Originally Posted by
scambo1
Just spitballin here:
DAL is one of the worlds largest users of jet fuel. When you remove the crack spread from the equation, you save a lot of money. If we aren't going to run on waste veggie oil or fischer tropsh and petroleum continues to be the fuel of choice, then this is just a smart vertical integration strategy.
Refineries are capital intensive businesses, but if we are buying one that is already built and which has also been depreciated, it might be like buying MD90s. I have no idea what the hard numbers might be.
Right on Scambo! the MD90 analogy is better than you think...
The crack speed is where its at... Huge increase from just a few years ago and a significant component of our fuel cost. There is a disconnect between the crude price and the price of the refined distillates. Most of the delta is attributable to speculative markets where simultaneously buying and selling futures of crude and finished distillates, typically heating oil and gasoline.
Traditionally the crack spread was a hedging tool used by refineries to control raw product price and maximize yield by producing the the optimal quantities of gasoline and oil. With the widespread increase of speculators from outside the supply chain, many smaller refineries have found themselves unable to participate from a capital standpoint and as ironic as it seems fallen on hard times with the record high fuel cost...
The large fully integrated refineries owned by the multinationals have had no such capital conturing putting further pressure on the independents.
In town, a local refinery recently was modernized, upgraded and capacity increased 30-40%. The owner was unable to participate on the necessary scale in the capital markets to control the crack spread,
so the refinery was sold to an Israeli company for $20M about a year and a half ago. MD90 indeed Scambo
Ironically production was halted in Jan 2012 because of the inability of the current owners to adequately participate in the financial markets...
So guess who comes to the rescue? Goldman Sachs.
The refinery will now buy crude oil at market price from a unit of Goldman Sachs and also sell refined products to the same unit of Goldman at market price. So now Goldman Sachs controls the crack spread directly...
The crack spread and the financial markets controlling it is why fuel prices currently are high and exactly why Delta is getting in the refinery game. By controlling raw materials, refining and refinery output, Delta can massage yields at every step using the revenue to offset fuel price fluctuations. The cost for entry is low and the financial benefits of running a refinery are realized before and after refining operations...
Cheers
George