A framework of regional cooperation for the oil refining industry of small developing countries: A case study of Central America
This study analyzes regional cooperation in the oil refining industry of small developing countries. These countries are characterized by scarce financial and economic resources and by small domestic markets. Despite the size of their markets, most of these countries have oil refineries. As a result, the scale of operations of these refineries is very low. In addition, these countries lack bargaining power in the international markets and their regulatory regimes governing the oil industry are inefficient. The underlying question of this study is whether regional cooperation is a viable option to significantly reduce the long-run costs of oil supplies for these countries.
The objective of this dissertation is to develop a framework of regional cooperation for the oil refining industry of small developing countries that integrates both efficiency and equity conditions. The framework is applied to a case study of Central America, and consists of two parts. First, an efficiency test is performed through an optimization model in order to measure the benefits of regional cooperation vis-a-vis other long-run supply options. Second, a series of equity conditions are defined in order to ensure a fair distribution of the net benefits from cooperation. These conditions include neutrality in the treatment of taxes, investment, national security concerns, employment, and in the allocation of costs.
The results of the case study show that regional cooperation is the most efficient long-run supply option for the oil refining industry of Central America. However, to be viable on equity grounds, a new policy and regulatory framework is required for the oil industry of these countries. Key policies addressed in this study include: pricing of oil products, liberalization of the oil markets, the role of the state in the oil refining industry, the role of foreign investment (multinational oil companies), taxes, and, staffing of technical and managerial personnel.
The framework proposed in this study is a useful tool for estimating the opportunity costs of non-cooperation. Estimates of the opportunity costs may be useful to policy makers in making assessments of the political risks associated with regional cooperation and the forgone benefits of choosing not to cooperate.
Area planning & development;
0999: Area planning & development
0765: Petroleum production