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Oil makes the world go round, and there’s no sign of that changing any time soon. Petroleum remains in high demand, as it is an efficient way to generate both BTUs (British Thermal Units, a measure of energy) and kilowatt hours. Petroleum also has a multitude of uses in industry, as it can be used as a lubricant and is a key component in the creation of plastics.

 

Natural gas, for its part, is a popular source of heating and cooking energy. It can also be converted into diesel fuel and electricity, and is essential in the creation of chemical fertilizers.

 

While crude oil prices and gasoline prices are relatively high compared to historic norms, when adjusted for inflation, natural gas prices are currently near a 10-year low, as of early 2012. This creates a natural possible buying point if demand for natural gas should increase – or if supply should fall – resulting in a price increase.

 

You can approach oil and gas investing in a number of different ways. For example, you can consider the industry a collection of companies providing products or services to consumers, as well as to other players in the oil and gas industry itself.

You can also approach the industry as a commodity, and seek to profit from changes in the prices of crude oil, gasoline, diesel, and other products.

 

Alternatively, you can buy shares in a number of oil and gas-focused mutual funds or ETFs. These help you gain substantial exposure to the commodity without taking direct risk in commodity spot prices and without tying too much of your fortune to the prospects of any one company.

 

These are two methods to gain exposure to the oil and gas markets, both via publicly traded companies – the most obvious being Exxon-Mobile (NYSE: XOM), one of the largest companies in the world, as measured by market capitalization. You can also buy stock in other companies such as British Petroleum, PetroChina, Chevron, ConocoPhilips, Marathon Oil, Royal Dutch Shell, Gazprom, the Anadarko Petroleum Corporation, and many others. Each of these companies engages in oil exploration, and you can buy direct exposure to them simply by buying shares or ADRs (American Depositary Receipts) through your broker.

 

You can purchase derivatives such as oil and gasoline futures contracts; these, however, can be risky, since futures contracts can and do frequently expire without any worth.

 

If you want to take a more direct equity position in a smaller company or project, you may consider making a play further down the oil and gas industry “food chain” into a small or micro-cap stock, or even a limited partnership that focuses on oil and gas. This is a more specialized field of investing, and if the business is not publicly traded, you will typically need to engage the services of a broker who specializes in this industry for access to these kinds of businesses. Or if you have a significant amount you can invest, you can deal with the company’s management directly for a private placement opportunity.

 

Broadly speaking, there are four kinds of oil and gas investments:

 

These companies or projects buy or lease land and invest money in drilling. If they strike oil, the investment can pay off 10 times over – sometimes much more if the company uses borrowed money (leverage) to finance operations. If not, they may lose nearly everything they invested in that particular project. Pure exploration companies are best suited for those with very high tolerance for investment risk. These plays are highly speculative.