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Capturing rents from natural resource abundance: private royalties from U.S. onshore oil and gas production

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  • Jason Brown
  • Timothy Fitzgerald
  • Jeremy G. Weber

Abstract

Innovation-spurred growth in oil and gas production from shale formations led the U.S. to become the global leader in producing oil and natural gas. Because most shale is on private lands, drilling companies must access the resource through private lease contracts that provide a share of the value of production ? a royalty ? to mineral owners. We investigate the competitiveness of leasing markets by estimating how much mineral owners capture geologically-driven advantages in well productivity through a higher royalty rate. We estimate that the six major shale plays generated $39 billion in private royalties in 2014, however, there is limited pass-through of resource abundance into royalty rates. A doubling of the ultimate recovery of the average well in a county increases the average royalty rate by 2 percentage points (an 11 percent increase). The low pass-through is consistent with firms exercising market power in private leasing markets, and with uncertainty over the value of resource endowments. The finding suggests that policies affecting the cost of extraction likely have little effect on the share of the value of production captured by mineral owners.

Suggested Citation

  • Jason Brown & Timothy Fitzgerald & Jeremy G. Weber, 2015. "Capturing rents from natural resource abundance: private royalties from U.S. onshore oil and gas production," Research Working Paper RWP 15-4, Federal Reserve Bank of Kansas City, revised 01 Jun 2015.
  • Handle: RePEc:fip:fedkrw:rwp15-04
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jeremy G. Weber & J. Wesley Burnett & Irene M. Xiarchos, 2016. "Broadening Benefits from Natural Resource Extraction: Housing Values and Taxation of Natural Gas Wells as Property," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 35(3), pages 587-614, June.
    2. Joseph Marchand & Jeremy G. Weber, 2020. "How Local Economic Conditions Affect School Finances, Teacher Quality, and Student Achievement: Evidence from the Texas Shale Boom," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 39(1), pages 36-63, January.
    3. Joseph Marchand & Jeremy Weber, 2018. "Local Labor Markets And Natural Resources: A Synthesis Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 469-490, April.
    4. Brown, Jason P. & Coupal, Roger & Hitaj, Claudia & Kelsey, Timothy W. & Krannich, Richard S. & Xiarchos, Irene M., 2017. "New Dynamics in Fossil Fuel and Renewable Energy for Rural America," USDA Miscellaneous 260676, United States Department of Agriculture.
    5. Maguire, Karen & Winters, John V., 2016. "Energy Boom and Gloom? Local Effects of Oil and Natural Gas Drilling on Subjective Well-Being," IZA Discussion Papers 9811, Institute of Labor Economics (IZA).
    6. Marchand, Joseph & Weber, Jeremy, 2017. "The Local Effects of the Texas Shale Boom on Schools, Students, and Teachers," Working Papers 2017-12, University of Alberta, Department of Economics, revised 31 Jan 2019.
    7. Catherine Hausman & Ryan Kellogg, 2015. "Welfare and Distributional Implications of Shale Gas," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 71-139.
    8. Hess, Joshua H. & Manning, Dale T. & Iverson, Terry & Cutler, Harvey, 2019. "Uncertainty, learning, and local opposition to hydraulic fracturing," Resource and Energy Economics, Elsevier, vol. 55(C), pages 102-123.
    9. Driouchi, Ahmed & Harkat, Tahar, 2016. "Knowledge Economy, Global Innovation Indices, Rents and Governance in Arab Economies," MPRA Paper 73507, University Library of Munich, Germany.
    10. Marchand, Joseph & Weber, Jeremy, 2015. "The Labor Market and School Finance Effects of the Texas Shale Boom on Teacher Quality and Student Achievement," Working Papers 2015-15, University of Alberta, Department of Economics.
    11. Cronshaw, Ian & Grafton, R. Quentin, 2016. "Economic benefits, external costs and the regulation of unconventional gas in the United States," Energy Policy, Elsevier, vol. 98(C), pages 180-186.
    12. Hitaj, Claudia & Weber, Jeremy & Erickson, Ken, 2018. "Ownership of Oil and Gas Rights: Implications for U.S. Farm Income and Wealth," Economic Information Bulletin 276228, United States Department of Agriculture, Economic Research Service.
    13. Jason Brown, 2017. "Response of Consumer Debt to Income Shocks: The Case of Energy Booms and Busts," Research Working Paper RWP 17-5, Federal Reserve Bank of Kansas City, revised 01 May 2017.
    14. Hitaj, Claudia & Weber, Jeremy G. & Hopkins, Jeffrey W. & Erickson, Kenneth W., 2018. "Ownership of Oil and Gas Rights and Farm Sector Income and Wealth," 2018 Annual Meeting, August 5-7, Washington, D.C. 274316, Agricultural and Applied Economics Association.
    15. Komarek, Timothy M., 2016. "Labor market dynamics and the unconventional natural gas boom: Evidence from the Marcellus region," Resource and Energy Economics, Elsevier, vol. 45(C), pages 1-17.
    16. Rickman, Dan S. & Wang, Hongbo, 2018. "What Goes Up Must Come Down? A Case Study of the Recent Oil and Gas Employment Cycle in Louisiana, North Dakota and Oklahoma," MPRA Paper 87252, University Library of Munich, Germany.

    More about this item

    Keywords

    Oil; Natural gas; Royalty payments; Mineral rights;

    JEL classification:

    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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