164 The Political Economy of Resource Use 



mand." The character and amount of subsidy to oil production in the 

 United States can only be understood in terms of the combined oper- 

 ations of percentage depletion, expensing of drilling operations, fed- 

 eral tax rates, state regulation of output, and limitation of imports. 

 Even this formidable combination, however, need not produce an 

 exceptionally high return to factors committed to oil production. It 

 may merely mean that oil producers pay wildcatters a much higher 

 price for oil discoveries than they would otherwise pay and both 

 wildcatters and established oil producers are led to explore areas 

 that would, in the absence of a high and stkble price for oil, be left 

 unexplored. Again the objective test of the nature and extent of the 

 subsidy would lie in a comparison of the current investment in discov- 

 ery with what the investment would be without percentage depletion, 

 regulation of output, and import limitation. That this difference would 

 be substantial there can be no doubt. But how much the difference is, 

 no one knows. 



Some light can be thrown on this matter by looking at the question 

 historically. What was the purpose of the special treatment and how 

 did its beneficiaries react? Was it to offer rewards to mineral discov- 

 erers commensurate with their special risks or, perhaps, in excess of 

 these risks? And no doubt a careful study of the reactions of producers 

 and of the returns to factors during the period of adjustment to special 

 treatment would be illuminating. 



When the federal income tax was introduced, in 1913, mineral pro- 

 ducers were treated as any other producer, i.e., they were entitled to 

 depreciate the cost of their investment over the expected life of the 

 investment. In 1918 the concept of discovery value depletion was in- 

 troduced and mineral producers were permitted deductions up to the 

 value of their property. Obviously, this was taken advantage of when 

 the value of the discovery exceeded the cost of acquisition. There is 

 no doubt that when this change was made discovery value depletion 

 was considered to be "a special incentive for exploration and discov- 

 ery." ^" Difficulties in administering this formula led in 1926 to the 



^•^ Eugene E. Oakes, "Incentives for Minerals Industries," in Resources for 

 Freedom (report of the President's Materials Policy Commission, Washington: 

 U.S. Government Printing Office, 1952), Vol. V. The next two pages draw 

 heavily on this study. 



