Rent from oil: a goldmine

Ground rent is the unearned increment that results from the exclusive ownership of a natural resource, it is estimated that up go 78% of profits from the oil industry is ground rent.Norway: a model of oil rent taxationIn the late 60s the country of Norway needed to decide how to manage the exploitation of its natural oil reserves. A Norwegian citizen, Farouk Al-Kasim, a geologist formerly employed by the Iraq Petroleum Company, was disillusioned by the nationalization approach that left the industry in his country of origin in a sorry state characterized by corruption and waste.The proposal from Al-Kasim and colleagues was as follows, while a Norwegian State Oil Company was to be established, the market was to be left open to other international companies with one caveat: the state was going to levy a severance tax (nominally an income tax) on companies that engage in extraction. The tax was heavy, equal to almost 100% of the ground rent of oil, in return the companies would be exempt from all other taxes and the country would subsidize R&D and exploration of further deposits.This approach has been characterized as fiscally neutral1, meaning it does not distort market forces and generates no deadweight loss. It also generates massive public income, in the case of Norway a considerable amount of this went to fund a government sponsored pension fund (the Oil Fund) which is now the world’s largest sovereign wealth fund.Fig. 1 the fund recentl