System Dynamics Modeling and Analysis of New Mexico Oil Production and Taxation

Abstract We develop and use a system dynamics model of New Mexico Oil Production and Taxation (NMOPT) to explore the potential impact of exogenous and endogenous oil taxation on the level and stability of state revenue. Endogenous policies determine taxes based on internal dynamics (e.g., production value), whereas exogenous policies are independent of internal dynamics. We examine two exogenous and two endogenous (progressive and regressive) policies. Progressive taxation increases tax rates as production or price increases. Regressive taxation decreases tax rate as production or price increases. Our historical analysis indicates that New Mexico follows non-progressive (exogenous or regressive) taxation. However, our model’s Monte Carlo simulations reveal that transitioning to an exogenous fixed-rate taxation can substantially enhance the level and stability of the state’s revenues. The state can increase its revenue even further by adopting progressive taxation, which could also be considered an environmental policy, as it limits oil production. However, progressive taxation’s benefits come at the expense of higher revenue volatility. This paper also has two computational contributions: (1) a new intergenerational decline curve formulation to capture oil wells’ long-term productivity and (2) a detrended coefficient of variation to measure time series volatility in dynamic simulations reliably.