As fuel prices rise, Delta airlines buys an oil refinery

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6 Responses to “As fuel prices rise, Delta airlines buys an oil refinery”

  1. NelC says:

    That could be interesting, if they bring air travel safety standards to the business of petroleum refining. Or the other thing, not-interesting, since hopefully nothing obvious will happen.

  2. eerd says:

    You missed the quote from Tom Kloza, in the NYT, who said: “It’s a little like a rabbi buying a church.”

    It is a bit weird. It seems to be an effort to get around Delta’s exposure to jet fuel and the difficulty of hedging it, but just moves its reliance further upstream and turns it into a short crude position. Is running a refinery easier than hedging? My inclination would be that it’s not.

    Presumably, though, the locals are happy given that the refinery was idle and there had been talk of turning it into a terminal. I think Pennsylvania contributed $30 million to the total of $180 million, which is not a bad bargain for Delta. Although I’m not entirely sure how well that chimes with the notion of free enterprise.

  3. fuzzyfuzzyfungus says:

    What I find interesting about this is that there is no particular reason to expect that Delta has any comparative advantage in running oil refineries. Best case, they’ll likely perform at industry norms, worst case their efficiency will be substandard.

    They presumably know this. If they are buying anyway, it suggests a bet (of nontrivial size) on their part that their aviation fuel costs are partly a product of under-production by the existing refiners, not simply a matter of cost of oil + cost of refining…

    • dioptase says:

       Refineries can tweak the cracking and distillation process to change the proportions of distillate produced.  Many plants try to maximize gasoline, producing less jet fuel.  So airlines have to buy fuel with a price set by demand for a different product.  By making their own, Delta can shift production toward jet fuel, making it cheaper.  So in a sense, it would be more efficient than the industry standard.

      But then again, that means they would be selling less gasoline, losing money there.  So it’s kind of a wash.

  4. RJ says:

    Imagine: “Delta Oil” gas stations. Every time you go to fill up the car, security guards will take naked pictures of you, slide their hand up your crack and ask you if you’re smuggling something dangerous down there.

  5. David Stephens says:

    This takes locavore to a whole new level. What next, is Whole Foods going to start selling only local sourced food…oops:
    http://www.slate.com/articles/arts/culturebox/2006/03/is_whole_foods_wholesome.html

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