Oil and natural gas production is subject to royalties and taxes. The State of New Mexico Oil and Natural Gas Administration and Revenue Database (ONGARD) service center collects royalty and tax fillings for the State Land Office and the Taxation and Revenue Department. However, there is at least a three month lag from when the sale occurred, to when it was reported for tax purposes, to when it will be reported in the ONGARD database.
So, if there is a need for the current price of New Mexico oil, then the previous method to calculate it will not suffice. However, since the price of West Texas Intermediate (WTI) oil and the price of New Mexico oil move in tandem and the price of WTI is published daily, then through regression, we can estimate the current price of New Mexico oil.
The results from regressing the price of New Mexico oil on WTI oil from the 228 months of prices are displayed below. The Adjusted R Square of 99.6% means that 99.6% of the variation in the price of New Mexico oil can be explained by variation in the price of WTI oil, which suggests the model is accurate.
Take 95% of the price of WTI and then subtract $.91 from it to estimate the price of New Mexico oil. For example, if the closing price for WTI was reported to be $31.94, then the estimated price of New Mexico oil would be $29.52. From 1997 through 2016, the price of New Mexico oil has been lower than the price of WTI oil. We will explore a couple reasons for this in the next blog.