U.S. Energy Outlook - Investment Opportunities - Tax Advantages
The United States is the world's largest consumer of oil, and currently imports almost 60% of its oil from foreign countries. Most of these imports come from OPEC countries, six of which are in the volatile Middle East. According to Energy Secretary Spencer Abraham, the energy sector in this country is strained to capacity and is facing its most serious shortages since the Arab oil embargoes and gasoline lines of the 1970's. As the world's largest economy, the United States is naturally the biggest consumer of oil. For forty years our energy demand has grown at a sustained rate of 2 percent annually to a current estimated usage of 18 billion barrels of oil per day. According to the U.S. Department of Energy, our energy demand will be 30 percent higher by 2020. Our dangerous reliance on foreign oil can be diminished by increasing our domestic production as much as possible.
"The good Lord didn't see fit to put oil and gas only where there are democratically elected regimes friendly to the United States." - Dick Cheney 1998.
Oil is one of the most important natural resources known to mankind. For most societies in the world, oil is the principal natural resource that fuels their economies.
Then why, in this great age of communication and technology, do we need to be concerned about a natural resource like oil? Simple. Nearly 98% of everything you have or do is in some way related to crude oil. Heat for your home, gas for your car, 2 liter plastic bottles for pop, and petroleum jelly are just a few examples of products created from crude oil.
The United States has the greatest standard of living in the world, as well as the largest economy. Why? Because we have always tried to maintain control over the supply, as well as price, of oil. Over the last 10 years, the U.S. economy has undergone the largest economic expansion in history and cheap oil has fueled this unprecedented growth. Unlike the 1970s, when the U.S. was held at bay by OPEC withholding oil production for political reasons, the growth of the oil industry during the 1990s, and beyond, will be more likely be determined by the laws of supply and demand.
As democracy and capitalism are spreading around the world, global oil consumption is at record levels. Throughout Latin America, Russia, India and Asia, economic growth is accelerating at a remarkable pace; much faster than anything we have seen in the U.S. Recently, Forbes described the development now exploding across Asia:
"You can almost smell the money in Shanghai, Bangkok, Kuala Lumpau or just about any East Asian commercial center outside Japan these days. Traffic snarled, construction booming, glitzy shopping malls showing the latest Hollywood movies... These formerly traditional societies, stagnant for centuries, are exploding into the modern capitalist world and spawning vast new middle classes with a taste for consumer goods and the means to indulge that taste. Healthy economics generate great wealth, and Asia is churning out billionaires as though on a conveyor belt." -Forbes
In these countries, more than two billion people, or more than 40% of the world's population, are suddenly entering the age of consumerism. Thanks to American movies, TVs and VCRs, they have seen what the rest of the world has and they want it all. "They want McDonald's french fries. They want Coke. They want Levi jeans. They want Caterpillar tractors. They want cars, cameras, mouthwash, homes, toothpaste, Tide, aspirin and ten thousand other products we take for granted. "In vast regions of these countries, they're starting from the raw basics of modern life. They need electric power, running water, sewage treatment plants, bridges, tunnels, roads, cities -- you name it. "And oil is the one commodity absolutely essential to this tidal wave of global growth. It's literally the blood supply of capitalism. If you're a developing country, you need all the oil you can get to drive your trucks, your cars, your planes and ships. You need oil to run your factories, machines and power plants so necessary to a modern industrial economy. "What we're seeing is the first simultaneous, worldwide economic expansion since the late 1970s. But this time, many newly industrialized countries are joining the party and importing an unending procession of super-tankers laden with black gold." -Personal Finance
When discussing crude oil and gasoline prices in the U.S., the general public needs to be reminded of these facts: Political upheavals (not just war), weather (such as hurricanes shutting down production in the Gulf of Mexico), supply and demand factors, and refinery and pipeline outages all can greatly influence what goes on at the trading floors on Wall Street and to other markets around the world. (Oil / Gas Journal, April 2003)
As any astute investor knows, it is extremely difficult during these times to find financial opportunities which provide both security and a solid return on your hard-earned money. Conventional investments in CD's, savings accounts, money markets, mutual funds, stocks and bonds, etc. are currently bringing very unsatisfactory returns and, according to the Wall Street Journal and other well-known financial publications, prospects for performance improvements in the near future are not good. With even the best performers projected to provide an annual return of 8 percent or less, the average investor will realize much smaller returns than this.
One key to better returns is to diversify your portfolio to take advantage of opportunities which have excellent risk-to-reward ratios while still maintaining your personal and/or family financial foundation. One should not be satisfied with the meager returns of CD's, passbook savings or money market accounts, and with the thousands of mutual funds available, it takes a financial genius to pick the right fund in the right sector. Prudent investment in sound, well researched oil and gas drilling programs, though still considered high risk, may offer a significant monthly cash flow from the sale of production from oil and gas wells, and very significant tax advantages as well.
Each investor is treated as a business partner for tax purposes, generating substantial tax benefits which flow directly to individual investors. Investors may receive tax deductions totaling approximately 75 to 85 percent of capital contributions in the first year, with the remaining balance written off during subsequent years. For most investors, percentage depletion and depreciation of tangible equipment costs are available to shelter ordinary income at rates of up to 50 percent of cash distributions in the first seven years and 30 percent thereafter. The drilling program also shelters passive income.
In other words, tax deductions obtained from intangible drilling and development costs (as well as depreciation of tangible costs) may be used to offset the investor's taxable income from other sources. Also, a portion of the investor's taxable income generated by the drilling program may be reduced by deductions from depreciations and percentage depletion allowances.
THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH INVESTING IN OIL AND GAS VENTURES. THE ABOVE INFORMATION IS FOR GENERAL PURPOSES ONLY AND IS NOT A SOLICITATION TO BUY OR AN OFFER TO SELL ANY SECURITIES. ANY SUCH SOLICITATION OR OFFER WILL ONLY BE MADE THROUGH A PRIVATE PLACEMENT MEMORANDUM ACCOMPLISHED IN ACCORDANCE WITH SEC REGULATION D, RULE 506. IN ADDITION, THE AFOREMENTIONED GENERAL INFORMATION IS NOT INTENTED TO BE INDIVIDUAL TAX ADVICE. CONSULT YOUR PERSONAL TAX ADVISOR CONCERNING THE CURRENT TAX LAWS AND THEIR APPLICABILITY AND EFFECT ON YOUR PERSONAL TAX SITUATION.
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NADC Management Team
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