AN INVESTMENT PLANNING MODEL FOR THE OIL-REFINING AND PETROCHEMICAL INDUSTRIES IN KOREA

The investment planning model presented here combines information from both the oil-refining industry and the petrochemical industry in order to consider how the Korean economy can best use limited availability of crude oil. The proposed model addresses two broad questions: (1) when is the best time to install new production capacity or to expand existing capacity in order to meet future demand for finished products, and (2) what options are available to deal with increasingly strict government anti-pollution regulations. Two models are constructed in this study, a static and a dynamic model. The static model is useful not only as the base of the dynamic model, but also as a tool for analyzing the refinery operations. This study is therefore concerned both with day-to-day operations and with long-term investment planning. In building the linear programming model, a special computer language called GAMS (General Algebraic Modeling System) is used. The results generated by models appear quite reasonable. Five general conclusions emerged from this study: (1) combining the oil-refining industry and the petrochemical industry into one model proved effective, as demonstrated by the large amount of inter-industry activities; (2) economies of scale play an important role, competing with transportation costs in determining the optimum program for production capacity expansion; (3) anti-pollution regulations strongly affect the location and size of the expansions; (4) interplant shipments of intermediate products make possible substantially reduced total costs. In addition, such shipments also affect the location and size of the production capacity expansions; and (5) national security considerations had a strong effects on total costs and on the location and size of the production capacity expansions.