Non-conventional fuel tax credits and the extraction R&D model

This paper applies the extraction R&D model in examining the effects of non-conventional fuel tax credits on natural gas reserves and extraction in southwestern and northeastern New Mexico, the second largest deposits of natural gas in the USA. Testable implications of both market prices and R&D effort are specified in an empirical supply function for natural gas. The findings of the paper indicate marginal R&D costs closely parallel real wellhead prices and are an important element in explaining natural gas reserves and extraction. The policy implication is that non-conventional fuel tax credits affected both natural gas reserves and extraction activity via their influence on R&D behaviour.