Petroleum Refining Industry: An Assessment of Its Production Structure*

Abstract

Cost structure of petroleum refining industry in Kuwait has been examined, with specific focus on factor substitution, and economies of scale and utilisation. This has been done by estimating translog cost functions, both long-run and short-run, using annual time-series data covering the period from 1976 to 1998. The results indicate that the implied production structure is non-homothetic, and the pattern of scale effect is labour and capital saving but material using. The evidence also supports presence of induced exogenous technical change, which is non-neutral (labour and capital using, and material saving). The elasticity of substitution between capital and labour is negative, implying that the two inputs are complements. The results also indicate absence of economies and diseconomies of scale in the petroleum refining industry.