An advanced linear programming refinery model



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In this dissertation a linear programming model of the petroleum refining industry is developed which reflects the age structure of the refining industry. This has been done by creating three classifications for refinery units: old, intermediate, and new, and assigning all refinery capacity to one of the classifications using a rough approximation method. Also modeled are investment opportunities available to refiners, including both investments in new units and investments in the updating of older units. Two major purposes are served by this "vintaging" of petroleum refinery units and representation of investment opportunities. First, refinery product costs may be estimated more accurately, and the sensitivity of these costs to federal and/or state policies may be more reliably determined. Second, curves representing the derived demand for capital in the petroleum refining industry may be constructed by parametric analysis. The model, therefore, represents a tool for studying the interactions of policies affecting environmental, energy, and capital parameters. In this paper the model has been used for several purposes. First, the effect of upward sloping crude oil supply curves on refinery product prices was examined. This analysis was undertaken because it seems possible that there may be some breaks in the pricing solidarity of the oil exporting nations. Piecewise approximations of constant elasticity crude oil supply curves provided a means of studying this contingency. The effect of varying supply elasticities on capital demand within the petroleum refining industry was also studied. Attention has also been given to the interactions of capital application, long run costs, and short run costs in the refining industry. By appropriately adjusting constraints on capital and unit capacities one may use the model to show the effect of capital application on long run and short run costs. It is demonstrated how these interactions can be used to study the dynamic aspects of policy analysis.