Welcome to Netrider ... Connecting Riders!

Interested in talking motorbikes with a terrific community of riders?
Signup (it's quick and free) to join the discussions and access the full suite of tools and information that Netrider has to offer.

[US] Delta Airlines buys a refinery in order to manage it's fuel cost.

Discussion in 'The Pub' started by robsalvv, May 2, 2012.

  1. IMO, this is an utterly brilliant business move.


  2. Interesting

    I have read that fuel costs go up as there is not enough refineries in USa and they have not built one in something like 25-30 years

    Though oil refinery productivity in the United States has been improving, the number of operating refineries has been dropping steadily. In 1982, the earliest year for which the Energy Information Administration has data, there were 301 operable refineries in the U.S., and they produced about 17.9 million barrels of oil per day. Today there are only 149 refineries, but they're producing 17.4 million barrels – less than in 1982, but more than any year since then. The increase in efficiency is impressive, but it's not enough to meet demand: U.S. oil consumption is 20.7 million barrels per day. Refinery capacity isn't the only factor in the price of gasoline, and according to the EIA it's not the most important one either (that would be the cost of crude oil), but it's certainly a contributor.

    Existing refineries have been running at or near full capacity since the mid-1990s, but are failing to meet daily consumption demands. Yet there hasn't been a new refinery built in the U.S. since 1976. Why? Several factors: Building a refinery is expensive, there are a lot of environmental restrictions on where and how they can be built and nobody wants to live near one. One company, Arizona Clean Fuels, has been trying to construct a refinery in the Southwest since 1998. Getting a permit to build took seven years, and the company twice changed the plant's proposed location because of environmental restrictions and land disputes. The refinery is projected to have a $3.7 billion total price tag. The EIA recorded per-barrel profits of $5.29 in 2006; at that rate, the 150,000-barrel-per-day refinery would need to operate for almost 13 years before its profits outweighed the cost of building it.

    In short, the reason for not adding more refineries is straightforward: It's hard, and it's expensive. The reason that we have so few in the first place is more complicated. In the 1980s and 1990s, there was a surplus of refining capacity. Then, over the course of two decades, half of the plants shut down. In 2001, Oregon senator Ron Wyden presented to Congress a report arguing that these closings were calculated choices intended to increase oil company profits. Fewer refineries means less product in circulation, which means a lower supply-to-demand ratio and more profit. Wyden's report cites internal memos from the oil industry implying that this reduction was a deliberate attempt to curtail profit losses.

    The economic pressures of oversupply could have led to plant closings even without a more calculated decision, of course. In 2005, the head of the National Petrochemical and Refiners Association testified at a House hearing that the rate of return on investment in refining averaged just five and a half percent from 1993 to 2003.

    - Jess Henig


    Porter, Adam. "Global refinery shortage shifts power balance." BBC News. 2 Oct. 2005.

    Mouawad, Jad. "No New Refineries in 29 Years? There Might Well Be a Reason." The New York Times. 9 May 2005.

    Schoen, John W. "U.S. refiners stretch to meet demand." MSNBC. 22 Nov. 2004.

    Reynolds, Sarah. "East County oil refinery will move." Yuma Sun. 5 Feb. 2008.

    Associated Press. "Arizona refinery permit took seven years, Senate told." 14 Jul. 2006.

    Wyden, Ron. "The Oil Industry, Gas Supply and Refinery Capacity: More Than Meets the Eye." 14 Jun. 2001.

    109th United States Congress. "Petroleum Refineries: Will Record Profits Spur Investment in New Capacity?" House Subcommittee on Energy and Resources. 19 Oct. 2005.
  3. It is amazing how economic theory goes round and round.

    Vertical integration of supply and service is bad you should focus on your core business.
    Vertical integration of supply and service is wonderful and ensures continuity of supply.

    Round and round the economic merry go round. Is it any wonder that economics is a pseudo science near enough to quackery. :)
  4. Agree. I expect most of the major players will follow suit within 2 years. I doubt the investment will be anywhere near as risky as they make it out to be, significant research would have gone into the purchase.
  5. Great business move. I always wondered why this hasn't happen earlier...cut out the middle man and you could save a lot of money.
  6. Jet fuel is a market commodity product, so they have to buy it at market prices, which is waaaaaaaaaaaay higher than what it costs to make. Now that they are gonna make their own, they will have reduced their costs by some ridiculous amount and it keeps the refinery folks employed.

    I love it.

    Tak's article is spot on.
  7. It's just a pity that a lot of Australia's large industry doesn't do a similar thing. With the likes of our own Iron ore, coal and other resources. Creates employment as well. Win win.