50%) and the fact that you’re actually purchasing minerals means that if a new oil zone is discovered you’ll be entitled to another royalty cash flow stream. However, you do need to know how to purchase mineral rights and find private owners who are willing to sell. Of course, this also means that you’ll need to be an active participant here. Whenever you stop to consider the large returns and the low risk factors, you’ll see why this has become a much preferred method of investing for individuals who are looking to invest in the oil industry.

Oil investments are considered by many to be among the best that are available in the U.S. for tax advantages to those savvy enough to take the plunge. Oil investment companies can enumerate the various avenues available to reap these rewards, including partnerships, mutual funds, and royalty and working interests. Regardless of how the oil investment is made, there is no other category available that can compete with the sheer number and variety of tax incentives.

No Income Limits on Tax Benefits

The numerous tax breaks given to oil gas investing is testimony to how seriously the American government is taking the effort to make the nation energy independent and urging people to invest oil. There are next to no net worth or income limitations on any of these tax incentives, so even the wealthiest of motivated investors can take advantage of them and realize what a solid investment oil can be. The only real limitation is that the investor can own only up to 1,000 barrels of oil a day.

Tangible and Intangible Deductions Defray Drilling Costs

A major tax benefit can arise from the intangible drilling costs. These include expenses for everything involved in drilling except the actual drilling equipment. This means grease, chemicals, labor and other expenses, which can make up to 80 percent of drilling costs, are completely deductible in the year they were incurred.

Deductions for tangible drilling costs cover expenses for the actual equipment needed for drilling. They are fully deductible as well, but only under a seven-year depreciation schedule.  Using these two tax benefits in combination means that, in a $100,000 drilling project, up to $80,000 could be written off when the intangible elements are purchased, with the remainder qualifying as a depreciation.

Other Tax Benefits are Available as Well

Other major tax benefits include lease costs, small producer tax exemptions, active income, and the alternative minimum tax. Lease costs are 100 percent deductible and include expenses such as the purchase of mineral rights and leases. They also involve accounting fees, administrative and legal fees, and all lease operating costs.

Under the small producer tax exemptions, otherwise known as the depletion allowance, small investors can exclude 15 percent of gross income from gas and oil wells from taxation. To qualify, investors cannot own more than 1,000 barrels a day or six million cubic feet of gas. Companies that refine or produce more than 50,000 barrels a day also are ineligible.

Active income is actually the net loss that may have been incurred in connection with production costs at the well-head. It can be used to offset other types of income, including capital gains, wages, or interest payments. Wrapping it up is the alternative minimum tax, in which additional intangible drilling costs are listed on the alternative tax return as a “preference item.”

The bottom line to investors, then, is that the oil and gas industry, with its ongoing support from the federal government, is primed for continued expansion. However, because oil exploration can be risky, it may not be for everyone. For those who meet SEC net worth and income requirements, though, investing in an independent gas and oil project may be just the ticket.

If you are looking for an investment option that can give you a decent return over a long period of time, you may want to invest oil. Unfortunately, many people do not know much about oil investing. Some people think that a person needs to be a multimillionaire to invest in oil and gas. The truth is that anyone can invest in this industry without have a significant amount of money.

Oil and Gas Investing Is Simple

Oil gas investing is as simple as buying a blue chip stock of an established oil and gas company. Those with a huge appetite for high risk investments can buy penny stocks of oil exploration companies with the hope that their investments will increase in value when the company discovers oil or gas in one of their overseas oil exploration blocks. Another way to invest in oil is buying corporate bonds issued by oil and gas companies. That said, there are many options for investment oil. There are many oil investment companies to help investors with this type of investment.

Reasons to Invest in Oil

- Oil drives the Global Economy: There is no doubt that the discovery of oil is what fueled the industrial revolution. Vast oil reserves beneath the surface and a huge demand for oil products means that oil prices will continue to remain stable in the near future. There is simply no other energy source that can replace oil, so investing in oil and gas will give you guaranteed returns for decades.

- Get Tax Benefits: Everybody knows that drilling wells is a costly affair, but what most people don’t know is that the cost incurred in exploration activities is tax deductible. For instance, any money that is spent on leasing equipment, purchasing mineral rights and administrative expenses are tax deductible. In fact, an oil exploration company may end up paying zero taxes for a couple of years.

- Get High ROI: When you invest in oil and gas, you can be assured of getting the best returns that any asset can ever give you. Millions of barrels of oil is consumed every single day to power the global economy, and this means better profits for oil investors.

- Increasing Demand: The worlds population is also increasing at a terrifying rate. Many developing countries are also industrializing very fast. In fact, many of them are now becoming middle-income earners or frontier economies. What this means for oil investors is increased demand, better prices and guaranteed financial security.

- Diversify Your Portfolio: It is important for investors to have a well diversified portfolio. While everyone has a favorite, holding some oil and gas stocks in your portfolio will be an added advantage.

- International Exposure: Oil and gas are international commodities. There are many producers, suppliers and consumers all over the world. This means that a single government or person cannot manipulate its value. With dollar investments like fixed deposit accounts, government bonds, T-bills and equity funds, devaluation of currency can adversely affect the earnings and value of an investment.

Quick Facts About The Oil and Gas Industry

Oil prices are usually affected by global events such as sanctions, disasters, politics and economic crises among other things. Oil exploration in Africa and many other parts of the world have been successful with dozens of oil and gas discoveries in the recent years.