Prices, inventories, and capacity : a theoretical-empirical study of the downstream petroleum industry
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Date
1978
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Abstract
Petroleum is the major source of energy in our society today. Few, if any, products on the market are not either made directly from petroleum or produced by a process involving petroleum at least as a fuel. Neoclassical economic theory, however, does not provide a model that combines joint production, excess capacity, and product inventories in a framework of stochastic demand and supply. Since there are industries, in particular the petroleum industry, that exhibit most or all of these characteristics, this study develops a theory of the multiproduct petroleum firm, which holds inventories of products under conditions of stochastic demand and supply. Under certain assumptions, most notably that of fixed output proportions, the theoretical model reaches certain conclusions regarding product demand, product prices, product inventories, and refining capacity. The theoretical model provides the basis for an econometric model of the downstream (re fin in g and product distribution) operations of the petroleum industry. The relationships among the variables in the theoretical model are expressed in functional form so that the parameters of the model can be estimated. The conclusions of the theoretical model are supported by the empirical results. These results demonstrate the importance of inventories and capacity, as well as the money prices of products, in both demand and production decisions.
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Vita.
Keywords
Petroleum industry and trade, Petroleum industry and trade, Mathematical models, Petroleum products, Prices, Petroleum, Refining, Economics