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Oil and gas interests are popular
alternative investments for anyone, not only those who are attempting to
complete 1031 Exchanges. Although there
is an additional tax benefit for those using oil and gas royalty and working
interests as replacement property in 1031 Exchanges, the cash flow, depletion
allowance, etc. of oil and gas programs usually compare favorable with CD’s,
mutual funds, bonds and the stock market.
In addition to royalty and
working interests that qualify for 1031 Exchange, there are other exploration
and drilling programs that do not qualify for 1031 Exchange. However, like royalty and working interests,
these programs may be of interest as alternative investments even though not
qualified as replacement properties for 1031 Exchanges.
The big boys have known about the
benefits of investment in oil and gas for many years, but this type of
investment is often unknown to smaller investors. Oil and gas investments are becoming more
attractive as the price of both oil and gas continue to escalate. To track oil prices, go to www.wtrg.com/prices.htm and you
may track
natural gas prices here.
Some people have said that oil and gas should be a part of every investment
portfolio.
Of course, you can also
participate in oil and gas by investing in the stock market. Value Line Investment Survey lists such
investments under categories such as Petroleum (Producing), Petroleum
(Integrated), Canadian Energy Industry, Natural Gas (Div.), etc. and Fidelity Investments
has specialized sector funds (Select Portfolios) called Energy, Energy Service
and Natural Gas. There are many other
stocks, mutual funds, etc. that are positioned to deliver returns based on oil
and gas prices. In the final analysis,
all such investments are fundamentally “plays” on increasing scarcity and
increasing prices of oil and gas. At the
end of Chapter 4 of his book, The Oil Factor, Stephen Leeb makes the
following observations (key points) about oil:
- Oil prices are set
to soar. The only question is whether
they will do so rapidly and abruptly, sending the economy and financial markets
into a deflationary tailspin, or more gradually, triggering high and rising
inflation.
- Prices will likely
reach at least $100 a barrel before the decade is out.
- As prices rise,
efforts to conserve may temporarily moderate the uptrend. Note, though, that in the 1980s it took a
more than tenfold increase in oil prices to spur serious efforts at
conservation.
- In any case, China will be a
big consumer of oil, helping to keep worldwide demand strong and prices high.
- Oil from new
exploration, including any efforts to open up the Arctic National Wildlife
Refuge, will barely make a dent in our growing need for energy.
Regarding
natural gas, Mr. Leeb says:
Over the next
decade, demand for natural gas in the U.S. is expected to increase by
over 30 percent, or by about 3 percent a year.
There is no evidence that we will be able to satisfy this demand. The years from 1990 to 2000 bear a strong
resemblance to oil, except that prices fluctuated around $2 (per 10,000 cubic
feet) rather than $20 a barrel. Every
time prices climbed above $2 they would quickly move back below that
level. The highest prices came during
the very cold winter of 1996, when storage levels fell to what was then a
record low. But in the early 2000s,
despite the fact that economic growth in the U.S. slowed down, natural gas
prices average nearly $4, roughly 100 percent higher. The $2 average price of the 1990s had become
the low price in the 2000s. So as the
balance between supply and demand for oil was shifting in 2000, so was the
balance between supply and demand for natural gas. It is clear that we will have to rely on
heroic efforts to come even close to meeting our need for natural gas. Even after prices surged in 2000, generating
record drilling, natural gas production increased just a bit more than 2
percent in 2001, not enough to meet one year’s projected average growth in
demand.
We do not handle stocks and
mutual funds, but if you feel that you would like to diversify into direct
participation royalty interest, working interest or exploration/drilling programs,
contact Jeff Riddell at (941) 366-1300 (or e-mail jeff@1031replace.com, or fill out and
submit the “Contact Us” form). By the
way, you can order Mr. Leeb’s book here
and there is another excerpt from his book, The Oil Factor, in the next
section under Oil & Gas in this website.
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