The tax treatment of oil and gas investment in the United States has been a contentious policy issue for decades. Reform advocates argue that eliminating tax preferences for producers of oil and gas could increase government revenues by billions of dollars each year while defenders of the existing tax regime contend that changing it would lead to large declines in domestic oil and gas production and to significant job destruction. Against the backdrop of low oil prices and increased domestic production, Gilbert E. Metcalf models firm behavior in response to the potential loss of each of the three major tax preferences in the United States. The potential losses are measured as equivalent price impact (EPI), the percentage drop in the price of oil or gas that would reduce the profitability of drilling a well as much as tax reform would.
The author finds that removing tax preferences would increase the global price of oil by only 1 percent by 2030. Domestic oil production could drop 5 percent and global consumption could fall by less than 1 percent in that timeframe. Meanwhile, domestic natural gas prices could rise between 7 and 10 percent, and both domestic gas production and consumption could fall between 3 and 4 percent. The author concludes that the estimated effects of removing the preferences on energy prices, domestic production, and global consumption suggest that none of the three preferences directly and materially improve U.S. energy security or mitigate climate change. If eliminated, however, they could enhance U.S. influence to advocate for international climate action and generate fiscal savings.