Pa. shouldn’t subsidize Delta’s refinery deal

Posted: May 12, 2012

Gov. Corbett is hailing it as “an important win for the local community and the people of Pennsylvania.” C. Alan Walker, secretary of the state Department of Community and Economic Development, calls it a “win-win for everybody.”

Their effusive praise was for a taxpayer-aided deal that will see Delta Air Lines buy the recently idled ConocoPhillips gasoline refinery in Trainer. In an attempt to battle rising jet-fuel costs, Delta will refine its own at the site, which will supposedly save $300 million a year.

Taxpayers have an involuntary $30 million stake — “a tremendous investment,” as Corbett put it, noting, “Delta is matching our investment 10-to-one.” Jobs will be saved, and the economy will be boosted, he says.

But this venture is no slam dunk. Not only is it a business model never tried by the airline industry; it is one fraught with peril, attempting to corral markets that, realistically, can’t be.

Delta will pay $180 million for the refinery. It gets the taxpayers’ $30 million only if it makes an additional capital investment of $170 million over five years and employs 402 people full-time for the same term. Delta subsidiary Monroe Energy will run the operation in partnership with BP, which will supply crude oil, and ConocoPhillips, which will market gasoline and other refined products produced there.

So what’s not to like about the deal? This kind of vertical integration is neither the panacea nor the “outside-the-box thinking” that the Delta and state government talking points claim.

While there might be lower transaction costs and an appearance of “independence,” vertical integration can also lead to unwieldy bureaucracies and, because of a lack of competition, quality problems. The results can mimic the inefficiencies of socialist economies.

Paul Ausick, writing for 24/7 Wall Street, doubted that Delta can realize its projected savings. It would require a cheaper grade of crude that won’t be readily available in the short term, he says. Not only will Monroe/Delta be trading lower-price fuels for more expensive fuel — “No savings there,” writes Ausick — but “the only way for Delta to make sure it saves money is to source its crude more cheaply.”

Ausick speculates that the lack of cheaper crude explains why JPMorgan Chase & Co., which was to engage in the crude-oil trading necessary for the project, is no longer involved. Perhaps that’s why taxpayers have been tapped.

Don Boudreaux, the noted George Mason University economist and proprietor of CafeHayek.com, asks: “If Delta owning and operating a refinery is such a profitable idea, why does it need a subsidy from government to make this outcome a reality?” As Jake Haulk, president of the Allegheny Institute for Public Policy, put it: “If Delta needed some cash, there are lots of capital firms who would be glad to invest in a deal as lucrative as this one — assuming Delta is not blowing smoke about the fuel cost savings.”

Government has no business making taxpayers venture capitalists. When it does, it’s often an indication that the venture isn’t such a capital idea.

Colin McNickle is the editorial page editor of the Pittsburgh Tribune-Review.

comments powered by Disqus
|
|
|
|
|