[Posted on March 2, 2015 by Michael L. F. Slavin]
As the U.S. economy continues to slowly bounce back from the financial miasma of the past half-decade, black gold has risen back to the forefront of many investors’ minds. After all, the overwhelming majority of the world’s energy needs still derives from the corpses of millions-of-years-dead organisms, and new technology is reclaiming old deposits of oil and natural gas – not to mention the surge in oil shale discovery in the States alone, which is quadruple what the Middle East has in proven reserves.
If there is any impediment to oil well investment this year, it probably rests on a handful of myths that have propagated through the investment sectors; which, as always, are couched in misunderstanding and rumor. As always, knowledge serves as a beacon of light to part the murkiness and set the record straight.
1st Myth: There’s No More Oil to Be Found
This isn’t even theoretically true. Of course, long gone are the days when America was a largely untried expanse with respect to oil prospecting – you’re not going to start digging in your backyard and stumble on the new Ghawar Field, for example. It isn’t impossible, of course, but it sure is inefficient. Much more probable is the modern technique of developmental drilling, which simply consists of looking for oil right nest to preexisting oil wells – the success rates here are very high with this approach. The success rates of either aren’t even comparable – one is close to 100 percent, whereas the other struggles to reach 0.4 percent.
So, when looking to oil well investment, this is the primary piece of information to discern – is the company engaging in developmental drilling, or are they punching random holes in the ground in the prospecting-equivalent of searching in the dark?
2nd Myth: Oil Wells Don’t Last Long
There’s no evidence to back this up; obviously at the very beginning, they churn out loads of easily-recoverable oil. However, technology has gotten so much better in the past decade that even a 40-year lifespan for the average well is rather conservative. Most of them will continue to remain profitable well into the future, and those projections are with current technology.
3rd Myth: Oil Investments Aren’t Very Liquid
Here, the exact opposite is true! It can be argued that oil and gold are the most liquid commodities that exist – one backs the dollar and the other governs cash flow. Indeed, the longer you retain your interest in an oil company, the more profitable the stock once – if – you decide to sell.
4th Myth: It’s More Profitable to Invest in a Big Company than in an Oil Well
Well, let’s just look at the math: a huge oil conglomerate like Royal Dutch Shell or BP is like a brontosaurus; its size may make it almost impermeable to attack – but it requires a huge amount of resources to sustain itself. A large fraction of your investment has to take into account their considerable overhead, which cuts into your potential profits; not so with an actual oil well, which deals only in oil.
5th Myth: You’re Liable for Mishaps
This is not so – much like any stock, the company assumes liability, which is codified in the operator agreement you sign. The worst thing that could happen to your investment is no different than any other business that goes down – you lose your investment, but you’re never in the red.