Oil Lease Royalties

The American government just decided to cancel plans for auctioning new oil leases in the Arctic. See this report at the Guardian.

According to the article, global warming is not a reason for that decision:

Sally Jewell, the interior secretary, said the decision to cancel auctions scheduled for 2016 and 2017 was dictated by current economies for oil, and the harsh conditions of hunting for oil in the Arctic which had forced Shell to pull out.

Under that reasoning, they may restart these auctions once the Arctic ice is gone completely and drilling becomes easier.

But anyway, I just noticed from this that there is already a “price on carbon” as far as offshore oil is concerned. That price is whatever the oil companies have to pay for the lease and for royalties.

I looked a bit around and found the monthly report by the “Bureau of Ocean Energy Management” on oil leases in the Gulf of Mexico. From that I learned that the government has set royalty rates at 18.75% right now.

All offshore oil belongs to the federal government. Oil companies are only allowed to drill for it without actually owning the resource.

That in turn means that the federal government puts a price on carbon already (whatever royalty payments are due under the lease agreements).

It also means that the government could reduce oil production for reasons of global warming, as opposed to the reasons given above for canceling the next couple of auctions for the Arctic.

All they would need to do is set an absolute royalty per barrel of oil, as opposed to the relative royalty they are using now. Set that at $100 a barrel, and interest for leasing will be low under current market conditions. Set it at $10 and interest may be higher.

Also, by reducing production in this way, they would reduce supply, which would increase prices. That in turn would increase the total value of the reserves still left.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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