Resource Wealth Gushing Sky-High

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In the early days of oil exploration, incredibly rich formations were discovered just underneath the surface.

In Texas in 1899, a company was formed to drill the Spindletop field, an area known for oil and gas seeping out of the ground.

Drilling was still a new science, so it took a few years to strike the oil. But once they did, oh boy…

The Lucas Gusher, as it became known, spewed out around 120,000 barrels per day under high pressure. There was no need for pumps. Oil soared hundreds of feet into the sky.

The Lucas Gusher at Spindletop in 1901, via Wikipedia

It took 9 days to cap the well. But once they did, production from the Lucas Gusher exceeded ALL other oil wells in the U.S. combined. The year was 1901.

This massive discovery led to the creation of Texaco and Gulf Oil, now Chevron.

It was the beginning of the oil boom, and Texas would remain its capital for a long time to come.

The Lucas Gusher played an instrumental role in the creation of the modern world. A sudden abundance of oil would lead to the combustion engine, automobile, and beyond.

It also inspired The Beverly Hillbillies.

The Easy Oil is Gone

The Lucas Gusher was struck at 1,100 feet below the surface. That’s a puddle compared to the 10,000 feet and more often required today (directional drilling can extend outwards by up to 20,000 feet).

The days of cheap and easy oil discoveries are over.

Modern oil production requires 3D seismic imaging, fracking, horizontal and multi-directional drilling, supercomputers, and complex offshore platforms.

Source: Rockpecker

A productive offshore setup like the one pictured above might produce 20,000 barrels of oil per day. But the costs are high, reaching hundreds of millions or even billions of dollars, according to our resident geologist Byron King.

Just leasing a drill ship can cost upwards of $1 million per day, with a 5-year contract being typical.

So to produce 1/6th the oil of the Lucas Gusher requires vast investment, cutting-edge technology, and leading expertise.

As a result, the price of oil has risen from around $1 per barrel in 1901 to around $62 today. At today’s prices, low-cost producers and oil services companies can still make a bundle of cash.

A key takeaway is that the level of investment and expertise required today is on a completely different level. The geological and political challenges oil companies face are extreme.

A Perfect Storm for Resource Investors

My distinguished colleague Jim Rickards caused a ruckus earlier this year with his American Birthright thesis.

He told Americans that thanks to Trump’s ambitious plan to cut red tape and open up federal lands to drilling and mining, we were set to unlock trillions of dollars in new mineral wealth.

Now we’re seeing it play out in front of our eyes. And the timing couldn’t have been better.

Gold is at an all-time high. Silver just crossed the $42/oz mark. Copper is heating up.

The dollar is falling, and with the Fed cutting interest rates, it could be headed a lot lower. That’s bullish for commodities.

We’ll keep exploring ways to profit from this shift. Stay tuned…

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