Sunday, April 10, 2016

Buggy Whips and Black Gold

The analogy goes that when the automobile exploded on the world, the buggy whip manufacturers all went broke. I'm sure plenty did, not seeing the coming shift in transportation. It's an old story where the old guard thinks that a new technology cannot push the old one out of the way, and they just kept making those buggy whips until one day the orders stopped. 

But I'm willing to bet a few smart people looked at automobiles and said "Uh-oh, we better find something else and soon" and started to divest their buggy whip departments. 

I don't know what they went in to, but they had a warehouse full of buggy whip supplies. Want to bet they went into overdrive making as many buggy whips as they could as fast as they could to empty the warehouses? 

But why would they do that?

The resulting glut of buggy whips on the market would have driven the price into the ground, but at least they would get something for those buggy whips, otherwise the components in the warehouses became stranded assets. You still have to pay for the buggy whip parts, you still have to pay for the warehousing, so sell it and get rid of it is plan A, even if you sell at a loss you get something. Plan B is to send all that stuff in the warehouse to the dump, and you have to pay to send it there. 

It happens all the time. Flip Phones all but wiped out the bricks that we used to have for cellphones. Feature Phones wiped out the Flip Phones, and the Smart Phone killed the Feature Phone. Want to bet some manufacturers got stuck with a warehouse full of the old type cellphones?

Stranded assets. You paid for them, you have warehouses full of the bits to make 'em, but nobody wants your crappy old cellphones.

I keep coming back to this because of the pipeline debates. 

I often wondered why there was this sudden rush to ship oil, especially dilbit, to anywhere?  Keystone was a "no brainer" until it stalled and now it appears all but dead. The pipes to the West to waiting China bound tankers was plan B, but that got mired down too. Plan C is Energy East, but that has opposition too. 

But still, why? The oil would still be there years from now, everyone was just talking about Peak Oil and we'd be sitting on a pile of gold. Or at least Alberta would. 

And then the Saudis struck. They started pumping oil as fast as they could, the prices dropped and oil dependant economies got hammered. They had (and have) no choice. They need to sell oil or they swirl down the toilet, they don't have a Plan B. 

So what happened?

Did the Saudis see something on the horizon that made them collectively say "Uh-oh"?

A disruptive technology could explain what's happening. 

Every time someone suggested processing oil and dilbit in Alberta, they were promptly shot down because it was too expensive. Refineries last a long time, surely it couldn't be that bad. If the pipes were to carry good oil as opposed to dilbit East to the refineries in Ontario and beyond, I don't think the opposition to those pipes would have been half as strong. Keystone might have actually happened. 

And somewhere between Keystone and Energy East, the Saudis happened. Their oil, the good stuff is being shipped around Africa instead of the quicker Suez route because the tankers are backed up at the ports in Europe. And yet the Saudis keep pumping. 

I don't see the economic argument for sending dilbit East or any other direction for that matter. It sells at a discount because it has to be double refined to remove the diluents before you can process the heavy crude into useful oil. It's slower and more expensive than processing lighter crude. The refineries in the US that do handle dilbit only do so when they have excess capacity. If there is sufficient light crude available, the dilbit waits. 

And so, can someone explain how having dilbit sitting in tankers s better than having bitumen in the ground? Those boats are going to sit and watch the tankers with the good oil coming and going until the Saudis turn off the taps. When that happens, will there even be a market for oil?

Something is happening. The Saudis aren't pumping like crazy for fun. If they thought they could make more by leaving the taps alone, they would have. They put us over a barrel years ago by tightening supply causing the original oil crisis, now it's the opposite. 

Is this the buggy whip scenario for the 21st century? Are the Saudis betting the farm (or the whole country) on getting rid of their oil and moving on to the next thing? And will the other oil producers who don't move on quickly enough going under like the buggy whip makers of yore?

We're lucky. We've got an economy that is only partly dependant on oil. It will hurt Alberta, but they're already starting to adjust. It will hurt the provinces in the East as well, they were hoping their offshore oil would be a Cinderella story for them as well. 

It's going to be rough for a while, but as I said, we're not as dependant on oil production like some in the Middle East or Venezuela. We have options. If we are agile enough, we might even catch the wave that the Saudis seem to be watching.

At least we have a shot at a Plan B.

Cheers, BC