What Is Petroleum? Why It's Important and How To Invest in It

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James Chen
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James Chen, CMT is an expert trader, investment adviser, and global market strategist.

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Updated April 16, 2024
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What Is Petroleum?

Petroleum, also called crude oil, is a naturally occurring liquid found beneath the earth’s surface that can be refined into fuel. A fossil fuel, petroleum is created by the decomposition of organic matter over time and used as fuel to power vehicles, heating units, and machines, and can be converted into plastics.

Because the majority of the world relies on petroleum for many goods and services, the petroleum industry is a major influence on world politics and the global economy.

Key Takeaways

  • Petroleum is a naturally occurring liquid found beneath the earth’s surface that can be refined into fuel.
  • Petroleum is used as fuel to power vehicles, heating units, and machines, and can be converted into plastics.
  • The extraction and processing of petroleum and its availability are drivers of the world's economy and global politics.
  • Petroleum is non-renewable energy, and other energy sources, such as solar and wind power, are becoming prominent.

Understanding Petroleum

The extraction and processing of petroleum and its availability is a driver of the world's economy and geopolitics. Many of the largest companies in the world are involved in the extraction and processing of petroleum or create petroleum-based products, including plastics, fertilizers, automobiles, and airplanes.

Petroleum is recovered by oil drilling and then refined and separated into different types of fuels. Petroleum contains hydrocarbons of different molecular weights and the denser the petroleum the more difficult it is to process and the less valuable it is.

Investing in petroleum means investing in oil, through the purchase of oil futures or options, or indirect investing, in exchanged traded funds (ETFs) that invest in companies in the energy sector.

Petroleum companies are divided into upstream, midstream, and downstream, depending on the oil and gas company's position in the supply chain. Upstream oil and gas companies identify, extract, or produce raw materials.

Downstream oil companies engage in the post-production of crude oil and natural gas. Midstream oil and gas companies connect downstream and upstream companies by storing and transporting oil and other refined products.

Pros and Cons of Petroleum

Petroleum provides transportation, heat, light, and plastics to global consumers. It is easy to extract but is a non-renewable, limited supply source of energy. Petroleum has a high power ratio and is easy to transport.

However, the extraction process and the byproducts of the use of petroleum are toxic to the environment. Underwater drilling may cause leaks and fracking can affect the water table. Carbon released into the atmosphere by using petroleum increases temperatures and is associated with global warming.

Pros

  • Stable energy source

  • Easily extracted

  • Variety of uses

  • High power ratio

  • Easily transportable

Cons

  • Carbon emissions are toxic to the environment.

  • Transportation can damage the environment.

  • Extraction process is harmful to the environment.

The Petroleum Industry

Classification

Oil is classified into three categories including the geographic location where it was drilled, its sulfur content, and its API gravity, its density measure.

Reservoirs

Geologists, chemists, and engineers research geographical structures that hold petroleum using “seismic reflection." A reservoir’s oil-in-place that can be extracted and refined is that reservoir’s oil reserves.

As of 2022, the top ranking countries for total oil reserves include Venezuela with 303.8 billion barrels, Saudi Arabia with 297.5, and Canada holding 168.1.

Extracting

Drilling for oil includes developmental drilling, where oil reserves have already been found. Exploratory drilling is conducted to search for new reserves and directional drilling is drilling vertically to a known source of oil. 

Investing In Petroleum

The energy sector attracts investors who speculate on the demand for oil and fossil fuels and many oil and energy fund offerings consist of companies related to energy.

Mutual funds like Vanguard Energy Fund Investor Shares (VGENX) with holdings in ConocoPhillips, Shell, and Marathon Petroleum Corporation, and the Fidelity Select Natural Gas Fund (FSNGX), holding Enbridge and Hess, are two funds that invest in the energy sector and pay dividends.

Oil and gas exchange-traded funds (ETFs) offer investors more direct and easier access to the often-volatile energy market than many other alternatives. Three of the top-rated oil and gas ETFs for 2022 include the Invesco Dynamic Energy Exploration & Production ETF (PXE), First Trust Natural Gas ETF (FCG), and iShares U.S. Oil & Gas Exploration & Production ETF (IEO).

How Is Petroleum Formed?

Petroleum is a fossil fuel that was formed over millions of years through the transformation of dead organisms, such as algae, plants, and bacteria, that experienced high heat and pressure when trapped inside rock formations.

Is Petroleum Renewable?

Petroleum is not a renewable energy source. It is a fossil fuel with a finite amount of petroleum available.

What Are Alternatives to Petroleum?

Alternatives include wind, solar, and biofuels. Wind power uses wind turbines to harness the power of the wind to create energy. Solar power uses the sun as an energy source, and biofuels use vegetable oils and animal fat as a power source.

What Are Classifications of Petroleum?

Unrefined petroleum classes include asphalt, bitumen, crude oil, and natural gas.

The Bottom Line

Petroleum is a fossil fuel that is used widely in the daily lives of global consumers. In its refined state, petroleum is used to create gasoline, kerosene, plastics, and other byproducts. Petroleum is a finite material and non-renewable energy source. Because of its potential to be harmful to the environment, alternative energy sources are being explored and implemented, such as solar and wind energy.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. National Geographic Society. "Petroleum."

  2. World Population Review. "Oil Reserves By Country."

  3. Vanguard. "Vanguard Energy Fund Investor Shares."

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