Picks, Shovels, and Rent

There is an old saying that during the gold rush, it wasn’t the guys who found the gold that got rich, it was the businessman that supplied the picks and shovels.  I’m wondering if a similar situation is not developing right now as North America embraces its energy craze, and the newfound riches that working with oil and natural gas has brought.  Sure this site might be dedicated to sustainable financial thoughts, but there is always room for that weird contrarian dude in the corner right?

There has recently been a spate of articles that I have read talking about the situations in new boomtowns like Esteban, Saskatchewan and Williston, North Dakota.  As many natural resource-driven communities have found out before, the sudden influx of new residents and easy money can be both a blessing a curse.  While property values suddenly go through the roof, and economic opportunities fall from the sky, the high impact on infrastructure and the basic pace of small town life can leave some prior residence feeling that it wasn’t what they signed up for.  Luckily, they can often sell out for a hefty profit.

“You’re Richer Than You Think” – If You Own an Oil Company That Is

There are many ways to make money off of oil (of which, I am so far making taking advantage of exactly zero… do as I say, not as a I do?) and other natural resource booms.  The mega-companies that are making billions of dollars leave all sorts of streams of trickle down income for the rest of us mere mortals.  The obvious way to grab a piece of the pie is to become employed as a labourer by one of these behemoths.  I had several friends out of high school go this route, and if you don’t mind the lifestyle the pay can range from $60K a year, to well over $100K if you tally up overtime, or you have any specific skills with heavy machinery, mechanical repair etc.  You can also become a geologist, like my friends from university.  These guys also work long hours, but don’t have to put up with the physical demands of the “roughneck” life and are not often exposed to the elements.  With 4-5 years of schooling, $120K+ is easily achievable.  The final direct way to get on the payroll of an energy giant is to offer professional services as a lawyer, accountant, electrician etc.

Picks and Shovels

If you don’t have a nice piece of paper with credentials on it to market to the big oil boys, and you don’t really want to experience life as a “rig-pig” you can become the seller of modern picks and shovels.  You see when all of this money suddenly pours into fairly isolated areas, and into the pockets of people who have little experience with such high incomes, it is inevitable that a lot of money is going to be spent on whatever is around.  Companies that are desperate to extract a valuable commodity can afford to subsidize whatever their workers need.

Perhaps the best example of this is the housing accommodation situation that is taking place in many rural boomtowns.  Houses that have seen their value increase incrementally over decades are realizing 200% gains almost literally overnight.  Charging monthly rents in the thousands of dollars, or even renting rooms by the day has become commonplace in many areas.  I was shootin the breeze with a friend who had worked in construction the other day, and I asked what was stopping people from throwing up cheap houses as quickly as possible and then charging a mint for them.  His reply was basically that the only thing stopping it was the red tape that construction has always had to deal with, and the pride that most contractors like to take in their jobs.  As long as you had friends in the right places to make sure your permits go through expediently, and don’t care about shoddy workmanship, my friend figured you could easily make a ton of money.  After all, there is really no reason to make “50 year” houses, since there will likely be no demand for them in 10-20 years (depending on the amount of natural resources available).

Sell For Record Profits or Rent For an Unbelievable ROI

There are a few different business models to take advantage of this unique supply-and-demand situation.  Most contractors are opting to simply build homes, and sell them for large profit margins.  If you have a little more patience, you could build several cheap multi-unit buildings and rent them out for an unbelievable return on investment.  Getting a good property manager out to an isolated area might be hard, but if you’re willing to do the job yourself after building a couple of solid developments, the stream of income would flow right into your pockets.

When companies are desperate to pay for somewhere for employees to put their heads, the money they are willing to throw around is almost mind blowing.  When energy prices continue to skyrocket, the petty fees for things like food and rent mean nothing to these guys who are dealing with billions and billions of dollars.  It is the perfect intersection of macroeconomics and personal finance, and it will no doubt make someone pretty well off for the rest of their life if they play their cards right (or if they own a place where others can play cards at all).

Risk and Reward

The downside of course is that the Middle East could settle down (now there is a longshot bet) or that electric car thing could finally catch on, and demand for your specific natural resource might go down the tubes.  A permanent structure in a place that has no more economy can become worthless, just as quickly as it made someone rich.  All the same, there is usually someone who is willing to roll the dice that the boom times will last long enough to make them rich.

Who needs the gold or oil when you can sell beds, hot meals, equipment, and the various human vices that inevitably follow such industries?  Anyone want to head out West to make a fortune?

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The very first episode of Brian Williams’ new “Rock Center” news magazine was about a small town in North Dakota that was booming because of oil fracking. And it was the individuals who rent apartments, own small stores, launderettes, that were making the biggest bucks.

This sounds very tempting financially but also it disrupts your life completely – breaking communities; straining infrastructure etc.

Similar things going on in South Texas. I heard a radio story today about the increase in traffic accidents in the area of the Eagle Ford shale play. More big rigs on the roads formerly not populated by more than a few old pickups.

That is a beautifully written article. I laughed when you describe the irony that hard workers do not make much money, it is made by those who exploit the demand supply gap. It is a harsh truth but presented very artistically

“it wasn’t the guys who found the gold that got rich, it was the businessman that supplied the picks and shovels”

Hi Teacher Man,

I have included this post at my site’s weekly roundup

PB @ EconomicallyHumble.com

Thanks.. this is a detailed education!

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