That crazy rebel-billionaire, Richard Branson is at it again. Frustrated at the rising cost of jet fuel, the Virgin Atlantic CEO wants to build his own oil refinery. The Virgin empire, which basically consists of branding consumer products (Airplanes, Music, Mobile Service) in a stylish manner, now wants to get into a very unstylish business:
"We are actively looking at building a refinery," he said. "If we don't start now to get more refineries built, then fuel prices could literally rocket to $100-$200 (per barrel of oil) and the world economy would come to a grinding halt."
Branson did not give any specifics of a project, which has been the subject of speculation in Europe for some time.
"We are reasonably far down the line," said Branson, whose Virgin empire ranges from air travel and mobile phones to music and financial services. "We most likely won't do it ourselves. We're talking about a $2 billion investment -- we're willing to put the money in and we're trying to encourage other airlines to put money in as well. It's a great way of hedging against fuel prices."
First of all, this whole economy "grinding to a halt" thing is getting a little tired. If $200 oil were gonna stop the economy in its tracks, then the economy would have slowed well before oil had a change to get that high. QED. Secondly, and more importantly, why does Branson think that investing in his own personal refinery will help him get energy any cheaper? If building new refineries is doable, and worthwhile, then the refiners themselves will certainly do their own building, and with for more expertise and economies of scale. Thirdly, the reason that fuel is expensive is because oil is expensive, and adding new refineries won't do anything to reduce the price of oil. If anything, it might do the opposite. If you want to get a better handle on the Refinery situation, then read this James Hamilton entry, from Econbrower. The upshot is that while the number of refineries has been at a standstill, actually throughput and capacity has grown due to more efficient use of the existing refineries.
Amazingly, R.B. (Richard Branson/Rebel-Billionaire...your pick), isn't the only one interested in going after raw materials for their company. A few days ago, Jeff Matthews cited a Bear Sterns report that suggested that Procter & Gamble (NYSE: PG) was "scouring the globe to find raw materials":
According to the report, P&G management—which I think anybody on Wall Street would rank up there with the best in the world—“has been working for quite a while at insuring an ability to use a variety of input costs [sic]. Nonetheless, we think that the recent announcements by chemical companies that they could be declaring force majeure on key inputs could limit supply and raise costs.”
Again, not quite sure why P&G would have any better luck finding cheap raw materials, when the raw materials companies aren't finding it themselves. Maybe they know something we don't (well, that's pretty likely actually). It seems likely though that with a lot of companies veering out of their traditional lines to start mining raw materials, overcapacity could develop sooner or later, and they'll get their wish cheap raw materials, albeit at a very high cost.