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Taxing Economic Rents in Oil Production : An Assessment of UK PRT

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  • Zhang, Lei

Abstract

Using a irreversible investment model of oil development, this paper shows how a fiscal regime can be neutral in that decision to develop is not affect by tax and efficient in recouping economic rents where cumulated operating profits are taxed if and only if they surpass an appropriate level of tax deductible allowances. For a simplified version of the Petroleum Revenue Tax (PRT) applied to the United Kingdom Continental Shelf until 1993, numerical calculations suggest that PRT was both neutral and relatively efficient. Why then was it substantially removed in 1993? One explanation is that the tax regime may be responding to the oil price so that fiscal change may be reversible, another is that it had disincentive effects not captured in our analysis.

Suggested Citation

  • Zhang, Lei, 1995. "Taxing Economic Rents in Oil Production : An Assessment of UK PRT," The Warwick Economics Research Paper Series (TWERPS) 445, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:445
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/1995-1998/twerp445.pdf
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    Citations

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    Cited by:

    1. Nakhle, Carole, 2007. "Do high oil prices justify an increase in taxation in a mature oil province? The case of the UK continental shelf," Energy Policy, Elsevier, vol. 35(8), pages 4305-4318, August.
    2. Carole Nakhle, 2007. "Do High Oil Prices Justify an Increase in Taxation in a Mature Oil Province? The Case of the UK Continental Shelf," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 116, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
    3. Abdo, Hafez, 2014. "Investigating the effectiveness of different forms of mineral resources governance in meeting the objectives of the UK petroleum fiscal regime," Energy Policy, Elsevier, vol. 65(C), pages 48-56.

    More about this item

    Keywords

    Irreversible investment ; Oil field development ; Tax neutrality ; PRT;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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