Investing in volatile commodities can ruin your family’s chances of getting a Green Card.
The American oil industry has experienced substantial volatility throughout its history, influenced by factors such as geopolitical events, supply and demand, and environmental concerns.
Consequently, if a new commercial enterprise (NCE) fails to create 10 full-time jobs, it will jeopardize the investor’s chance of receiving a Green Card.
EB-5 investors, who need to mitigate both financial and immigration risk, should avoid volatile commodities markets.
In this article, we will examine the causes of volatility in the oil market and the dangers of rural oil investing for EB-5 investors.
Here’s What We’re Going to Cover:
Why Are Oil Prices So Volatile?
Recent Trends in Oil Prices
Wildcat Drilling in a High-Risk Business
Risks for EB-5 Investors
Protect Your Investment and Immigration
Why Are Oil Prices So Volatile?
Oil is a commodity, or a raw material. The trading prices of commodities are historically very volatile, driven by supply and demand. Commodities are also subject to fluctuations in geopolitics.
Conflicts in oil-producing regions can disrupt supply chains and cause spikes in oil prices. For example, tensions in the Middle East and Ukraine have sent shockwaves through the global energy market in recent years, impacting the value of oil investments.
Similarly, domestic economic downturns can lead to decreased demand for oil. The resulting surplus from decreased demand drives down prices. Research shows a strong correlation between recessions and declines in oil prices.
Environmental concerns are also leading to stricter regulations and reduced support for traditional fossil fuels. The transition toward cleaner energy alternatives and electric vehicles may continue to reduce the future demand for oil.
Recent Trends in Oil Prices
U.S. crude oil prices continue to be volatile in 2023.
Brent crude climbed 29 percent between June and October 2023, trading near $97 a barrel. This was due in part to extensive cuts in oil production by Russia and Saudi Arabia.
Prices then fell for four weeks straight, settling at $77.42 in November for future January 2024 contracts.
Meanwhile, U.S. oil production fell 0.6 percent in October 2023 to 13.2 million barrels per day, as the United Auto Workers strike caused a decrease in demand for motor vehicles. Then, U.S. inventories of crude oil rose by 3.6 million barrels in November 2023.
The future of oil investment looks grim. The International Energy Agency predicts global demand for fossil fuels will peak before 2030. According to Haitham Al Ghais, Secretary General of the Organization of Petroleum Exporting Countries (OPEC), the oil industry is facing a “dangerous” underinvestment crisis.
Al Ghais has warned that the oil industry needs more than $12 trillion in investments to prevent a spike in energy prices, predicting crude prices could trade above $100 per barrel by 2045.
“By underinvesting, we are actually endangering energy security,” said Al Ghais. “Without this [investment], I think there are serious possibilities that prices, the volatility, will be increasing as demand grows.”
Wildcat Drilling in a High-Risk Business
Most rural EB-5 investments in oil are for high-risk exploratory operations known as wildcat drilling.
“Wildcatting” refers to the practice of drilling test oil wells in unexplored, unproven, or high-risk areas.
Exploratory drilling in the 21st century yields far more misses than successes. Oil and gas companies have already explored nearly all of the Earth, including the oceans, meaning few unexplored oil-producing areas remain.
A study by Rystad Energy found that onshore wildcat drilling ventures only had a 10 percent success rate in 2020. Millions of dollars can be sunk into a single unsuccessful well, bankrupting a company.
Oil Bankruptcies and Scams
Since 2015, more than 500 bankruptcies have been filed in the North American oil and gas industry. Over 100 oil and gas companies went bankrupt in 2020 alone, including 46 exploration and production companies.
In particular, the pandemic shutdown caused a crash in global oil demand, demonstrating how much the industry’s fortunes are directly tied to volatile market forces.
Additionally, the North American Securities Administrators Association (NASAA) has warned that oil and gas investment scams are on the rise, largely due to enticingly high oil prices.
Fraudulent oil and gas deals are usually structured with offerings made to investors in one state, alleged drilling operations occurring in another state, and the limited partnership located in yet another state. This reduces the chances of law enforcement uncovering any fraud and deters investors from visiting a potentially nonexistent drilling site.
The NASAA recommends investors only consider oil investments with well-established companies listed on the New York Stock Exchange.
Risks for EB-5 Investors
EB-5 investors are not guaranteed a return on investment or a Green Card for any family members. Specifically, USCIS will not grant Green Cards unless the investor’s funds create at least 10 full-time jobs lasting two years or more.
If a project fails financially, any jobs it created will likely not last long enough to meet this requirement, putting your entire family’s chances of immigration at jeopardy.
It is therefore crucial to choose well-capitalized projects with a strong business plan to best ensure your family’s immigration outcome.
Most often in rural oil ventures seeking EB-5 capital, investor funds are solely used to buy equipment and lease land for drilling. If the drilling is unsuccessful, investors lose everything—they only get back whatever monies the used drilling equipment can be sold for.
This type of investment allows operators to wildcat drill using investor funds and then walk away, leaving EB-5 investors without a path to immigration or repayment.
With only a 10 percent success rate, this is a dangerous level of risk for EB-5 investors.
Furthermore, rural micropolitan economies centered on the oil and gas industry are rarely diversified. As a result, even established oil towns like Pecos, Texas, and Liberal, Kansas, have seen employment plummet since the COVID-19 pandemic crushed demand for jet fuel and gasoline.
Protect Your Investment and Immigration
It is strongly recommended that EB-5 investors do not invest in rural oil EB-5 projects. Construction projects, particularly in the real estate or hospitality sectors, are much more secure and reliable options for EB-5 investment. Real estate development projects will not promise high returns, but they will also be much less likely to result in a complete loss of EB-5 investment capital and a much higher likelihood of creating the required 10 new jobs for Green Card approval.
Investing in the American oil industry comes with inherent dangers driven by historical volatility, geopolitical uncertainties, regulatory changes, technological disruptions, and market sentiment.
These dangers are even more pronounced for EB-5 investors, who face not only financial but also immigration risks if the project is unsuccessful.
Due diligence is key with any EB-5 investment. Before investing, foreign nationals should ask the following questions:
- Does the project already own the land, or will it lease the land?
- If the project owns the land, then the EB-5 investors will enjoy greater financial safety with real property as a project asset.
- Have all EB-5 jobs been created before investment?
- Investing in projects with the required jobs already created drastically reduces immigration risk.
- Does the project developer have a long track record of successfully repaying all of its debt?
- Developers who have defaulted on loans in the past should be avoided, as this can indicate increased financial risk.
- What is the project’s senior loan?
- If the project doesn’t have a senior loan secured, it likely doesn’t have enough funding to reach completion.
- Is there an I-526E refund guaranty in case of denial?
- Some projects allow EB-5 investors to receive accelerated repayment if USCIS denies their immigration petition.
- How much developer equity has been committed to the project?
- Developer equity in a project should always be greater than the EB-5 capital raised. This signals strong developer confidence in the project and prevents the bulk of financial risk from falling on EB-5 investors. A tiny amount of developer equity and a large promised profit split for EB-5 investors is a sign of extremely high risk.
EB5AN is an industry leader in EB-5 investment, helping over 2,300 families from more than 60 countries successfully achieve immigration to the United States.
We help investors learn about the risks involved in an EB-5 investment and help them evaluate potential options for investment and identify the best option for their family’s immigration to the United States.
For more information on EB-5 investing and how to find the right EB-5 project for your family, schedule your free one-on-one consultation with EB5AN today.
