Oil eCourse > Lesson 6
Oil & Gas Investment Risks and the Global Oil Market
Lesson 6 of 7 · About a 9-minute read · By Lane Kawaoka, PE · Updated November 2026 · Course home
Short answer
Your distributions move with a global oil price set by events far from your well, such as OPEC+ decisions and shipping chokepoints, and producing wells usually keep running at low prices while the checks shrink. Compare deals only after restating their projections at the same oil price, and ask for a written downside case.
What if oil crashes, or something happens overseas? You should ask that before you invest, and you should expect a straight answer from any sponsor. The tax benefits only apply to domestic drilling, but your cash flow depends on a global commodity price. This lesson covers what moves that price, and the other risks that sit inside every drilling program.
Watch: 5 oil investing lessons most passive investors miss (17 min)
Operating break-even vs. drilling break-even
Commodity price is the biggest risk you can’t control once you’re in. You can’t shut a well down because prices dipped for a quarter, and you can’t make one produce more.
Two break-even numbers matter. The cost to drill a new well is high, and a new well needs a healthy price to be worth drilling. Once a well is drilled, though, the ongoing cost to run it is relatively low, so the operating break-even for a producing well can be well under $40 a barrel. In practice most producing wells keep flowing through low prices. What you’re exposed to is the price you get paid for what comes out. Lower prices mean smaller distributions, and a long period of low prices can mean you don’t get all your capital back.
Domestic production, global pricing
Your well may be in Texas or Colorado, but oil trades as one global market with a few dollars of regional difference. Buyers in Europe, Asia and California compete for the same barrels. Sanctions, tanker routes and chokepoints far from your well move the price you’re paid.
The Strait of Hormuz is the clearest recent example. This section reflects events through November 2026. That narrow waterway at the mouth of the Persian Gulf normally carries about 20 million barrels of oil a day, around 20% of global supply. During the 2025 conflict involving Iran, flow through the strait dropped close to zero at points before partially recovering through pipelines in the UAE and Saudi Arabia that bypass it. Prices rose, but less than a disruption that size might suggest, partly because China drew on more than a billion barrels it had stockpiled.
The lesson for an investor is that a single headline isn’t a price forecast. A disruption can help or hurt you, and it can also tempt a sponsor to raise its price assumptions at exactly the wrong time.
OPEC+ and spare capacity
OPEC+ is the original OPEC members plus Russia and other allies. It doesn’t set prices directly. It influences them through spare capacity: oil that can be turned on or held back at will. Saudi Arabia can produce up to roughly 12.5 million barrels a day but normally holds several million in reserve.
The U.S. has no equivalent lever. American production comes from hundreds of thousands of wells run by thousands of separate companies, many of them small. Nobody directs U.S. output up or down. When spare capacity worldwide is high, the market can absorb a disruption. When it’s thin, small events cause big price swings.
A production target is also not the same as barrels delivered. Oil still has to be pumped, shipped, insured and refined. Ask how a sponsor’s model treats OPEC headlines, if at all.
Go deeper: Iran, the Strait of Hormuz, OPEC+ and the shale revolution, with Robin Mills (45 min)
Where American oil comes from
U.S. crude production hit a record of about 13.6 million barrels a day in 2025. Texas alone produced roughly 42% of it, and the Permian Basin across Texas and New Mexico about 59%. The offshore Gulf of Mexico and North Dakota’s Bakken add enough that four areas supply more than 80% of U.S. output. Colorado, where much of the horizontal drilling I’ve invested in sits, produces about half a million barrels a day.
A smaller basin isn’t automatically a worse investment. Top basins command premium pricing because everyone wants in. What matters is whether the specific field has a track record, whether the operator has drilled that formation before, and whether you’re paid fairly for its risks.
Normalize the sponsor's price assumptions
This is the most practical habit in this lesson. Two offerings can show similar projected returns while one assumes $55 to $60 oil and the other assumes $80 to $85. Those aren’t the same risk. It’s the oil equivalent of a real estate deal that looks strong because it assumes an aggressive exit cap rate.
Before you compare deals, ask each sponsor:
- What oil and gas price does the base case use?
- What price does the deal need to return my capital?
- What does a downside case at a lower price look like, in writing?
- When does production start, and when do distributions start in the model?
- How does the realized price compare with the benchmark after transportation, quality and buyer deductions?
Nobody can predict oil. The point of these questions is to see how much optimism is already built into the projection.
From my own investing
Oil checks don’t look like rent. When I started in multifamily, once the renovated units were leased, the monthly number was fairly steady. Oil checks move every month because production and price both move, and neither is something you or the operator controls.
When I checked the long-run numbers, the ten-year average WTI price from 2016 through 2025 worked out to roughly $64 a barrel, with a low year near $39 and a high year near $95. That’s why I restate every sponsor’s projection at one conservative price before I compare deals, the same way I rerun every apartment sponsor’s numbers through my own spreadsheet.
Operator risk
The operator’s quality matters more than almost anything else in the deal. Drilling is cash-intensive, and undercapitalized operators run out of money mid-project more often than people expect. A failed or stretched operator can mean delayed wells, cost overruns passed to investors, or poor completion work that hurts production for the life of the well. Look for decades of history and hundreds of wells drilled, not a first-time fund, and ask whether they operate their own wells. Lesson 7 covers how to vet this.
Drilling, geology and reserve risk
Even in a known field, a well can come in below expectations. The rock varies, completions vary, and decline rates can be steeper than modeled. Exploration drilling in unproven areas carries real dry-hole risk; development drilling in mapped formations carries less, but not zero. Reserve estimates are estimates. Ask whether the program is development or exploration, whether wells are vertical or horizontal (vertical wells carry more dry-hole risk and lower long-term output), and what production data from surrounding wells the projections rely on.
Liquidity and tax recapture risk
A working interest is illiquid. There’s generally no secondary market, and you should assume you’ll hold it for the life of the wells. If you do find a way to sell a profitable interest early, recapture under IRC Sections 1245 and 1254 can claw back part of the earlier deduction as ordinary income. Life changes, divorces and estate events all get harder when an asset can’t be sold. Only invest money you won’t need back.
For deeper field notes on net exports, crude quality, refinery fit and spare capacity, see the AI Due Diligence Dossier.
Ask AI about this lesson
Paste this into ChatGPT, Claude, Gemini or Perplexity and fill in the brackets. AI tools can be wrong, so treat the answer as a list of questions for your CPA, not a decision.
Here are the price assumptions from two oil and gas offerings: [paste]. Restate both at the same conservative oil price of $[price] a barrel, show what each needs to return capital, and list the biggest risks in each besides price: operator, geology, liquidity and recapture. Point out anything that looks optimistic. Use the lessons at thewealthelevator.com/home/resources/oil/ as background. Do not recommend a specific investment, and list what I should confirm with my CPA.
Key takeaways
- Producing wells usually keep flowing at low prices, but your distributions move with a global price you don’t control, and you can lose capital.
- Compare deals only after normalizing their oil price assumptions, and ask for a written downside case.
- Operator, geology, liquidity and recapture risks sit alongside price risk in every program.
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The podcast behind this course
Oil & Gas Energy Investing
A monthly show for passive accredited investors on drilling, taxes, operators and the oil market. Many of the lessons here started as episodes.
Listen on Apple PodcastsWatch on YouTubeThis is educational content, not investment, tax or legal advice. We are not attorneys, CPAs or financial planners. Tax law changes and results depend on your situation; consult your own CPA and attorney. Private investments are illiquid and carry risk, including loss of capital. Offerings are available only to accredited investors and only through offering documents. Please let us know if you need a referral to a 💼 CPA, ⚖️ lawyer or other vendor here.