Petroleum: Investing Essentials

A primer on investing in the petroleum industry.

Aug 12, 2014 at 12:00AM

Petroleum has played a role in society for eons with evidence found that petroleum was used as far back as ancient Babylon to make asphalt for building walls and towers. Ancient tablets from Persia indicate that petroleum was used for medicinal purposes and for lighting. Today we use petroleum-based products for everything from fueling our cars to manufacturing plastic.

Petroleum Industry Well

Photo credit: Flickr user Justin Vidamo

What is petroleum?

Petroleum is a Latin word that combines the word petra, or rock, with oleum, or oil, giving it the meaning of rock oil. Petroleum refers to the liquid mixture of hydrocarbons in the ground, as well as petroleum-based products. It's a broad term that also encompasses gasoline, kerosene, heating oil, asphalt, and other refined petroleum products.

How big is the petroleum industry?

The petroleum industry refers to everything from exploration to find sources of hydrocarbons, to oil refining, to the marketing of gasoline to consumers or petroleum feedstock to the chemical industry. The petroleum industry is vital to modern society. It provides the transportation fuel we need each day, as well as the raw materials to make everything from pharmaceuticals to fertilizers.

Roughly 90 million barrels of oil are used each and every day around the world. More than 18 million barrels are used daily in the U.S. alone, with about 8 million employed in making gasoline. Taking things down to a personal level, the average American each month will use 1.8 barrels of oil, which is about 75 gallons.

How does the petroleum industry work?

The petroleum industry is structured into upstream, midstream, and downstream sectors. Upstream refers to the companies engaged in the exploration and production of petroleum. Independent oil and gas companies typically only engage in upstream activities. Midstream refers to the companies that pipe and process raw petroleum and refined petroleum products. Master limited partnerships are common owners of midstream assets. Finally, downstream refers to the companies that refine petroleum products to turn it into useful products, as well as the companies that sell these products. Refiners, petrochemical manufacturers, and retail gas stations are all downstream operations of the petroleum industry.

Petroleum Industry Motor Oil

One of the many products produced by the petroleum industry. 

The petroleum industry's infrastructure in the U.S. is vast. According to the American Fuel & Petrochemical Manufacturers,144 refineries; 200,000 miles of crude oil and refined petroleum product pipelines; and thousands of railcars, barges, and tanker trucks are used to move petroleum products around the country. Because the industry is so vast and has so many parts, it offers an array of investment opportunities.

A major integrated oil company such as ExxonMobil (NYSE:XOM), for example, does everything from explore for oil and gas to produce synthetic motor oil for vehicles. ExxonMobil and its peers would be an option for investors looking for broad petroleum industry exposure. However, investors can also invest directly in companies that are solely focused on exploring for oil and gas, or even companies that only own retail gas stations. The investment opportunities within the petroleum industry come in all sizes and risk profiles.

What drives the petroleum industry?

The transportation industry is one of the biggest drivers of the petroleum industry. The United States, for example, uses 18 million barrels of oil per day, with just over 8 million of those barrels used to make gasoline, or 46% of petroleum demand. That said, Americans are driving less and gasoline demand is down more than 6% from its peak in 2007. A focus on fuel efficiency and the lingering effects of the Great Recession have had a noticeable impact on gasoline demand in the U.S.

However, demand for the petroleum industry's products is expected to grow elsewhere in the world. Global demand for transportation fuel is projected to grow by 40% through 2040. Demand for diesel is expected to outpace demand for gasoline, as the following chart illustrates.

Petroleum Industry Demand

Source: ExxonMobil Investor Presentation. 

Meanwhile, demand in the petrochemical industry is expected to rise from about 150 million metric tons per year to nearly 250 million metric tons, with about two-thirds of that growth coming from Asia.

Even amid the growth of renewable energy options, the petroleum industry's future is very strong. Emerging markets will be a big driver of demand going forward, as petroleum will remain key to fueling cars and commercial vehicles, as well as in meeting growing demand for petrochemicals. The industry offers investors a wealth of opportunities, from small petroleum producers to major integrated energy companies.

 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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