News Taxes shrink with oil and gas price decline

Oct. 23, 1995
The Energy Information Administration reports U.S. oil and gas severance taxes dropped 38% during 1985-93, reflecting a slide in field prices. (64934 bytes) EIA data show producing states collected $6.4 billion from oil and gas operators in 1985, but the take dropped to $4 billion in 1993.

The Energy Information Administration reports U.S. oil and gas severance taxes dropped 38% during 1985-93, reflecting a slide in field prices. (64934 bytes)

EIA data show producing states collected $6.4 billion from oil and gas operators in 1985, but the take dropped to $4 billion in 1993.

During the same period, the effective rate of severance tax on a crude oil equivalent basis fell 31% to 81/bbl from $1.17. The decline reflects market prices and volumes of production. The tax per barrel as a percent of price per barrel varied little, ranging from 5.9% in 1988 to 6.5% in 1986, 1991, and 1992.

Tax reliance

EIA noted that reliance on oil and gas severance taxes varies widely among states.

Of the top eight oil and gas producing states, California collects relatively minor sums of oil and gas severance taxes, while Alaska depended on severance taxes for nearly 50% of state tax receipts in 1993.

Nationwide reliance on oil and gas severance taxes has decreased since the oil price collapse of 1986, when the decline in prices and production eroded the severance tax base. (27674 bytes)

Severance taxes collected by Texas, for example, fell 46% from 1985 to 1993.

The top eight states, except for Wyoming, increased the absolute level of tax receipts from sources other than oil and gas severance taxes.

EIA said state governments frequently regard severance taxes as a revenue source that carries little burden for the state's residents, especially if the taxed resources are produced by out of state companies or are shipped to customers in other states.

For example, North Dakota collects about 5% of its tax revenue through coal severance taxes. The coal is used for power generation in the state, with most of the electricity sold out of the state. So a portion of the severance tax burden is transferred out of North Dakota.

Added cost

"Although sev- erance taxes can be an attractive source of revenue, they can inhibit development of a state's energy resources by increasing the cost of energy production," EIA said.

"If the added cost of a state's severance tax cannot be passed along, the profitability of energy production deteriorates, making energy investment less attractive. An energy producing state must balance the revenue effects and incentive effects of its severance taxes."

State Oil and Gas Severance Taxes*

Effective tax per Total Effective Price barrel taxes tax per per as a (Billion barrel barrel percent $) ($) ($) of price 1985 6.4 1.17 19.19 6.1 1986 5.4 1.00 15.48 6.5 1987 3.4 0.66 10.84 6.1 1988 3.6 0.68 11.55 5.9 1989 3.4 0.66 11.03 6.0 1990 3.8 0.76 11.88 6.4 1991 4.5 0.89 13.72 6.5 1992 3.7 0.75 11.05 6.5 1993 4.0 0.81 12.77 6.3 *Natural gas converted to crude oil equivalent on the basis of 1 Mcf = 0.178 bbl. Source: Energy Information AdministrationCopyright 1995 Oil & Gas Journal. All Rights Reserved.