# Production Functions And Cost Functions In Oil Pipelines

897 words - 4 pages

1. For an 18-inch pipeline designed for 150,000 barrels per day, what is the short-run cost per barrel (per thousand miles) of transporting crude oil if the throughput is (a) 50,000 barrels per day (b) 100,000 barrels per day (c) 150,000 barrels per day?Using chart 7,a) Cost of transporting 50,000 barrels would be 30 cents.b) Cost of transporting 100,000 barrels would be 17 cents.c) Cost of transporting 150,000 barrels would 16 cents.2. Can a 16-inch pipeline with 10,000 horsepower transport 100,000 barrels of crude oil per day? If a firm has a 20-inch pipeline, how much horsepower must be used to transport 150,000 barrels per day?This question can be approached in two ways. Both the approaches give different answers.a. Using Chart 1, a 16-inch pipeline with 10,000 horsepower will NOT be able to transport 100,000 barrels of crude oil per day. The pipeline will require at least 20,000 horsepower. If a firm has a 20-inch pipeline and wants to transport 150,000 barrels per day, they should use 20,000 horsepower.b. Using formula , T = (H) (D ) / (0.01046)When D= 16 inches H= 10,000, we get T= 349619.69 barrels. Thus, a 16 inch line pipeline with 10k horsepower can transport 100k barrels of oil.If the pipeline is 20 inch and we need to get 150k barrels of oil, using the formula, we will need 357.793. Does it appear that there should be many pipelines competing to transport crude oil over a particular route? Why or why not?I don't think there would be multiple lines competing to transport crude oil over a particular route unless there is more demand than what is currently being supplied. It does not make economic sense to run pipelines at less than maximum capacity as they require a huge investment. The cost of laying the line and the materials costs of steel, pipe coating, line block valves, corrosion protection and so forth are a huge investment and would not be feasible for an oil company if the pipeline would not be supplying oil to its fullest capacity.4. According to Leslie Cookenboo, plant D in Figure 1 "is not the optimum plant for the output at which it itself is most efficient (Q1)." How can this be? Explain.Optimum point is the point where the output costs the least per unit. The point where Q1 falls on the curve of plant E is lower than the lowest point on the curve of plant D. Therefore plant E can produce D's optimum output more cheaply than D.5. Leslie Cookenboo stresses the difficulties and limitations of estimating cost functions on the basis of historical cost data, rather than engineering data of the sort he uses. What are these limitations and difficulties?According to Leslie Cookenboo, where...

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