Publication Date


Document Type


First Advisor

Kreidle, John R.||Bishop, George W. (George Wesley), 1910-

Degree Name

M.S. (Master of Science)


Department of Finance


Petroleum products--Prices


The percentage depletion provision of the federal income tax laws as it applies to oil and gas producers has been a controversial issue in Congress during recent legislative sessions. Advocates for the provision maintain that the general public benefits from the depletion allowance by a lower total price for consumer products, greater national security due to extensive research efforts in exploration and production and that the federal government would actually lose tax dollars eventually if the provision for percentage depletion were reduced or eliminated. Opponents of the provision maintain that the level of 271/2 per cent is too high for the oil and gas industry in comparison to other depletable resources. In addition the provision is no longer needed to encourage exploration to develop crude oil reserves since the United States already has adequate reserves of crude oil as determined by some oil industry experts. The main purpose of the study is to show how the percentage depletion provision affects the consumer of the oil industry’s products. This was determined by calculating the price of regular grade gasoline with and without the percentage depletion provision applicable. In addition, the study attempts to measure the affect percentage depletion has on the net income of twenty-five oil companies. The major conclusions to be drawn from the study are: 1. That percentage depletion does affect the price of crude oil and regular grade gasoline. The actual amount of increase in price for the latter was 0.69 cents per gallon. This is considerably below the industry’s estimates of 3 to k cents per gallon. The low differential of O.69 cents is primarily due to the fact that the raw material costs (crude oil price) represent only 10' per cent of the total consumer cost of a gallon of regular grade gasoline. Thus*if the percentage depletion provision affects only the raw material cost (crude oil price), the corresponding increase of cost to make gasoline would be affected to a minor degree. 2. Profits of twenty-five oil companies were dependent on percentage depletion by varying amounts from 5 to 80 per cent of net income. Hence, in order to maintain profits at the present levels most oil companies would be forced to raise prices of consumer products. The results, as calculated in this study, were based on an actual percentage deplet3on rate of 23 per cent of the value of crude oil. Due to the 50 per cent limitation in the total deduction from a producer’s income the effective rate has been estimated at 23 per cent. Since data received from the twenty-five oil companies did not include specific figures as to the actual monetary amount of percentage depletion, the total amount was calculated from each company’s production figures for the years 1963 through 1965, using an average price crude oil and the 23 per cent rate of depletion. Thus, the conclusions of the study are an approximation of what would actually occur if the percentage depletion provision were reduced or eliminated.


Includes bibliographical references.


viii, 75 pages




Northern Illinois University

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