Originally Posted by
mkgrip
Hasn't this been explained about a billion times in this thread?
If X ammount of jet fuel costs $1000 on the open market, and DL has that amount of its own fuel, it can either:
A) Pump the fuel into a DL plane and fly
B) Sell that fuel for $1000 to somebody who needs it, say AA.
If they choose option A they will have $1000 less money on their account than if they choose option B, so they lose $1000 by not selling it on the open market and therefore the real cost of that fuel in option A is no more or less than 1000$.
If DL did not have a refinery, it would have to buy that fuel in order to get to option A, again costing no more or less than the very same $1000.
Of course if the refinery itself could turn a huge profit if able to produce fuel way below market prices, but if it is able to do that it would be profitable even if DL didn't use any jet fuel itself. Same is true of any other business DL could invest in, if the buy a profitable tennis shoe factory, it will (by definition) bring profit to them.
I'll take a stab at this. Everything you have said is correct, but there is another question at hand: whether the "X amount of fuel" is even produced at all. In other words, with refineries closing down recently, capacity (and consequently supply) has decreased, leading to an increase in prices. By buying and operating the refinery they are increasing refining capacity and increasing supply of jet fuel, which will drive down prices. Thus, we have something more like the following:
Scenario 1: Refinery is closed, supply is restricted and X amount of fuel sells for $1100 on the open market.
Option A-- buy fuel for $1100.
Scenario 2: Refinery is operating, supply is expanded and X amount of fuel sells for $1000 on the open market.
Option A-- use own fuel.
Option B-- sell fuel to AA for $1000.
In Scenario 2, either option costs $1000. But in Scenario 1, there is only one option, and it costs 10% more!
It should also be noted that neither scenario encompasses any externalities, so if there happens to be a disruption in refining capacity elsewhere in the country (or if more oil companies shut down their refineries), both scenarios would change.
This example is not designed to show that Delta made a [good/bad] purchase per se, simply that the situation is not as simple as it seems. The refinery purchase is essentially a giant hedge against decreased capacity.