Economies of Scale in Natural Gas Pipeline

Economies of scale refer to the cost advantages that a company experiences as it increases its production scale. In this case, the larger the diameter of a natural gas pipeline, the lower the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is because of several reasons:

Lower Fixed Costs

As the diameter of the pipeline increases, the fixed costs associated with building and maintaining the pipeline are spread out over a larger volume of gas. This lowers the average fixed cost per unit of gas transported, making it more cost-effective.

Lower Operating Costs

A larger pipeline also allows for more efficient transportation of gas. The pressure of the gas can be maintained more easily, and there is less friction as the gas flows through the pipeline. This means that the operating costs per unit of gas transported are lower for larger pipelines.

Higher Capacity

A larger pipeline has a higher capacity, which means that more gas can be transported in a single trip. This reduces the number of trips required to transport the same amount of gas, and therefore reduces the overall cost of transportation.

Conclusion

In conclusion, the larger the diameter of a natural gas pipeline, the lower the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles due to economies of scale. Lower fixed costs, lower operating costs, and higher capacity all contribute to this cost advantage.