Topical Discussion

DEPRECIATION is a misunderstood expense. Yes, it is a “non-cash” expense, but it is real nonetheless, and usually a large value. Some jurisdictions allow it to be considered in lost profits considerations, others prohibit it. There is an economic rationale for both positions.

A LINEAR PROGRAM is a mathematical model of a refinery operation. As the saying goes, “all models are wrong, some are useful”. LPs are used for two different purposes. When tuned for one, it is out of tune for the other. The difference can lead to sub-optimized operation, or inaccurate projections of future performance. Its use in lost profits considerations is often suspect.

The economics for ETHANOL in the 1980’s were suspect, since they were based on the byproducts of the corn harvest, using a low valued material. With the RFS we have the results of a complete economic cycle of plant-harvest-ferment-sell ethanol as a motor fuel. The industry now supports 200 processing plants – more than the number of US refineries – producing one-sixth of US demand. We now have a “true” economic picture, subject only to the price subsidies of federal and state governments. The ethanol industry no longer needs these subsidies. The markets and engineers at these facilities can bring this part of the renewable fuels industry to sustainable, economic viability.

The new TAX LAWS opened the door for new investment in the refining industry, but only for a few years. An understanding of the IRS Asset Classification revenue procedures opened that door many years ago for some in the industry, and we helped them recognize that many “refining” assets are really “chemical” assets, with shorter lives.

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