Integration, decreasing costs, and efficiency in the petroleum industry

Book · Mon Jan 01 04:00:00 EST 1979

OSTI ID:5535475

Kobrin, P

It is shown that integration between monopolisitic and competitive stages of production generally leads to increased output and profits even in the presence of fixed proportions production functions. The motivation for the integration effect is that the monopolist will, upon integration, levy only a margin cost shadow price. This theory can be applied to the petroleum industry where the crude oil production stage can be organized competitively but pipeline transportation is subject to decreasing costs. Fixed proportions prevail because other factors cannot be substituted for crude in the pipeline stage. In a simulation patterned on the Alaska North Slope, the expected results were found: integration increased both output and profits. It was observed that under integration, a marginal cost shadow price would be established even for a natural monopoly stage. Thus, where integration is feasible, the problem of financing declining cost stage losses does not prevent marginal cost pricing and consequent attainment of economic efficiency. 23 references.

• OSTI ID: 5535475
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
020700* -- Petroleum-- Economics
Industrial
& Business Aspects
29 ENERGY PLANNING, POLICY, AND ECONOMY
290200 -- Energy Planning & Policy-- Economics & Sociology
294002 -- Energy Planning & Policy-- Petroleum
ECONOMIC IMPACT
EFFICIENCY
INDUSTRY
PETROLEUM INDUSTRY
PRICES
PRODUCTION
PROFITS
VERTICAL INTEGRATION