Now here’s something I was never expecting: Delta Airlines has apparently agreed to buy a Pennsylvania oil refinery from ConocoPhillips for $150 million (plus $30 million in government assistance for job creation). Once you get your head around it, it all makes perfect sense. Fuel is the largest expense an airline has. It’s also tremendously volatile and on a permanent upward trajectory. Why not try to contain some of that volatility by simply getting directly involved in the refinery business? While you’re at it, why not optimize the refinery to produce mostly jet fuel?
In a nutshell, that’s what Delta plans to do – to the tune of a tremendous expected savings of $300Million a year, easily paying for their initial investment. But at the meta level, this transaction gets even more interesting – it secures a more predictable jet fuel source for Delta, but also represents a likely future trend as companies go to ever greater lengths to reduce fuel costs. More importantly, it’s a demonstration of the ever increasing pressures of peak oil. I should add that I’m making a big assumption – that Delta knows what they’re doing in terms of getting the right people to run an operation like a refinery!
Will other airlines follow suit? What about car companies? Massive fleet owners like Enterprise Holdings? We usually cover examples of companies finding ways to use fuel more efficiently. However, from a strictly economic point of view it makes perfect sense to work from the other direction – influencing price directly by getting involved in the refining process itself. Perhaps it’s only a matter of time before companies are buying up oil wells directly.
Moves like this are likely to also influence the price the rest of us pay at the pump – and not in the way people may like. If an airline can cordone off a refinery for their own private use, then it certainly doesn’t bode too well for Joe Sixpack and his SUV.
Nonetheless, as we’re fond of pointing out, high gas prices are actually good in the long term. Delta is wisely hedging their bets by securing a break for the time being. But high prices bode well for innovation and economic growth in the long run. Other airlines and innumerable startups are looking at renewable alternatives to petroleum based jetfuel and aircraft manufacturers are scrambling to introduce more efficient models of aircraft, including re-popularizing turbo props. All of this ultimately means new companies and new jobs over time.
Joe Sixpack may have to wait a while before these innovations benefit him directly, but at the end of the day, clever thinking on overcoming our dependence on oil is a sign of the times.