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Investing in oil in the short term and long term includes risks and rewards in both scenarios. The oil price whilst it is high, is good for investors and companies invested in oil exploration and integrated oil activities. For the companies investing in oil exploration, the costs of investing in oil machinery is high. The payback may take many years to achieve as the exploration times and also the seismic surveys take time to evaluate the viability of oil field's around the world.

Political and Geo-demographic factors are important that mean that certain places such as Iraq may not be acceptable places to drill oil in the short term though longer term the prospects are better. Conversely certain states such as Turkmenistan have billions of oil that even their own people do not know about. The risks of investing here would be that the oil agreements have not been signed for or agreed by the political leader in Turkmenistan and also that the price that would have to be paid would be higher based on the high current market price of oil. So longer term some nation states who have significant though the reserves will be undeveloped would be areas to invest in. Though political risks and uncertainty still exist in making investment in oil.

The oil price is the most important factor that is used to value a companies stock. The anticipated turnover is affected by the level of output the company can extract from the ground and as such the price paid by customers is based on the price of oil. A slump in oil price from $100 to $50 oil would be a welcome move to consumers though the affects this would have on companies profits would be disastrous.

Lead times in machinery that can be used to extract oil is also another risk to companies oil exploration and drilling is also another short term factor that also adds to risk for oil companies as the time taken to get the required machinery to get the job done also adds to delays in the output process. Whilst now is a good time to invest whilst oil prices are high, firms will delay even further projects at times when the price of oil stumbles.

Longer term the supply of oil and its availability amongst smaller venture organisations is also a threat as the amount of money and assets it has at its disposal to find a likely successful field is reduced to perhaps more of a gamble than a likely certainty.

Economic conditions are likely to remain stable globally generally speaking which does not affect oil demand, though companies need to be aware of the political, legal and technical complications that surround the oil industry.

The ways to value an oil stock would be to use a shareholder value analysis project schedules, estimate a stock's value based on previous historical results and use the growth measure to value the revenues, tax etc. Once the free cash flow has been determined, the cash flows can be rearranged to increase the revenues based on increase or decrease in oil price. Also important is reading the news of companies announcements which also have implications for oil stocks.

Learn more about this author, Costas Chryanthou.
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