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A new technique for extracting residues of oil from existing [#permalink]
19 Jan 2005, 11:32
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A new technique for extracting residues of oil from existing oil wells by using lignins, a by-product of papermaking, is profitable provided that oil prices are over 20 dollars a barrel. Since oil prices are rising, investors looking for companies with prospects for rapid growth in profits would be wise to invest in paper manufacturers, whose currently almost worthless by-product will soon be a profit-boosting commodity.
Which of the following, if true, most seriously weakens the argument above?
(A) A small quantity of lignins are currently sold by paper manufacturers to chemical companies, but most of the lignins produced are burnt as waste.
(B) The 20-dollar-a-barrel oil price as a threshold of profitability for using lignins allows for the increased cost of refining crude oil that has been extracted using lignins.
(C) Only one-half to two-thirds of the total oil in a well can be extracted using conventional techniques of pumping and flooding with water.
(D) Petroleum-based substances that can be used as a substitute for lignins in extracting oil are costly and are made from oil, and these substances therefore increase in price as oil increases in price.
(E) The quantity of lignins produced annually in the manufacture of paper is several times larger than the amount that is likely to be useful in the oil industry.
Simple Demand and Supply equation in (E). Since the supply is always greater than whatever the demand for lignin be so the paper industry will never be able to drive the price of lignin and therefore no rapid growth in profitability.
I am not convinced with explanation give for choosing E as the answer.
If paper manufacturing produces lot of worthless lignin and even if some of it could be used for oil extraction, I don't see why it would weaken the argument seriously. Nobody claimed that all the Lignin will be useful!
The statement claims that an oil extraction process using Lignin would be profitable if oil price is high. Since the oil price is rising it is likely the process would indeed be profitable. However the jump here is that it recommend investment in Lignin production, assuming the profitbility in the oil extraction process would drive the Lignin price up. However if there are more supply than demand for Lignin, its price will not rise. Therefore E is the correct answer.