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Delta Air Lines Buys Oil Refinery… Can You Say Peak Oil?

| Wednesday May 2nd, 2012 | 7 Comments

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.


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  • Jmyers

    Let’s scientifically analyze the situation. An experienced oil and gas company cannot themselves make money on a refinery because it is so antiquated that they are going to shut it down if they cannot sell it. an airline company gets 30,000,000 dollars from the federal government to buy a mistake and have the taxpayers fund it and they know nothing about the oil and gas business? Gee, let’s all buy stock in that company!

  • Whoopdedoo

    Ok, let’s look at it another way.  COP has 10 guys to turn a valve (i.e. too much overhead )DAL will not run the refinery…Monroe LLC will.  They have experienced execs running it.  Part of the deal is DAL will own the pipeline from PHL to JFK and LGA.  They are 2 huge hubs for DAL..  So I agree with you that refineries will continue to close on the east coast.  So, what happens when your supplies close down.  The price of oil goes up.  Except if you own your own refinery.  The stock that   that you passed on has gone up 10% since the purchase.

    • Jmyers

      Sorry, my grandfather worked his entire life for Conoco and ran their refineries and I have been in the biz for 35 years myself.  I can assure you, pretty much all the same people will be working there later as work there now.  That is a fact of life.  Like AA and the other airlines, there are too high of costs with labor as it is, but that is not that particular refineries problem.  It is not possible to spend enough to upgrade it just as one cannot spend enough to upgrade a Model T and make it a worthwile long term investment that will payoff. 

      Just because stupid people who know nothing about business complexities buy stock in a company on what they think is “intelligent media hype” and run its value up over a short time frame, does not make it a prudent long term investment.  I would make an exception for daytraders.

  • Edison

    You guys seem to know a thing or two about the industry.  Never mind the stock price.. .you think it’s a bad move for Delta?

  • http://MrEnergyCzar.com/ MrEnergyCzar

    Only the very wealthy will be flying a number of years after cheap easy oil has peaked.  Just like when passenger flights first started out.  Maybe one tenth of the airports would even be open.  This is just a desperate move to sustain the unsustainable…  sad really…

  • Andrew

    I guess the real issue will be total yield (as a percentage of throughput) of the Jet fuel cut.  Whilst the spec on Low sulfur diesel has been more and more of a challenge (costly) to make; has Jet A-1 or 54 grade spec changed substantively over the past 15 yrs?  Other factors to consider as a Delta shareholder would be the Refinery’s (ex Tosco?) cost of environmental compliance and long term liability?  These are just a few thoughts to ponder, as a frequent flier, I want the airliens to make some $$$ so they can hopefully get back to providing a civilized, fair priced mode of transport!

  • Perry525

    Vertical integration makes sense, removing the middle men and their profit.