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Competitive Speculative Storage and the Cost of Refinery Product Supply

Mark Newton Lowry

Year: 1989
Volume: Volume 10
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol10-No2-13
View Abstract

In a recent article in thisjournal, Charles Tiplitz (1986) presented estimates of the cost-minimizing level of seasonal distillate fuel oil inventories in the US primary sector. The costs he considered are for storage and the extra cost of operating refineries at extreme distillate yield. The "effect of price expectations" on seasonal inventories is deliberately excluded from the analysis.The Tiplitz study has interesting and useful results. However, it raises (without answering) the question of how cost-minimizing stocks differ from stocks held for price reasons. Some readers may conclude that price-responsive stocks are somehow different from or additional to cost-minimizing stocks.This interpretation runs counter to economic intuition. n the classic theory of the firm, the profit-maximizing plan for variable inputs also minimizes the variable cost of the most profitable output level. When there is an opportunity to store, supply can be accomplished through storage as well as input processing. Stocks are a variable input in the supply process. If producers are expected-profit maximizers, they should therefore manage stocks like other inputs to minimize the expected variable cost of supply.

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