An Oil Company Produces Oil at Two Wells

question 82

Essay

An oil company produces oil at two wells. Well 1 can produce up to 150,000 barrels per day, and Well 2 can produce up to 200,000 barrels per day. It is possible to ship oil directly from the wells to customers in Los Angeles and New York. Alternatively, the company could transport oil to the ports of Mobile and Galveston and then ship it by tanker to New York or Los Angeles. Los Angeles requires 160,000 barrels per day, and New York requires 140,000 barrels per day. The costs (in dollars) of shipping 1000 barrels between various locations are shown below:
-(A) Assume that before being shipped to Los Angeles or New York, all oil produced at the wells must be refined at either Mobile or Galveston. To refine 10000 barrels of oil costs $12 at Mobile and $10 at Galveston. Assuming that both Mobile and Galveston have infinite refinery capacity, determine how to minimize the daily cost of transporting and refining the oil requirements of Los Angeles and New York.
(B) Rework (A) under the assumption that Galveston has a refinery capacity of 150,000 barrels per day, and Mobile has a refinery capacity of 180,000 barrels per day.

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Definitions:

Junk Bonds

Junk bonds are high-yield bonds that carry a higher risk of default compared to investment-grade bonds, offering higher interest rates to compensate for the increased risk.

Interest Rate Risk

The potential for investment losses due to fluctuations in the interest rates, affecting the value of interest-bearing assets like bonds.

Variable Rate Coupons

Bonds or other loans that have interest payments adjusted at periodic intervals based on a reference interest rate.