Suggested Citation:
Leighty, Wayne (2008) Modeling of Energy Production Decisions: An Alaska Oil Case Study. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-08-26

Understanding the dynamics of optimal oil production has been a major application in economics of theories regarding finite resource extraction and dynamic programming for many decades. Recent high oil prices have caused oil-holding nations and states to revise their tax policies. Many of these revisions have tipped the tax slope (i.e., more share of both upside potential and downside risk via higher tax rate) and have introduced a variety of credits and deductions for oil company investments in the area.

This report seeks to inform such policymaking by investigating the effect of government tax policy on dynamic firm behavior in oil production in Alaska. The main novelty of our paper is modeling the effects of a wide variety of tax structures (not just tax rates) on dynamically optimal oil production paths. We also develop a method for estimating field-specific cost functions without direct observations of production cost.