Cost-minimizing industry structure for petroleum refining: an application of contestable market theory and multiproduct cost functions
Since the elimination of crude-oil price controls and the entitlements program in 1980, the US petroleum-refining industry has undergone significant changes in structure and technology. The number of refineries has declined from 303 in January 1981 to 191 in January 1985. Several mergers and acquisitions among major refiners have resulted in some reductions in capacity as plants have been retired or sold to independents. Meanwhile, capital investment in existing refineries has made the US industry much more flexible in terms of handling various grades of crude oil. This research first estimates econometrically the long run cost structure of petroleum refining operations using a translog multiproduct cost function and company refining data from the Financial Reporting System (FRS) maintained by the Energy Information Administration. The principles of contestable market theory are then applied to the estimated cost function to determine the cost minimizing number and size of overall company refining operations. It is determined that the existing structure is not sustainable due to the discrepancy between the optimal and existing industry structures and the fact that firms are not producing where price equals marginal cost for each of the three products: motor gasoline, distillate fuels, and other refined products.
- Research Organization:
- Southern Methodist Univ., Dallas, TX (USA)
- OSTI ID:
- 5052457
- Resource Relation:
- Other Information: Thesis (Ph. D.)
- Country of Publication:
- United States
- Language:
- English
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Related Subjects
29 ENERGY PLANNING
POLICY AND ECONOMY
PETROLEUM INDUSTRY
PETROLEUM REFINERIES
ECONOMIC ANALYSIS
USA
COST
DATA ANALYSIS
MARKET
MINIMIZATION
ECONOMICS
INDUSTRIAL PLANTS
INDUSTRY
NORTH AMERICA
020400* - Petroleum- Processing
020700 - Petroleum- Economics
Industrial
& Business Aspects
294002 - Energy Planning & Policy- Petroleum
290200 - Energy Planning & Policy- Economics & Sociology