It’s no secret that the U.S. economy has slowed down. Everyone has seen newspaper or television reports on this. That means reduced demand for both gas and oil in the U.S. in the short term, which in turn logically means that prices for production are not as high as they were. But no one should over-react to this news. Let’s look at the basics. Why do investors put money in gas and oil projects?

First, for the immediate tax benefit (to U.S. citizens or residents). They invest, say, $100,000 and get an $89,000 tax deduction, which they can use against ordinary income (if they are general partners) in the same year. Second, they get income that is partially sheltered against the “tax bite” by the depletion allowance, which is 15% to 24% of gross production income. And finally – which is most important – the rational investor does not look at a gas and oil program as a “fast buck” proposition. To make money, you must invest in projects that will produce revenue over a period of years. As we have said before, gas and oil wells can and do produce revenue for many decades.

So – the point is simply this: looking at current gas and oil prices is no way to determine whether a gas or oil program is right for any particular investor.

And further, nothing at all has changed with respect to the long-term demand for oil and for natural gas. The economy will at some point resume its growth pattern, and the demand for hydrocarbons will increase apace. Just to take one example – the U.S. government recently released data showing that 93% of all power generation plants that are in development in the U.S. are going to be gas-fired! Recession or not, those power plants will come on stream, and the added demand for gas will be enormous, literally in the trillions of cubic feet of gas per year!

We should also point out something that is very little known or understood outside the energy industry, but it can have a major long-term effect on an investment program. When the prices that oil and gas producers receive for their output decline, so does the rate of drilling of new wells. That means that the demand for mineral leases and for drilling services, also begin to drop off. Accordingly, the producer can negotiate better terms on leases, and drill wells for less money. And, in many cases, the operator can actually get the wells drilled faster – which means revenue can come in sooner – because there is less of a “waiting list” for drilling rigs and other services. So, a softening of demand has some mitigating factors. Discerning investors understand that cycles do occur, and that an excellent time to invest is when costs – and gas and oil prices – are not over-inflated by unrealistic expectations.