The purpose of this chapter is to present a summary of what is known about economics of scale in the coal industry, in the crude oil industry, in the petroleum refining industry, and in the integration of these industries. By economies of scale is meant the relationship of costs to size. The measurement of economies of scale is often an attempt to designate the most efficient size or sizes. Most economies of scale studies have dealt with size of plant rather than with size of firm. This focus on size of plant has occurred because data limitations often make it impossible to say much about multiplant firms and their possible efficiencies.

Three approaches have been used to measure economies of scale: the engineering study, estimation of the production function, and the survivor technique. The engineering approach studies the actual technology that is most efficient in the industry and determines which size or sizes of plant can fully take account of all the possible cost saving techniques. Inevitably, the engineering study must overlook many factors, such as management efficiency, shipping costs, stockpiling costs, and the effect of variations in capacity utilization on costs. As a consequence, it will almost always indicate that the largest sizes are the most efficient. It can, however, produce dollar estimates of cost saving of large size.

Fitting production functions to industry data can produce statistical evidence on the degree of homogeneity. However, because of data limitations and sample size, the conclusions drawn are usually that constant returns to scale are or are not consistent with the evidence. Little can be said about either the size of the cost advantage of large operations or about the minimum efficient size.