The Determinants of Investment in Petroleum Reserves and Their Implications for Public Policy

Abstract

Interest in the determinants of investment in crude oil and natural gas reserves derives from three sources. First, it is always interesting to find a satisfactory explanation of investment behavior in any industry. Second, an aspect of the current concern with the "energy crisis" is the domestic crude petroleum industry's productive capacity, which is an increasing function of the stock of proved oil and gas reserves. Third, there is a decades-old controversy over the special provisions of the federal corporation income tax law which apply to petroleum producers. The article presents a model of investment in proved reserves in the U.S. crude petroleum producing industry. The empirical results indicate that investment in petroleum reserves depended on three public policies: the special federal tax pro- visions, state market-demand prorationing, and the federal oil import quota. It is possible to draw some tentative policy conclusions from our empirical results, although a complete analysis of the three public policies will require additional empirical estimates.