Comments on
Taxation and the Extraction of Exhaustible Resources:
Evidence from California Oil Production by Nirupama Rao
Roberton C. Williams III
University of Maryland, Resources For the Future, and NBER
Chicago-RFF Energy Policy Symposium
6/21/2011
Measuring effects of taxation on oil production is
an important problem:
-many taxes and subsidies for oil extraction -many proposed changes
Measuring effects of taxation on oil production is
an important problem:
-many taxes and subsidies for oil extraction -many proposed changes
a difficult problem:
-lots of important unobservables
-expectations about future prices are important, so temporary
and persistent price shocks have very different effects
Oil Producer’s Problem
-Primarily a question of timing: nearly all oil will eventually be
extracted, so the question is when to extract it
Oil Producer’s Problem
-Primarily a question of timing: nearly all oil will eventually be
extracted, so the question is when to extract it
-No-arbitrage condition: present value of marginal scarcity rent (price
minus extraction cost) stays constant on optimal extraction path
Oil Producer’s Problem
-Primarily a question of timing: nearly all oil will eventually be
extracted, so the question is when to extract it
-No-arbitrage condition: present value of marginal scarcity rent (price
minus extraction cost) stays constant on optimal extraction path
-Key is current prices relative to future prices:
-Current price up, future price constant: extract more now
-Current and future prices up: rents up, but extraction unchanged
Responses to a Tax
-Might choose to leave more oil in the ground, but this effect is likely
to be small (happens only if tax is large enough to drive scarcity
rent to zero)
Responses to a Tax
-Might choose to leave more oil in the ground, but this effect is likely
to be small (happens only if tax is large enough to drive scarcity
rent to zero)
-Important effect is retiming of production: producers shift extraction
path to reduce present value of taxes paid
-Temporary tax: extraction shifts to periods without tax
Responses to a Tax
-Might choose to leave more oil in the ground, but this effect is likely
to be small (happens only if tax is large enough to drive scarcity
rent to zero)
-Important effect is retiming of production: producers shift extraction
path to reduce present value of taxes paid
-Temporary tax: extraction shifts to periods without tax
-Permanent tax: taxes away scarcity rent, but extraction path
stays (approximately) the same
Difficult Empirical Problem
-Prior estimates of effect of taxes on oil extraction vary widely
Difficult Empirical Problem
-Prior estimates of effect of taxes on oil extraction vary widely
-Huge unobservable variation across wells => can’t get good
estimates based on cross-sectional variation
Difficult Empirical Problem
-Prior estimates of effect of taxes on oil extraction vary widely
-Huge unobservable variation across wells => can’t get good
estimates based on cross-sectional variation
-Getting good price data is harder than you would think (we talk
about “the price of oil” but prices vary for different grades of
crude oil)
Difficult Empirical Problem
-Prior estimates of effect of taxes on oil extraction vary widely
-Huge unobservable variation across wells => can’t get good
estimates based on cross-sectional variation
-Getting good price data is harder than you would think (we talk
about “the price of oil” but prices vary for different grades of
crude oil)
-Because expected future price matters, effect of transitory price
change is very different from effect of permanent price change
How This Paper Gets Better Empirical Estimates
-Great data set: well-level production data, with policy-driven welllevel price changes
How This Paper Gets Better Empirical Estimates
-Great data set: well-level production data, with policy-driven welllevel price changes
-Policy changes affect after-tax price at different times for different
wells (based on grade of oil produced and production history)
How This Paper Gets Better Empirical Estimates
-Great data set: well-level production data, with policy-driven welllevel price changes
-Policy changes affect after-tax price at different times for different
wells (based on grade of oil produced and production history)
-This makes it possible to identify production elasticity based on
within-well policy-induced variation in price over time
How This Paper Gets Better Empirical Estimates
-Great data set: well-level production data, with policy-driven welllevel price changes
-Policy changes affect after-tax price at different times for different
wells (based on grade of oil produced and production history)
-This makes it possible to identify production elasticity based on
within-well policy-induced variation in price over time
-Provides a much better measure of response to policy changes than
prior studies based on time-series changes in world oil price
Suggestion for the Estimation
-Current estimates are still a bit difficult to interpret, because price
coefficient combines effects of current price and future price
Suggestion for the Estimation
-Current estimates are still a bit difficult to interpret, because price
coefficient combines effects of current price and future price
-Would be useful to explicitly consider expectations
Suggestion for the Estimation
-Current estimates are still a bit difficult to interpret, because price
coefficient combines effects of current price and future price
-Would be useful to explicitly consider expectations
-Data set has some variation in future expectations (some changes
phased in, others implemented immediately, and these should
affect expectations differently)
Estimating Deadweight Loss
-Paper estimates that deadweight loss of tax is 13% - 66% of revenue
Estimating Deadweight Loss
-Paper estimates that deadweight loss of tax is 13% - 66% of revenue
-This estimate is fairly modest, but still much higher than I would
have expected
Estimating Deadweight Loss
-Paper estimates that deadweight loss of tax is 13% - 66% of revenue
-This estimate is fairly modest, but still much higher than I would
have expected
-Simple approximation in static case:
DWL
0.5!"Q
"Q
"P
!
!
= 0.5
= 0.5
" = 0.5 "
Revenue
!Q
Q
P
P
= 0.5(0.15)(0.237) = 1.8%
Estimating Deadweight Loss
-Paper estimates that deadweight loss of tax is 13% - 66% of revenue
-This estimate is fairly modest, but still much higher than I would
have expected
-Simple approximation in static case:
DWL
0.5!"Q
"Q
"P
!
!
= 0.5
= 0.5
" = 0.5 "
Revenue
!Q
Q
P
P
= 0.5(0.15)(0.237) = 1.8%
-Intuition suggests static formula will overstate DWL
Estimating Deadweight Loss (cont.)
-There might be a mistake somewhere (either in the paper or in my
calculations)
Estimating Deadweight Loss (cont.)
-There might be a mistake somewhere (either in the paper or in my
calculations)
-Or there may be some counter-intuitive reason why the dynamic
DWL is higher than the static estimate
Estimating Deadweight Loss (cont.)
-There might be a mistake somewhere (either in the paper or in my
calculations)
-Or there may be some counter-intuitive reason why the dynamic
DWL is higher than the static estimate
-Either way, it’s worth investigating
Policy Implications
-Taxes on oil extraction are relatively efficient ways to raise revenue
Policy Implications
-Taxes on oil extraction are relatively efficient ways to raise revenue
-Lower estimated DWL/Revenue than many other taxes
Policy Implications
-Taxes on oil extraction are relatively efficient ways to raise revenue
-Lower estimated DWL/Revenue than many other taxes
-DWL/Revenue could be even lower (static estimate much lower)
Policy Implications
-Taxes on oil extraction are relatively efficient ways to raise revenue
-Lower estimated DWL/Revenue than many other taxes
-DWL/Revenue could be even lower (static estimate much lower)
-Permanent taxes would be more efficient
Policy Implications
-Taxes on oil extraction are relatively efficient ways to raise revenue
-Lower estimated DWL/Revenue than many other taxes
-DWL/Revenue could be even lower (static estimate much lower)
-Permanent taxes would be more efficient
-Current effective federal tax rate on oil production is probably negative