TAXING ECONOMIC RENTS IN OIL PRODUCTION: ASSESSMENT OF UK PRT

Using an irreversible investment model of oil development, this paper illustrates how a fiscal regime can be in that the decision to develop is not affect by tax and 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 the fiscal change may be reversible; another is that it might have had disincentive effects not captured in our analysis.