# Understanding Petroleum: Importance, Uses, and Investment Strategies

![Petroleum: A naturally occurring liquid found beneath the earthâs surface that can be refined into fuel.](https://www.investopedia.com/thmb/2cjaq0B_zOzZ8sCi16z7b7K3ec8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/petroleum.asp-final-5f3ec6769f714e2789652d5178204adf.png)

*— Investopedia / Tara Anand*

## What Is Petroleum?

Petroleum, or crude oil, is a vital fossil fuel formed by the decomposition of organic material over time. Essential for powering vehicles and machines and convertible into plastics, it significantly influences [global politics](https://www.investopedia.com/articles/investing/081315/opec-vs-us-who-controls-oil-prices.asp) and the economy. Understanding its extraction, uses, and investment methods can help individuals make informed financial decisions.

### Key Takeaways

*   Petroleum, a non-renewable fossil fuel, plays a central role in global transportation, energy, and manufacturing.
*   The petroleum industry significantly impacts the global economy and politics due to its vital role in energy production.
*   Investing in petroleum can be done directly through oil futures or indirectly via energy sector ETFs and mutual funds.
*   The extraction and use of petroleum pose environmental risks, including carbon emissions and potential ecological damage.
*   Alternatives to petroleum, such as solar and wind energy, are increasingly being explored due to petroleum's environmental impact and finite availability.

## The Role of Petroleum in the Global Economy  

The [extraction](https://www.investopedia.com/articles/active-trading/102214/economics-oil-extraction.asp) and processing of petroleum and its availability is a driver of the world's economy and geopolitics. Many of the [world's largest companies](https://www.investopedia.com/articles/personal-finance/010715/worlds-top-10-oil-companies.asp) extract and process petroleum or make petroleum-based products like plastics and fertilizers.  

Petroleum is [extracted through drilling](https://www.investopedia.com/investing/oil-gas-industry-overview/), then refined and separated into various fuel types. 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.

> **Fast Fact**
>
> 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](https://www.investopedia.com/ask/answers/060215/what-difference-between-upstream-and-downstream-oil-and-gas-operations.asp), 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.

## Advantages and Disadvantages of Using Petroleum  

Petroleum powers transportation, provides heat and light, and is used to make plastics for 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.

Petroleum extraction and its byproducts are harmful to the environment, however. Underwater drilling can cause leaks, and [fracking](https://www.investopedia.com/terms/f/fracking.asp) may impact the water table. Burning petroleum releases carbon, which increases temperatures and contributes to 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.
    

## Key Aspects of the Petroleum Industry

### Classification

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

> **Fast Fact**
>
> As of 2025, the top-ranking countries for total oil reserves include Venezuela with 303,008 million barrels, Saudi Arabia with 267,230, and Iran with 208,600.

### Extracting

Developmental drilling taps into known oil reserves. Exploratory drilling is conducted to search for new reserves and directional drilling is drilling vertically to a known source of oil.   

## How to Strategically Invest 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](https://www.investopedia.com/articles/investing/022017/top-3-oil-etfs-2017-uso-ieo.asp) include the Invesco Dynamic Energy Exploration & Production ETF ([PXE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PXE)), First Trust Natural Gas ETF ([FCG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FCG)), and iShares U.S. Oil & Gas Exploration & Production ETF ([IEO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=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, a non-renewable fossil fuel, plays a crucial role in the global economy and everyday life, powering vehicles and heating systems, and serving as a raw material for plastics and other products. The extraction and use of petroleum influence world politics and the environment due to its significant carbon emissions.

Investing in petroleum can be done through oil futures and ETFs, but it's important to consider the environmental consequences and the rise of [alternative energy sources](https://www.investopedia.com/terms/r/renewable_resource.asp) like solar and wind power, which are increasingly being adopted to reduce reliance on fossil fuels.  
  

> **Article Sources**
>
> 1.  National Geographic Society. "[Petroleum](https://education.nationalgeographic.org/resource/petroleum)."
>     
> 2.  World Population Review. "[Oil Reserves By Country](https://worldpopulationreview.com/country-rankings/oil-reserves-by-country)."
>     
> 3.  Vanguard. "[Vanguard Energy Fund Investor Shares](https://investor.vanguard.com/investment-products/mutual-funds/profile/vgenx)."