Proposal to Build a Pipeline

1 Proposal to Build a Pipeline The utilization of cost-benefit analysis is one of the most significant factors used by decision-makers in their endeavour to make the right choices regarding how scarce resources can better be used. In most organizational contexts, most decisions are often made under the conditions of limitations. The most conspicuous limitation factor can be cited as the accessibility of funds. This explains why managers and key decision makers ought to endeavour towards the endorsement of projects that harbour the most efficient, sustainable economic and social outcomes. To realize this effect even better, there may be the need for the integration of the Cost-Benefit Analysis (CBA). The essay attempts to perform a Costbenefit analysis of a certain Oil company X who is on the verge of building a pipeline from Canada to New Orleans. In the later sections of the essay, issues concerning supply and demand including price ceilings, floors and market surpluses and shortages will be addressed.

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2 Analysis

To proceed as required, it is important to consider the issue of demand and supply.

The quantities the buyers are willing to buy are highly reliant on a range of factors. The most significant of such variables may perhaps be the item’s price. From the economist points of view, as prices rise, buyers tend to buy less of the item. The vice versa is true. Most of the economist will often resort to the use of what is known as the demand function to assign unique values for the cost analysis purposes. This section presents the precise equation below:

While Q dx depicts the demand for the goods or quantities, Px refers tothe price of the good. I depicts the income of the consumer. Py here can be used to resent the price of another good (there is a possibility of many goods).

A hypothetical equation may be introduced based on the above equation Qdx=8.4-0.4 Px+0.06I-0.01 Py.

Based on the equation, it is important to note that Px and Py have a negativecross-price elasticity of demand. This means that they are complements.

Linear Market Model Before further proceeding, the study assumes that both market supply and demand functions are linear with fixed additive and coefficient residual. Though somewhat unrealistic, the additivity and the linearity assumptions tend to significantly to do away with the intricacies that are related with the estimation approaches. This is an important factor that

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can be used to function as a benchmark for evaluating whether there is a need for them to be relaxed in the future or not. The structural form of this equation is represented below d

d

d

d

Demand: q t (Pt ; Xt )= β p P t + X t β p + Et Supply: q st ( P t ; X t )= β sp P t + X t β sx + Ets

Market clearing: q dt ( P t ; X t) =q sp ( P t + X t ) = qt This simplifies to: Demand: qt= β dp P t + X t β dx + Etd (1) Supply: qt = β sp P t + X t β sx + Ets (2) The demand and supply equations above are largely structural equations of the linear oil market approach. The solution of (1) and (2) for quantity and price as functions of the covariates, the equations below (reduced form) will be obtained.

(3)

(4) Econometric analysis often endears towards estimating the structural constraints:

Somewhat estimating (1) and (2) distinctly by ordinary least squares (OLS) is likely not to lead to consistent estimates. The initial issue with equation by equation OLS is the inherent lack of identification. Due to the fact that it Becauseupply and demand approach, the price coefficients are not identified. The second problem regarding this is particularly the lack

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of efficiency. To find the apt solution, it is there quite imperative to ensure that there is a need to employ the method for consistent and efficient estimation. Therefore, to proceed as required, we will assume that the vector belonging to covariate Xtcan undergo a decomposition of four components as shown below.

The substitution of the above equation with the structural equation (1) and (2) leads to

Officially, the exclusion criterion is as follows: 1st Assumption (Exclusion). In the expanded structural equations above, for supply and demand, The structural model regarding the assumption one can be written as shown in the sections below:

Supply and Demand: analysis International and local inflation rates

International

2013

2014

2015

2016

2017

1.5 percent

0.7 percent

0.0 percent

0.5 percent

0.5 percent

PROPOSAL TO BUILD A PIPELINE

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Local

3.2 percent

4.7 percent

4.6 percent

4.5 percent

Base year = 2013; ADB cost escalation as from June 28, 2013

The management of the oil company X is quite affirmative that the construction and the subsequent supply of oil will go on uninterrupted. However, there are risk assessment deliberations that have been put in place in case of anything negative that may be used to disrupt the normal transportation of oil after its completion. The available risk assessment acknowledges eventualities that may be caused by certain shocks such as inflation, unemployment, natural disasters which may affect the supply and demand of the oil products in the organization. Total costs in the wake of such eventuality can be determined by the three levels CES function shown below:

1

2

3 Impacts of various macroeconomic effects on the oil pipeline project Macroeconomic factor

Effect description

Inflation

Higher - short-term

Economic growth

Lower - and therefore negative shock (external)

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Unemployment

Higher - as the economy slows down

Spare economic capacity

Increase - as a result of weaker growth

The balance of trade in both services and

Deterioration-rise in import bills

goods Business investments

Falls-increased costs which affect the profit

fiscal balance by the government

Deterioration- less tax revenue

Cost estimation For effective and efficient outcomes, it will be better if the cost of the oil project was based on the labor, material and equipment technique. Here we assume that labor, material, and equipment are deployed in all of the respective tasks. We also assume that the project is segmented into some tasks (n), the equation below can be used to determine the cost estimate for the construction of the oil line from Canada to Orleans.

Where Qi refers to the amount or rather the quantity of work for i Mi - the cost of material for task i Ei - the rate of unit equipment for task i Li - labour units required for every Qi units Wi - the associated wage rate for Li Equilibrium quantity and price (Q2, P2) The ensuingequilibrium quantity and price for the project take the graph shown below:

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Q2 = TR2 = P2 = 600 – (1/2) Q = Q (3/2)Q = 600 Q = Q2 = 400 P = P2 = 400 TR2 = (400) (400) = $160,000 Risk Assessment and Recommendations When it comes to the issue of environmental risk and liability assessment, it is quite important to note that oil pipeline construction just like any engineering works has instances of high risk and liability indices. Most of such risks can be averted if identified and planned

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for before they can happen. Some of the probable risks concerning the construction of the oil include. 

Equipment and pipeline transportation



Pipeline insulation



Pressure test



Repair and construction of access roads



Painting



Secondary events - may be as a result of fire due to explosive mechanisms



Natural disasters such as earthquakes, floods, and mudslides



Industrial radiography



De-rusting and other maintenance activities



On-shore and off-shore pollution-related issues



Waste incineration

Recommendations 1. Integration of training and manuals for all staffs at different levels of the construction.

Education may be effective if it focuses on issues such as: 

Effective risk assessment techniques for different experts and staffs at all levels



The management of emergency situations



Waste management

2. Introduction of preventive mechanism in all major sites, including sites that pose greater risks to the public and the effective function of the pipeline 3. Performance of continuous environmental monitoring

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4. Utilization of effective equipment such as booms, oil separators, skimmers, as a way of preventing pollution of the water bodies, soil, and air.

Conclusion The essay has attempted to perform a Cost-benefit analysis of a certain Oil company X who is on the verge of building a pipeline from Canada to New Orleans. The precise issues of discussion include the factors concerning supply and demand including price ceilings, floors, and market surpluses and shortages will be addressed.

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10 Reference

Scott, R., Slayton, R., Baggs, J., & Jernigan, J. (2015). Including the economic value of mortality risk reductions in cost-benefits analysis (CBA) of healthcare-associated infections. In Open Forum Infectious Diseases (vol. 2, no. suppl_1). Oxford, UK: Oxford University Press.

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