One hundred years ago today, President Woodrow Wilson signed the Mineral Leasing Act of 1920 into law, providing a framework for oil and gas companies to lease public lands and compensate taxpayers for the extraction of publicly-owned resources. Through massive lobbying efforts from oil and gas trade associations and corporations to keep the status quo, the law has largely remained intact since then; the latest significant update was in 1987.

The result? Oil and gas companies have taken advantage of a wildly outdated system, snapping up leases on public lands at bargain rates, paying virtually nothing to sit on idle leases, and depriving U.S. taxpayers of billions in royalties thanks to low royalty rates. A comparison of royalty rates by the Center for Western Priorities shows that taxpayers could have received more than $10 billion in royalties over the last five years if higher royalty rates had been in place, highlighting the pressing need to reform the laws regulating the production of oil and gas on public lands.

Oil wells in California during the 1920s | Photo courtesy Orange County Archives

Since 1920, companies have been paying the same royalty rate for oil and gas extracted from public lands, 12.5 percent, the lowest rate allowed by law. This royalty is a payment made by drillers to taxpayers, calculated as a percentage of the value of the oil and gas extracted, with minor deductions allowed. With the exception of Alaska, roughly half of the royalty revenue goes to the federal treasury and half goes to the state where drilling occured.

The 12.5 percent federal onshore royalty rate is markedly lower than rates charged by leading oil and gas producing states in the West — royalties in Texas can go as high as 25 percent, Colorado has a 20 percent royalty rate, and New Mexico can similarly charge royalties of up to 20 percent. The royalty rate for producing oil and gas on public lands is also vastly lower than the rate charged for producing oil and gas through offshore drilling, which stands at 18.75 percent.

Using revenue data released by the Interior Department for Fiscal Years 2015–2019, a comparison of royalty rates shows that, had higher royalty rates been in place, taxpayers would have received billions more for oil and gas extracted from public lands.