The current oil price is a fantastic opportunity. In fact, if you have a car, you can kill two birds with one stone. Well, not really kill, but you the currently low oil price is a win-win situation for most of us. We get richer twice: once through filling up our cars and second through the great middle and long-term investment opportunity the low price is presenting.

The Gas Pump and Two Free Beers

A few days ago I had a couple of drinks with a friend. It was an awesome evening, chatting about the football game we were attending the following weekend and playing some backgammon. A great evening all together and a rather cheap one indeed with a couple of beers for zilch. Free beer, a dream come true. No, we didn’t cheat the owner out of money. We paid our dues, but were still drinking a couple of cold ones for free. All thanks to the oil price.

Anyone with a car has already noticed the massive savings compared to a year ago. Fuel prices here in Paris are somewhere in the region around  €1.20 per liter (or about € 4.50 per gallon). Compare this to a bit more than year ago with fuel prices around € 1.35 to € 1.40 mark (around €5 per gallon). Even if you were to fill up your tank only once per month (as I generally do since I either take trains, planes, or cycle if it’s within an hour distance in Paris), you’d save substantially when filling up your car with gas. Last year I parted with about €73 each time I went to the pumping station. This year it is around €62. That’s a saving of €11 per month. Maybe nothing to brag about, but it does pay for two beers. Then again, your savings might be significantly higher if you had to use your car more often. I am lucky enough to not having to use my car every day. If you are interested in how much you are saving, follow this link to a simple calculator. If you want to check the fuel price for the last few years, here's a good website with data for various countries.

As fuel prices will not always stay that low, enjoy them while they last and enjoy seeing your savings grow or go out and spend it on something fun and worthwhile. Who said oil can only make the wealthy oil barons rich? Oil can make you rich, and at the least can buy you two free beers. But how about making serious money?

Making real money – No Oil Barrel in the Living Room

This wouldn’t be Captain Finance if we didn’t look at some ways of making money mid- and long-term and using the currently low oil prices to make financial gains. The easiest way of turning the low oil prices into a driver for your wealth is by buying oil. Yes, go ahead and stock up on those barrels of liquid gold. Oil prices have not been as low since 2004 and are unlikely to significantly fall further. In fact the last few weeks have shown an upward momentum coming back from below $30 to over $40 in a relatively short time.

Again over a couple of beers (yes, there is a lot of beer in this story), a friend asked me about what to do with his six figure investment portfolio. He was invested in a few companies across the globe, but felt that it was the time to make some changes. He just didn’t know how and where to put his money. “How about some oil,” I inquired. “Oil,” he looked at me in disbelief. “How do I buy oil? Where would I store it?”

It made me smile: “Not actual barrels of oil. That would be a bit risky to keep oil in your living room.” “Then how can I buy oil?”

It is actually really simple to invest in oil. Unless you are really keen on storing some barrels in your garage (which I am not even sure is legal in many jurisdictions due to safety concerns), there are much easier, cleaner, and less space demanding ways. There is no need to give up your living room space.

Investing in oil derivates (futures and options)

Certificates, options, and futures are one way of investing in oil, alas risky. The latter in particular, oil futures, are almost speculative in nature – you are betting on the future. Every time you make an investment you are in fact betting on future developments of a particular asset, but oil futures are risky in that you are obligated to buy oil for a particular price on a particular date. While with other investments you can generally choose what price you want to pay or when, futures are an obligation that allows no leeway. Oil futures are in essence a bet on where the price will stand in, usually, a few months into the future. Whether it is airlines, refineries, or utilities, companies from various sectors deal in futures and options to secure oil reserves for a specific price. Sometimes this might work in your favor when the price moves are in your favor, but other times you might end up losing quite a substantial sum or all. In addition you are faced with a muptiple number of issues (from margins; i.e., you are buying only at a fraction of the price - at a ratio of 1:1000. In other words you only need to invest $1 to earn $1000, but the same applies to losses. You may have seen the movie Margin Call. It was risky then and is still risky now to invest on a margin. You can also buy other types of products from the derivatives family to bet on oil, but many products carry other risks such as intrinsic changes to a product that may be too costly and difficult to comprehend for many private investors. So a rather risky investment.

Investing in oil companies

Another method, and in fact my preferred one, is buying stocks in oil companies. For three reasons: the primary one, dividends. With derivatives you are buying the actual, unproductive commodity or a bet on the underlying asset. With a company you are buying parts of a productive entity – the company, its machines, its innovations and ideas, and its people. A commodity will not pay dividends as it does not produce a profit. It is simply a product that can be turned or used for certain purposes. A company, in contrast, if managed well, will return a profit and as such a dividend - of course, there are exceptions to this rule with companies unwilling or unable to share the profits with their shareholders, but this is an exception and not the norm. The second reason: as the oil price goes up so will profits and the share price. The third reason: companies active in the oil sector are diversified and might still be profitable even amidst a falling share price.

Take for example Total SA. One of the biggest oil and gas manufactures in the world. Currently Total’s share price is around €42. That is a full €21 from its ten year high of €63.05 on July 9^th, 2007. In other words, the share is currently trading at 33% below its ten year high. Of course, times were a bit different, the world was in a state of euphoria and prices across the board only knew one direction. But even less than two years ago, during times of uncertainty over Europe's Greek crisis and generally more skepticism in the markets Total’s share price traded at €52.72 on June 23^rd 2014. That is a difference of €10.72 or 20%. Undoubtedly history does not predict future share prices, but investing in a stable company that is a major player in its industry at times of low profits due, primarily, to the underlying commodity’s historically low price, gives space for hope and the potential for future growth when the oil price starts climbing again.

Of course, you could also invest in BP, ENI, or Shell or any other good, stable company active in the oil business. The advantage over certificates or futures is that you will not only profit from a higher oil price, but also regular dividends. Thus even if the price was not to go up in the next few months, you’d still be rewarded while waiting

Investing in Oil-Related ETFs

If buying certificates, futures, or individual companies is not your thing, how about an ETF? Whether an ETF that combines oilfield services companies such as Schlumberger, Big Oil such as ExxonMobil such as the Energy Selector or a Vanguard Energy ETF that holds companies active in refining, drilling, equipment, and transportation, oil related ETFs give you relatively cheap exposure to the oil markets.

Alternatively you could invest in a sector that benefits from the low oil prices such as the airline industry or the the transportation sector. ETFs include the U.S. Global Jets ETF investing in the airline industry and IShares Transportation Average holding US transportation, airline, railroad, and trucking companies

Investing in oil related companies

There is another possibility to profit from the low oil price: invest in companies that have hedged against a climbing oil price. Some of these companies may be in logistics, others in air traffic. Any major air carrier will safeguard itself against rising oil prices through contracts, or in other words, will buy a guarantee that in the future they can acquire oil for a specific price, thus protecting themselves against any major hikes that might damage their profitability and endanger their business.

Whilst most airline companies will do this, some might have secured better deals and acquired substantially more than others. This should allow them to be outpace their competitors and reward you the investor with share price gains. Given, this is the least direct and most risky bet, as there are other factors at play that might influence the development of a logistics or airline company. But it is worth a consideration if you are already eyeing an investment in these sectors.