Additional studies of competition and performance in OCS oil and gas sales, 1954-1975

Economic rent is commonly defined in economics as any payment to a factor of production in excess of the minimum necessary to engage it in production. In the case of OCS lands owned by the federal government, the minimum supply price necessary to induce the federal government to lease production rights would be the costs of establishing and administering lease contracts. Assuming, for the sake of simplicity, that these costs are small enough to be ignored in the analysis, all payments to the federal government for use of OCS lands are forms of economic rent.

An ideal leasing system should transfer the full amount of economic rent implicit in OCS resources to the federal government. Whether such a complete transfer of economic rent occurs depends upon the conditions of competition in the market for OCS leases. The principal means for capturing economic rent under the bidding system employed by the federal government over the years 1954-1969 are the bonus paid by the highest bidder and a royalty payment which has historically been fixed at 16 2/3 percent of gross production value. Of less importance is an annual rental payment, usually about \$3.00 per acre, which is paid as long as a tract under lease is not producing.

In the sections which follow, major factors affecting the capture of economic rent by the federal government are discussed and data are presented which demonstrate the importance of the different means used. In computing the amounts of economic rent captured by the federal government, the discounted cash flow technique is employed. This requires selection of an appropriate discount rate, in contrast to the internal rate of return analysis used in Part I, above.