In the summer of 1880, shortly after the Texas & Pacific Railway was completed to Sierra Blanca, a New York Irishman named John Thomas (Pat) Monahan discovered water at the western edge of the sandhills.  The water source came to be called Monahan's Well by the summer of 1881.  Eventually, a pump station was installed and two water tanks were erected on the south side of the track.  Later, a depot and an old boxcar were located near the tracks, thus Monahans came into existence.

In 1882, Mollie Dawson came with her family to the area.  The Dawsons found three other men and their families here, one was a pumper for the railroad, one had a small general store north of the railroad tracks and one operated a hotel where cowboys ate when they came to town.  The name of Monahans was officially adopted by the Post Office in 1891.

During the 1890s, a grocery store, general store, boarding house and the Holman House Hotel were built.  The next ten years showed progress with the building of new stores, a restaurant, the Terrell Boarding House, cattle pens and a lumberyard.  By 1905, the estimated population of Monahans was 89.  Ranching and farming were the industries of the Ward County until oil was discovered in the 1920s.

The town grew rapidly after the opening of the nearby Hendrick oilfield in 1926 and was incorporated in 1928.  In January of 1928, Shell Oil Company constructed a million barrel tank to relieve the markets' glut of oil.  Once completed, the tank was immediately filled with oil.  The tank covered eight acres of land and its capacity was 1,084,000 barrels.  The tank was only used once then abandoned due to the tank leaking.  In 1929, the Texas-New Mexico Railway completed tracks from Monahans to Lovington, New Mexico to handle the increasing transportation demands of the oilfields.  By 1930, the population had increased to 816.  A carbon black plant was opened in 1937 at Monahans and a chemical plant was opened the following year.  In 1938, Monahans became the county seat of Ward County. 

By 1940, the population of Monahans had grown to 3,944.  The Texas Electric Service Company's Permian Basin Generating Station began in 1948 and later developed into a larger plant.  Because of the oilfield expansion in Ward County, Monahans continued to grow to a population of 6,311 in 1950 and 8,567 in 1960. 

As oil activity declined, so did the population.  The Monahans population had declined to 8,333 by 1970, to 8,101 by 1990 and to 6,821 by 2000. 

The population in Monahans has began to grow again due to an increase of oil and gas production in and around Ward County once again.  The 2013 Census Estimates population at 7,356 which is an increase of 5.8% since 2010.