The Changing Landscape of 21st Century Investing in Oil Wells

[Posted on Jan 25, 2013 by Michael L. F. Slavin]

Ever since the beginning of the 1970s, the United States has seen a fall in the production of domestic oil. The shrinking availability of easily obtained supplies and the emergence of international mega-fields helped produce this steady decline, but oil production realities have changed in the 21st century. Rather than the United States becoming a barren wasteland for oil as has been predicted, many people are anticipating that America is about to enter a golden age of oil production in places like the Midwest and Gulf of Mexico, and that domestic investing in oil wells will continue to rise.

A Short History of Oil Well Investing

The first oil well was produced in the United States in 1859. Back then, harvesting oil from the ground was a major hands-on process that was dangerous for workers and was often unreliable in its results. Investments for producing these wells were most often made by private companies and individuals. As a result, oil wealth and investing in oil wells in the late 19th century was concentrated into the hands of only a few individuals: John D. Rockefeller of Standard Oil being the most famous.

The progressive era of the early 20th century brought about the breakup of the great industrial monopolies. Oil investments became diversified among many different companies and firms, opening up opportunities for everyday working men. World War II and the expansion of the middle class rapidly increased oil production during the 1950s and 60s until production peaked in 1970. Since then, domestic production has declined, but new technology is making once inaccessible oil reserves ripe for the picking.

The Emergence of Shale

Whether or not a resource is worth pursuing depends on the cost of retrieval and the price it sells for on the market. Producing light sweet crude in relatively shallow wells has always been a huge money maker for oil investors, but obtaining shale oil or oil from deep underwater wells has been cost-prohibitive until recently. There are many factors that account for this change, but the most important are technology and rising energy prices. High-tech drills and fracking techniques are making oil that was once seen as impossible to get now accessible. Even so, these techniques are much more expensive than traditional drilling. It is only the high prices for energy on the world market that are making this type of investment a profitable venture. As long as you can sell oil for a higher price than you produced it for, there is money to be made.

The Advantage of Investing in a Collective Good

Oil, more than any other substance on Earth, has been responsible for the massive industrial development of the modern world. Oil fuels our vehicles, planes, trains, boats, personal computers and feeds the world through industrial fertilizer. The government has a vested interest in making sure that oil supplies grow through time, so they make investments in oil production through subsidies and tax breaks for investors. Huge portions of production costs are completely tax deductible, alleviating much of the risk usually involved with investing.

 

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