Sunday, August 3, 2008

Oil Royalties

"The Bush administration on Tuesday proposed charging energy companies wanting to squeeze oil out of vast shale deposits in the West lower royalties than what they pay for drilling on other federal lands, including offshore in the Gulf of Mexico and Alaska. ... 'For years, the cost of extracting oil from shale exceeded the benefit, but today that calculus is changing,' Interior Secretary Dirk Kempthorne told reporters Tuesday", Houston Chronicle, 23 July 2008.

This is counterintuitive, but reducing oil shale property royalties may increase Uncle Sam's tax collections from them. This is because reduced royalties will increase total oil shale production as more oil becomes "intramarginal" and is produced. Uncle Sam also will collect income taxes from the oil companies profits on this oil shale. I applaud this move. I'm sure if he were still alive, Uncle Miltie would too. Further, to the extent royalties are expected to be collected on currently "intramarginal oil", lease rates will increase.

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