A low utility value does not mean forgoing a certain project. It means waiting until your finances improve to the point where you can afford to take on this project.

But by waiting, other opportunities may present themselves that may be even better than the current project. If you invest in the current project with its low utility, you may lose opportunities for other projects because your short-term cash position is too low.

For most projects you invest in, you lose opportunities elsewhere. This is known as your opportunity cost.

When negotiating a proposal, you need to consider what are your opportunities elsewhere in the game. Doing the financial analysis as suggested in this section contributes to a good assessment of opportunity costs, but often opportunity costs are hard to quantify? Sometimes you need to see past the numbers and calculations and have an innovative perspective as to what the real opportunities are in this game. If you can improve your instinct for seeing and evaluating those almost unquantifiable opportunities in an OilFinancier seminar, you should be able to take this instinct with you into your career.

I have envisioned certain obscure opportunity costs, but have not mentioned them here for a reason. I want the participants to recognize them on their own. And there may be other opportunity costs I have yet to realize.

"Sunk Costs," are referred to as costs that have occurred and cannot be recovered. Perhaps the best example of sunk costs in the oil industry is the drilling of an exploration well. The well’s logs and drill stem tests may prompt the oil company to case the well. But when the oil company decides to evaluate whether it is profitable to complete this well, the drilling costs are not considered in this financial analysis for they are already paid for and there is very little chance of recovering this investment. The well need only pay for the completion and tie-in costs to warrant the capital spending for the completion. Whether it recovers the original drilling costs is actually irrelevant to the financial decision.

An advanced version of OilFinancier will have sunk costs as a major component to financial strategy. But perhaps the best example of sunk costs in this basic version is the cost of oil rights. Although financiers can sell or trade these rights, there will be a few who will pay too much for their oil rights. They will try justifying this price by expecting too much of the revenue from a successful well.

But to the other potential investors of this well, the price paid for the oil right—whether it was $400 or $40,000—is irrelevant. If the investors can’t see a reasonable return on their portion of the drilling costs, they won’t invest. The owner of the oil rights has two choices. He can hope that he will somehow and sometime earn the profits he thinks he deserves from his rights or he can cut his losses and get this asset working for him today. But he should realize that his oil right is essentially a sunk cost. If he had paid too much for it it’s too bad. C’est la vie!

You really need to know how to evaluate oil rights if you want to be good at OilFinancier.