In what has to be one of the dumbest notions ever, Delta Air Lines Inc. (NYSE: DAL) is reported to be considering buying an oil refinery. There are plenty for sale in the US, including the ConocoPhillips (NYSE: COP) 185,000 barrel/day plant in Trainer, Pennsylvania, that is apparently the one Delta is most interested in. But there’s also another one in Pennsylvania owned by Sunoco Inc. (NYSE: SUN), a second Sunoco-owned refinery in Maryland, and a really big one (500,000 barrels/day) in the Virgin Islands, Hovensa, jointly owned by Hess Corp. (NYSE: HES) and Venezuela’s national oil company.

The reason these refineries are for sale is because they are — most of the time — money-losers. Except for Hovensa, all are capable of refining only Brent-quality crude, which is currently the most expensive crude in the world, and the international benchmark for pricing other grades.

Today, Brent costs about $123/barrel. From a 42-gallon barrel of crude at a more or less standard refining ratio (called the ‘crack spread’), a refinery actually produces nearly 45 gallons of refined products (that’s called ‘refinery gain’). Of that production, about 3.5 gallons are kerosene — aka, jet fuel.

The current cost of a barrel of jet fuel is $139 according to the International Air Traffic Association. If it becomes a refiner, the only thing Delta can wring out of that cost is profit, which is currently non-existent in east coast refineries. That’s why real oil companies are closing the refineries.

Of course Delta can sell all the other products — gasoline, diesel fuel, etc. — but then it needs either to contract that out or have a staff to manage the sale. No savings there.

There’s an old joke that the way to make a small fortune in the entertainment business is to start with a large fortune. The same thing is true of the refining business.

Paul Ausick

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