Three Essays on Oil Industry and Public Policy

Abstract

This thesis provides both empirical and theoretical evidence on the effects of public policies on the oil industry. In Chapter 1, I examine the impacts of prorationing and compulsory unitization to solve the common pool problem; in Chapter 2, I provide empirical evidence of the relationship between taxation and producers' extraction paths under a new horizontal drilling technology; in Chapter 3, I build a theory model which analyzes a specific royalty-exemption program.

In Chapter 1, I use a difference-in-difference methodology to examine the effects of prorationing and compulsory unitization on the U.S.oil production. The empirical result indicates that both unitization and prorationing increased the well-head price. In addition, unitization restricted the production, but prorationing raised the production. Unitization also mitigated the congestion of producing wells, while prorationing encouraged producers to operate more producing wells than necessary. However, the effectiveness of solving the common pool problem was still limited for both policies, because neither of them could sustain the value of well production.

In Chapter 2, I probe the impacts of taxation on oil extraction paths from horizontal wells. I use a fixed effect method to study the horizontal well incentive program in Manitoba. The empirical results suggest that producers tilt their extraction paths downward before they start to pay the tax. There is also a reduction in oil production after producers pay the tax.

In Chapter 3, I use an optimal control model to illustrate how a royalty-exemption program will affect the oil extraction path over time. The royalty-exemption program is defined as a program that grants oil producers an upfront royalty-free volume at the beginning of their production, they pay the royalty after this volume is used up. I find that because the royalty payment is foreseen in the future, producers start to adjust their production at the royalty-free period. When the royalty is in effect, it can either induce producers to produce at a lower rate and extend the well life, or encourage them to extract more and shorten the well's production life, depending on when producers start to pay the royalty.