Modeling of Energy Production Decisions: An Alaska Oil Case Study

Understanding the dynamics of optimal oil production has been a major application in economics of theories regarding finite resource extraction and dynamic programming for many decades. Recent high oil prices have caused oil-holding nations and states to revise their tax policies. Many of these revisions have tipped the tax slope (i.e., more share of both upside potential and downside risk via higher tax rate) and have introduced a variety of credits and deductions for oil company investments in the area. This report seeks to inform such policymaking by investigating the effect of government tax policy on dynamic firm behavior in oil production in Alaska. The main novelty of our paper is modeling the effects of a wide variety of tax structures (not just tax rates) on dynamically optimal oil production paths. We also develop a method for estimating field-specific cost functions without direct observations of production cost. We find that changing the tax rate alone does not change the oil production path except for marginal fields that cease production. Introducing credits or deductions into the tax policy, however, can change the oil production path, but at the expense of net social benefit, meaning either oil companies or the government will be made worse off (i.e., lower profits or lower tax revenue). Analyses of Alaska’s oil production industry are particularly valuable now because of Alaska’s potential role in the next several decades of US energy supply.


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  • Accession Number: 01145318
  • Record Type: Publication
  • Source Agency: UC Berkeley Transportation Library
  • Report/Paper Numbers: UCD-ITS-RR-08-26
  • Files: BTRIS, TRIS
  • Created Date: Nov 6 2009 12:17PM