Application of Data Envelopment Analysis to Measure the Technical Efficiency of Oil Refineries: A Case Study

Abstract

This paper is an attempt to implement the Data Envelopment Analysis (DEA) approach to measure the relative efficiency of a sample of oil refineries in Iraq over a period of two years, 2009-2010. We demonstrate that DEA is an effective tool for the Ministry of Petroleum (MOP) for monitoring and controlling the performance of oil refineries, which are growing as an important sector in Iraq. The authors followed a case study methodology where data about the inputs and outputs of refineries are gathered and analyzed to compute the relative efficiency of the refineries. Based on the results obtained, 50% of the refineries were efficient in 2009, while 58% of them were efficient in 2010, and the overall efficiency of the refineries studied was about 82% and 87% respectively. Later, inefficient refineries were investigated closely to identify the areas in which the use of resources manifest decreasing returns to scale. We concluded the paper with some recommendations on the applicability of the DEA for oil refinery efficiency evaluation. Due to the absence of research work, in this discipline, in the oil sector in Iraq, this study shall augment our knowledge on how oil refineries in Iraq may apply DEA to measure their efficiency, and how they might use the results to overcome efficiency problems. Although the results of the present paper are limited to the oil refineries studied; the DEA approach could trigger the attention of policy makers in the MOP to apply DEA to improve the efficiency of other DMUs. In addition, other manufacturing and service sectors in Iraq could, also, benefit from this approach.