I'm posting this mainly because I need help understanding the business model being followed by the company below, and to get clarification on some aspects of the synthetic fuels industry.
To the best of my understanding, it costs anywhere from $5-35 per barrel to produce synthetic fuels such as gasoline and diesel, using proven coals-to-liquids refining processes. Those costs translate to maybe $1 per gallon on the retail market, give or take a nickel or two.
Back when oil was cheap - under $30/barrel, Congress passed legislation to provide tax credits for synthetic fuels producers because their costs to produce usable fuel were higher than petroleum fuel producers. But as the price of oil rose above $30/barrel, the tax credits for synfuel production diminish. I'm not real clear on the details of these tax credits, which is one reason for posting the diary.
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Given that synthetic fuels are now cheaper to produce than petroleum fuels, many companies have launched plans to open plants to produce a cheaper fuel for our domestic consumption, in that great free market capitalist tradition (see
here,
here,
here,
here).
However, there are over 100 synfuel producers in operation today, who've been in operation for over two decades, but we've yet to see any of these lower priced fuels on the market. My hopes to see these cheaper fuels enter the market to help replace petroleum fuels, and give us a much needed respite from exhorbitant petroleum fuel prices, are growing dim.
Here's the article that reports the activities on one business model in the industry, that I'm hoping can be explained in greater detail by our resident fuels experts.
DTE Energy Co., owner of Michigan's largest utility, reported its first quarterly loss in three years after the company idled synthetic fuel plants because of the prospect that tax credits tied to production will be cut back.
...
DTE in May shut its nine synthetic fuel plants, which process coal waste and provide the company with federal tax credits that are reduced as oil prices rise. The company, which had earlier forecast that synthetic fuel production would account for about one-third of earnings this year, shuttered the plants on concern that gains in oil would eliminate the tax benefit.
"A lot of synfuel producers will likely be booking some expenses," said Mark Sadeghian, an analyst with Morningstar Investment Services, who rates the shares three stars out of five and doesn't own them.
In a statement, DTE Chief Executive Officer Anthony Earley said: "The impact of high oil prices on our synfuel operations has created negative pressure on earnings."
(Another article reflecting the impact of these plant closings is here, where a waste product supplier took a hit this quarter because the synfuel plants they supplied coal to have shut down)
Can someone explain what's going on here, and why these plants are closing instead of moving into the domestic retail fuels market to make their money? If your product can net you comparable oil industry profits while selling on the retail market for $1-2/gallon, WHY aren't you selling that product on the retail market? Does anybody here think $1-2/gal gas prices wouldn't cause a stampede to the gas station?