Is ‘OIL’ the U.S. Government’s Sugar Daddy?

How much does the U.S. government make from oil that is produced domestically? This is one of several questions I pondered while recently pumping regular unleaded into the family minivan. Sometimes I get a sneaking suspicion that the $$$ counter on the pump will never stop, and as it continued it’s climb…. $55.47…. $60.13…$65.53…I wondered, “How much of this is going to the government?”. I’m not talking about taxes here (mainly because I want to talk about those in another post), but am considering the government’s cut on revenues that the oil companies are generating on domestically produced oil. So I did a little digging and the magic number is…[drum roll please]…about $10B expected in 2012. However, that number will continue to climb and between 2012 and 2022, the government is expected to take about $148.9B1  from oil companies producing oil domestically. To be more accurate, this number includes natural gas drilling as well.

So a couple of things to note that will help put some context on this number. The government is only able to share in revenues from oil produced on federal lands. So much oil is produced on federal lands? Well according to the EIA, in 2011 the U.S. produced about 2,065,172 thousand barrels of crude oil. Of this amount, about 646 million barrels were produced on federal lands, or about 31.3%. The vast majority of domestically produced oil is produced on private land. If an oil company wishes to explore and ultimately drill oil reserves on federal land, the government has the power to lease the use of that land (not sell) to interested parties. Once they do this, the government makes money in primarily two ways: They receive a bonus payment from private firms, simply for the opportunity to explore and drill; they collect royalties on revenues derived from oil collected.  The current royalty rate is 18.75% for offshore drilling and 12.5% for onshore drilling1. The government makes more annually on offshore leases by the ratio of 3:11.

You may notice, that the amount of drilling on public lands has lately been a hot topic on the campaign trail Governor Romney claiming that as President he would open up all of the federal lands to drilling. The Obama Administration has prevented a number of federal lands from being exploited for oil production due to environmental concerns. The amount of talk regarding this topic leads one to believe that there is much to be gained in the form of government revenue if these federal lands are opened up. How much exactly will be gained?? I’ll skip the drum roll and just tell you: $7B over the next 10 years1. Yep, about 5% additional revenue over the next 10 years. It turns out that about 70% of federal onshore and offshore lands are already being exploited. Given that the argument for tapping into the remaining 30% is usually related to America’s “energy independence”, we find that though tapping into additional federal resources is a worthy cause on its face, it probably wouldn’t move the needle that much. Thus, we have another instance of an issue that is made out to be a little more than it is for political gain.




1Congressional Budget Office

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