The Best Ways to Invest in Oil and Gas

By Dr John

Here is the first of Dr John’s hopefully many missives for paid subscribers, which outlines exactly what it says in the title. I notice oil and gas prices have pulled back a bit this week. The end of the bull market? Or just a “healthy correction”?

Resources (generally mining, agriculture and fossil-fuel energy) have been deeply unpopular in the years since the end of the last commodity bull market circa 2011 when, after a decade of over-investment, commodities producers started to generate surpluses to global requirements and raw material and energy prices fell across the board.  

Many natural resource funds closed due to lack of investor interest. As a member of the investment committee of an IFA business, I remember scrambling to look for alternatives. But the seeds of every bull market are born in the aftermath of the preceding bear and today we are entering an era of rising natural resources prices. A decade of under-investment is finally coming to haunt a global market spurred by an ever-increasing appetite for food, materials, and energy. 

I believe the energy sector occupies a special position in this space because this underinvestment has only magnified in recent years owing to green and ESG lobbies preventing the development of gas and oil projects. Yet over 80% of all global energy is still fossil-fuel based and even Elon Musk recently admitted that we will continue to use fossil fuels for decades - in Europe renewables and hydro still produce less than 20% of all energy. It’s also becoming more widely accepted that OPEC+ is struggling to grow production. (I’m waiting for a book to be written called “The Energy Crisis: How the Greens Ruined Everything” which I expect we will see in the next year or two).

BP Statistical Review of World Energy 2021

Not only does investing in energy make sense in this historical context, but cheap energy is needed to fuel the green revolution, to build solar panels and wind turbines. I’d much rather have cheap energy with high taxes on frivolous use and low taxes on producing renewables, compared with our current situation of expensive energy with people unable to afford heating their homes. Similarly, I’d rather have home-grown energy taxed at 65%, providing employment, capital investment, NI contributions and taxes allowing monies to flow to government coffers to help the poor get through an energy crisis, than simply buy energy on the global market and see that cash exit the country to Qatar or Saudi Arabia.

So, I am actively keen on investing in energy and the next question is: how?

Do I simply buy titans Shell (LSE:SHEL) and BP (LSE:BP), UK domiciled stocks on low p/e ratios (of around 5 and 4 for the next year)? Should I invest in a low-cost ETF? Or should I go for something a bit more spicy?