ROYALTY INCENTIVES AND GULF OF MEXICO OIL PRODUCTION

This paper employs field‐specific estimates of Pindyck's (1978) widely cited model of natural resource supply to simulate effects of changes in federal royalty rates on the timing of exploration and output by firms in the deepwater Gulf of Mexico oil industry. Results suggest that deepwater Gulf oil production is highly inelastic with respect to changes in royalty rates. Royalty rate decreases are shown to increase early period exploration effort, result in little change in reserve additions and future production. Policy implications of this study suggest that public officials should be wary of arguments that large increases in deepwater Gulf oil field activity can be obtained from reductions in federal royalty rates‐particularly reductions in the early years of oil field development.