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The Impact of Removing Tax Preferences for U.S. Oil and Natural Gas Production: Measuring Tax Subsidies by an Equivalent Price Impact Approach

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  • Gilbert E. Metcalf

Abstract

This paper presents a novel methodology for estimating impacts on domestic supply of oil and natural gas arising from changes in the tax treatment of oil and gas production. It corrects a downward bias when the ratio of aggregate tax expenditures to domestic production is used to measure the subsidy value of tax preferences. That latter approach underestimates the value of the tax preferences to firms by ignoring the time value of money. The paper introduces the concept of the equivalent price impact, the change in price that has the same impact on aggregate drilling decisions as a change in the tax provisions for oil and gas drilling and production. Using this approach I find that removing the three largest tax preferences for the oil and gas industry would likely have very modest impacts on global oil production, consumption or prices. Domestic oil and gas production is estimated to decline by 4 to 5 percent over the long run. Global oil prices would rise by less than one percent. Domestic natural gas prices are estimated to rise by 7 to 10 percent. Changes to these tax provisions would have modest to negligible impacts on greenhouse gas emissions or energy security.

Suggested Citation

  • Gilbert E. Metcalf, 2016. "The Impact of Removing Tax Preferences for U.S. Oil and Natural Gas Production: Measuring Tax Subsidies by an Equivalent Price Impact Approach," NBER Working Papers 22537, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22537
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    References listed on IDEAS

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    1. Charles F. Mason & Lucija A. Muehlenbachs & Sheila M. Olmstead, 2015. "The Economics of Shale Gas Development," Annual Review of Resource Economics, Annual Reviews, vol. 7(1), pages 269-289, October.
    2. repec:ucp:jpolec:doi:10.1086/697203 is not listed on IDEAS
    3. Adelman, M A, 1990. "Mineral Depletion, with Special Reference to Petroleum," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 1-10, February.
    4. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    5. Gilbert E. Metcalf, 2014. "The Economics of Energy Security," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 155-174, October.
    6. 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.
    7. Charles F. Mason, 2016. "Concentration Trends in the Gulf of Mexico Oil and Gas Industry," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
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    1. repec:spr:climat:v:150:y:2018:i:1:d:10.1007_s10584-018-2266-3 is not listed on IDEAS

    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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