An investigation of economic efficiency in Indonesian petroleum refineries: A nonparametric approach

The study emphasizes the applicability of micro economic models in assessing the producer's efficiency and optimization behavior. The choice of the subject, i.e., petroleum refining, poses complications due to its multiple output nature and the inherently complex oil market. We adopted the production frontier approach as the theoretical basis and the nonparametric approach using the linear programming (LP) technique to tackle the problem at hand. First, is to apply the data envelopment analysis (DEA) method to assess the relative efficiency of petroleum refining firms across selected Asia-Pacific countries. Second, is to apply a LP optimization model to investigate the cause of inefficiency in the Indonesian refineries.; The study has shown that with the proper input-output specification that take into account the characteristics in petroleum refining input-output transformation, DEA can be applied to assess petroleum refineries' relative efficiency. However, further investigation on the cause of the inefficiency will have to be explored from the refineries' input-output processes. The well-established LP approach in refinery modeling has been put into a good use in this study. It provided the means to assess how the refinery was run, and by taking into account the value of the products, enabled the investigation of the opportunity costs of not achieving the optimal operations that would have maximized the net benefit of each petroleum refinery's operation.; The DEA results revealed that, in 1998 and 1999, most of the Indonesian refineries did not fare too well in comparison in the data set. The economic efficiency results particularly suggested that the Indonesian refineries did not fully utilize their cracking capabilities. Further investigation using LP model simulations confirmed this. Indeed, the simulations revealed many insights that otherwise would not have been known by using the DEA approach alone. First, based on the 1998 data, most of the Indonesian refineries were not operating economically, suggesting that they were not maximizing the value of the outputs in the refining systems. Further, the LP simulations identified that the economic inefficiency had resulted in significant benefit foregone based on the opportunity costs of not achieving the optimal refinery operations.; Despite market constraints such as domestic demand slated and limited availability of the most desired indigenous crude oils, optimal usage of the refineries' facilities, especially the cracking units, could have saved the government to the tune of US{dollar}557 million in 1998 alone. Because oil prices were generally low in 1998, this amount would have been higher in the previous and latter years, and by not addressing the issue meant that this benefit foregone have accumulated for some years. This is obviously a substantial amount for a country that has been struggling to escape from the economic crisis.