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Oil seems to be on every bodies mind a lot lately both in the good sense and the bad sense, but regardless of what one thinks of the oil industry it is the #1 most efficient energy source in the world. And if we didn’t have it we would still be on horse and buggies or riding a bicycle to and from work.The oil industry has always had a mystical aura about it in the fact that it just appears out of the ground and the thoughts of Jed shooting at the ground in the Beverly Hillbillies and it comes bubbling out of the ground. In reality this is not the case, but it does make for a good story.I am not going to go into the many different reasons of why oil is a good thing, but I do want to address the bad publicity it has gotten in the area of risk that is involved when investing into the oil industry.First I want to disclose that I come from a family that was born and raised in Southern Illinois who made their living working in the oil industry by drilling and servicing oil wells. I know people are never aware that there are such things as oil wells in Illinois, but there are approximately 650 oil fields and around 30,000 oil wells in the state. It is a dirty business and not very many people want to do this kind of work, but we are all thankful for the people who have chosen to work in this industry.When most people think of investing in oil wells they think of dry holes and unscrupulous individuals like Snidely Whiplash hiding in the weeds waiting to prey on another suspecting investor with cash hanging out of their pocket. Again, another myth. The reality of investing in oil wells is that with this kind of investment you can at least visit the well site and see where your money was invested and talk to the operator who you invested with and find out the situation if it is either good or bad. Not so when an individual invests in the stock market or mutual funds. And that is why I wrote the article about the “10 Myths of Investing in Oil”When people invest money they are either buying stocks or mutual funds or REITS or some other type of investments I can’t even pronounce and how do they do it? Either online with a computer screen in front of them or at an Edward Jones or Financial Institution’s office. And even then you don’t know what you are investing in. You get to meet a nice person to whom you write the check to, but that is about it. And is it risky? Can you say “Bernie Madoff?”My point to the story is not to make light of investing in stocks, bonds, mutual funds, or CD’s or other financial instruments. It is only to let people know that investing in oil is no more risky and sometimes less risky than the many different financial products that is touted by the many financial institutions.Relax, enjoy the journey and hopefully I have shared some information that will benefit you in some way.Myth #1 – You can lose all of your money.
Truth – It depends on how you want to look at your money. In reality the money that you invest into the oil business is different than the money you would invest into the stock market or the purchase of real estate. When someone invests into the stock market or the purchase of real estate they are investing with “post” tax dollars. Meaning they are using the money they have left over after paying the taxes that are owed on the money they earned to make the investment. But when someone invests into the drilling of an oil well they are given preferential treatment from the federal government in the form of Tangible and Intangible investment allowances. What this means is that if you invested $25,000.00 into the drilling of an oil well you would be allowed to write off or deduct the Intangible amount of your investment off of your annual gross income 60% to 75% of your investment could be written off against your personal income) of the year you made the investment. In essence you could never lose all of your money, because it never was all your money in the first place. The government was going to get their part of your income regardless whether you invested into an oil well or not. Generally they were going to get between 35% to 40% of your income anyway. So when you invest into an oil well you are really using some of your money and part of the government’s money.
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Myth #2 – It is more profitable to buy stock in Exxon or a major oil company from my stock broker than to invest in an oil well.
Truth – When you purchase stock from a stock broker or online in essence you are buying tiny piece of a huge corporation with millions of many different pieces. There is some comfort in knowing that it is a large corporation with holdings all over the world, but it also comes with a huge overhead to support. When one purchases stock in such a large corporation with their large overhead it takes a lot of movement in the market for one to make a substantial profit, plus you are buying the stock with “post” tax dollars so you only getting to invest 60% to 70% of the income you had earned. You have already given up a large part of your buying power before you even start. When you invest into an oil well it is called “Direct Participation” and that is what is happening. You are investing directly either into one oil well or a group of oil wells. Your investment is more focused on the production of oil and not on the running of a huge corporation. Your investment will have the chance to grow faster and larger when it is focused instead of thrown into a huge group where it is used to run the machine.
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Myth # 3 – Most oil wells are a dry hole. They only find oil in about 1 out 10 wells drilled.
Truth – There are different kinds of drilling when it comes to finding oil. The type that most people have heard of is “Wildcatting”. It is what was talked about on the TV shows of Dallas and other movies about oil wells where the guy goes out into the middle of nowhere and when he is down and out on his last dollar hits a gusher of a well and it blows up in the air and everyone lives happily ever after like the Beverly Hillbillies. In situations like that where one is drilling in the middle of no known oil production the odds of getting a dry hole are probably more like 25 to 1 that you will get a dry hole.The other type of drilling that is done and has a much higher success rate is “Developmental Drilling”. When you are doing developmental drilling you are either drilling next to or very near to existing oil wells or oil fields. This type of drilling is highly successful and can sometimes have a 100% success rate. When investing into an oil well be sure to clarify if the investment is a wildcat or a developmental drilling project. Chances are if you are investing into a developmental drilling project you odds of hitting oil and making money are going to be very good.
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Myth # 4 – If someone offers you an opportunity to invest into an oil well it is a scam.
Truth – The best way to find out if you are getting a good investment opportunity is to do the research. Generally that is why people buy stocks and investments from a stock brokerage house or online service they have heard of, because they are not really interested in doing the research. An investment representative will ask them their tolerance for risk and take their money and invest it for them. Minimal risk. Minimal return.When in investing into an oil well do the research. A for real oil drilling and exploration company will invite you to the drilling site and explain the risks to you first hand. They will allow you to hear what the geologist has to say in regard to whether the well is going to be commercial or not in his opinion. Legitimate oil operators don’t shy away from the investor who wants to learn more about the process of drilling and producing oil wells. They welcome the questions and comments and it allows you to get directly to the people who are making the oil well investment decisions and thereby increasing your knowledge of the oil industry and reducing your risk.
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Myth #5 – I know that the only reason I am asked to invest into an oil well is because they know it isn’t going to be a good well.
Truth – If anyone really knew how much oil an oil well would make before it was drilled do you really think they would be asking you to invest? Nobody knows. And I mean nobody knows how much an oil well is going to produce. When a project is based on developmental drilling it is easier to get an idea and a possible range, but even then nobody ever really knows how much an oil well will make. All oil wells are different. They can be right next to each other and be totally different. And that is why oil operators share the wealth and the risk when drilling. Because of the unknown. Even the largest companies in the world like Exxon, Shell or BP share the risk when they are drilling new projects, because they too know that there is an unknown factor when drilling oil wells and it is better to have a piece of a lot of oil wells than have all of your eggs in basket per se with just one oil well.
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Myth #6 – Investing into an oil well is easy, but it is after they start the well is when it gets expensive.
Truth – Very rarely are the carrying costs to maintain and operate an existing oil well excessive. The exception is rare. The cost to prepare, drill and complete and oil well are expensive, but if an oil well is completed properly the cost to maintain and operate are almost minimal. There are some wells that may go a year or beyond before ever needing any additional maintenance. Only when you have factors such as corrosive fluids or other chemical reactions down hole do you encounter excessive maintenance costs. It is rare that you will have excessive mechanical costs after an oil well has been completed. Your oil operator is also your partner when you are involved in direct participation oil drilling and they do not to be burdened with high carrying costs either. You can be assured they have already factored carrying costs into the equation, because they want the oil well to be a viable investment too.
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Myth #7 – Drilling oil wells sound dangerous and could have a lot of liability and I don’t want to become part of the liability factor.
Truth – Investing into oil wells is like when you buy stock. You are only liable for the amount of your investment. In the stock market if the company you invested in goes broke or has a product liability issue you are not affected by these issues other than your investment may go down or become worthless. The same is true when investing in an oil well where you have an operating agreement between yourself and the operator stating that you are not liable for any actions of the oil well and the operator is assuming the responsibility and liability. It is like getting the best of both worlds. You are on the ground so to speak in the front row watching your investment, but without any of the liability.
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Myth # 8 – Oil wells don’t have a very long life span.
Truth – Oil wells have a very long life span. Oil wells have a tendency to begin with a higher rate of production, because in the beginning you are letting off the pressure that has been captured underneath the earth’s surface for millions of years and over time it is like putting a very tiny tube into the side of huge tire full of air whereby it eventually slows down to a slow stream and continues to blow out air. Oil wells are similar. After the initial pressure has been released there is still oil in place and some wells will continue to produce 20, 30, 40 & 50 years under their own pressure. Some oil wells will need to get a push later in life with an operator injecting water or some form of gas to give the oil a push and help it come out. But generally an oil well has a long life. The production won’t be at a very high daily rate, but it will keep going and going and going like the Ever Ready Battery Bunny.
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Myth # 9 – If the price of oil goes down and the well is a low producer I won’t ever get my money back.
Truth – Everything in life is cyclical. Things go up and thing and things go down. And the price of oil is not different. However, in today’s world the market place is different. We now have 1 Billion people in India with a 300 Million middle class that is evolving and we have 1.1 Billion people in China that has 300 Million middle class that is evolving there too and are consuming more and more energy to help their countries grow and prosper. Plus like the stock market oil wells are known to be long performers and continue to produce and give an economical return to their investors. In the stock market if the sales of a company should tumble and go into the negative column as it did with General Motors and all of the investors money was wiped out with the company filing bankruptcy due to low sales. In the situation of an oil well if the market price should drop below the amount needed to be profitable you can turn the well off and wait until the market price returns. And it always cycles back around again to profitability in the oil business. You find after doing the math on the amount of money you have invested that over time before factoring in your tax benefits that oil investments generally have a very high rate of return.
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Myth # 10 – If I invest in an oil well I will be stuck with it forever and won’t be able to sell my interest.
Truth – An interest in an oil well is sellable, because it is based on cash flow. Just like a stock is priced based on earnings times a multiple an oil interest is the same way. The longer you own an oil interest and the more established the production becomes the easy it is to sell, because it has a proven cash flow record just like a stock in a company would have.
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Bonus Myth # 11 – They have found all of the oil there is to be found so why waste the time to drill?
Truth – It is believed that all of the big oil or easy oil has been found in the Continental United States excluding the offshore oil which is yet to be discovered. But big oil and new oil is expensive. Because it is in hard to get to places and it is much deeper than the oil found in the past it is much more expensive and therefore it would cost a private investor considerably more to invest in this type of oil exploration.But there are thousands of proven oil fields in the United States with oil reserves in place that have been sitting idle for many years. Fields that were abandoned when the price of oil had dropped and before new technology was invented to get the oil out with reduced costs and at today’s prices make the developmental drilling procedures of an existing oil field very profitable and cost effective in today’s market place.

Ideally, all of the decisions we make in life involve consideration of both the pros and the cons of the possible outcomes. For example, the decision to eat a piece of chicken past its expiration date should be based not just on the potential for a tasty dinner, but also the potential for a less-than-pleasant gastro-intestinal reaction.In other words, most things in life have both upsides and downsides, and our actions should be – though aren’t always – predicated on whether the upsides outweigh the downsides. While many bad decisions can occur as a result of a failure to consider the downsides, just as many poor choices are the result of the failure to understand the downsides, rather than not considering them at all.Most people know that irresponsible financial behaviors can give you a bad credit score, for instance, but many folks tend to underestimate the many downsides of having bad credit. To help put things in perspective for your next financial decision, here are three of the biggest downsides to having bad credit.1. You Have a High Chance of Being Rejected for New Credit
At its heart, having bad credit is basically like walking around wearing a sign that says, “I can’t handle debt.” At least, that’s how most creditors are going to interpret your poor credit history and low credit score when you come asking for a line of credit.That’s because lenders use your credit reports and scores as a means of determining your credit risk, or how likely you are to repay what you borrow. So, if you have a history of missing payments or defaulting on debt, lenders aren’t going to want to give you more money, and they will reject your application for new credit.Think of it this way: If you loan your neighbor your lawnmower in June but they never return it, how likely are you to lend them your snowblower in December?Since most major banks have a fairly low risk tolerance, bad-credit consumers are left with limited options for finding a credit card or loan. Namely, you’ll be looking at lists of subprime lenders who specialize in bad-credit, high-risk applicants – lenders who aren’t exactly known for their affordability or top-tier rewards. Which leads us to the next big downside to bad credit: the expense.2. Creditors, Landlords, and Utility Companies Will Charge You More
It took a few tries, but you finally found a subprime lender that will work with you. Great, hard part over, right? Wrong. Lest you think that qualifying for new credit is the only big downside to having bad credit, just take a look at how much that credit is going to cost you.As we mentioned, your credit score is what lenders use to determine your credit risk. High-risk applicants are the most likely to default on their debt (not pay it), so lenders willing to work with bad-credit consumers have to find some way to balance the risk. They do this by jacking up interest rates and adding on extra fees.As an example, consider a $10,000 car loan repaid over three years. Applicant A, who has a great credit score of 750, will likely be offered an APR of around 3.5%, which means Applicant A will pay around $550 in interest over the three years.At the same time, Applicant B, who has a low credit score of 580, had to use a subprime lender to get the same size auto loan. The subprime lender charged Applicant B an APR of 10%, which means Applicant B will pay over $1,600 in interest over three years.What’s worse, it’s not just lenders and credit card issuers that will charge you more for having bad credit. You’ll likely face a credit check when applying for a new apartment or when you set up utilities in a new location, and having bad credit can result in being charged a larger security deposit than you would otherwise need to provide.3. You May Miss Out on Valuable Financial Opportunities
An important part of finance and accounting, opportunity cost is basically the consideration of what you’re missing out on when you make a decision to do something else. For example, if you choose to spend your last $5 on a fancy coffee, the opportunity cost could be that $5 hamburger you don’t get to eat later.When it comes to your credit, having bad credit is rife with opportunity cost. Take credit cards, for instance. With bad credit, you’re stuck using subprime or secured credit cards that likely cost a lot without offering very much. In contrast, if you had good credit, you could potentially earn hundreds of dollars worth of credit card rewards and perks every year simply by using the right credit card.And it goes beyond credit cards. Drivers with good credit can get dealer incentives when shopping for a new car, and you can even earn insurance discounts for having a healthy credit profile.Don’t forget the extra cash you’ll likely be required to provide when renting a new apartment. Say you’re required to make a $1,000 security deposit when you move in because of your bad credit. That money could easily be earning you dividends in your retirement account if it weren’t being wasted in your landlord’s bank account.Don’t Let Bad Credit Hold You Back
Although it’s our own decisions that often lead us to bad credit, few of us actively choose to tank our credit scores. You can wind up with bad credit as a result of a series of seemingly minor decisions that are made without full consideration of the consequences. Hopefully, however, knowing these three major downsides of bad credit helps give you perspective when making your next financial decision, be it large or small.For consumers already struggling with bad credit, these downsides are likely daily considerations. But they don’t have to be lifelong obstacles. You can rebuild bad credit over time by practicing responsible credit habits. You can also use credit repair to remove any errors or unsubstantiated accounts dragging down your score.The most important rule for building credit is to always, always, always pay your bills on time. Your payment history is worth up to 35% of your credit score, and delinquent payments can cause you to lose dozens of points with a single mistake. You’ll also want to ensure you maintain low credit card balances and only borrow what you can afford to repay as agreed.With time and diligence, even the worst credit can be rebuilt, freeing you from the many downsides of having bad credit. Even better, having great credit has plentiful upsides that will make the hard work well worth the effort.