The article models how oil prices are determined in an economy where investing in oil wells is costly and irreversible. In this model, oil prices show mean-reversion and heteroscedasticity, with risk premiums changing over time. The futures curve shows backwardation due to a convenience yield. The model successfully captures key aspects of oil futures prices and the relationship between oil consumption and economic output. The estimation results suggest the presence of convex adjustment costs for investing in new oil wells. The researchers also propose and test a linear approximation of the equilibrium regime-shifting dynamics implied by the model, with implications for time-varying risk-premia.