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Men Plan, Gods Laugh

The morning after the State of the Union address I overheard this discussion.   An individual referenced a proclamation made by President Biden regarding fossil fuel usage to be net zero emissions by 2050, effectively phasing out oil.  The comment, framed as a question, was; “If you were an executive of an oil company having to make decisions about capital investments today knowing that the future might make your product obsolete what would do?”

My first thought was you’d have to assess the potential to be reality.  There is one risk in investing and running a business that you can’t minimize; government risk.  The ability of a government to, in the blink of an eye, change the landscape is forever looming.  If you think the rhetoric is just hot air then I’d say move forward as normal.  Why allow idle boast to drive decisions?  If though, you fear the risk as legit, then you have got to take a completely different tact.

What really is the potential for the risk to be legit?  Tough to say but it has happened and will likely happen again.  The most recent sudden landscape change was at the beginning of COVID and the call went out across the land to shut down every business.  WHAM!!!!  Business plans were shot to hell as production and revenue came to a screeching halt.  The businesses that were able to survive had quickly adjusted what or how they did business.  This change was short term, not long term in nature like ending oil usage.

Long term changes in the landscape have occurred and will likely occur again.  There are several examples; the abolishment of slavery and prohibition. Both dramatically changed how businesses operated.  Looking specifically at prohibition, prior there were thousands of breweries, distilleries and wineries.  More closely looking at brewers of beer roughly 10% survived.  Our current robust explosion of “microbrew” is only now matching the number of breweries of the last 1800’s.  One brewer that did manage to survive was Anheuser-Busch.   They did it by pivoting, making freezer trucks and campers for cars was one of the many things it did.

My answer to this individual’s question is this; taken seriously I would begin diversifying away from oil, while holding onto what you have originally done for as long as you could, hopefully to the end.  Why? First part is obvious, you got to be able to survive after the last well pumped its last drop.  You have to start making freezer trucks.  Second part is basic economics.  During the time that oil and gas producers are being phased out you want to be one of the last standing because you will be able to continue to hold prices high as fewer suppliers are in the market.  Slowly decommission as warranted, minimal investment to keep going.  If you are the last and only one at the end, as demand is slowing you can wait until the inflection point to bail out or ride it to the end.  Best scenario is you sell your last gallon just when one more gallon was needed.  Then turn off the spigot and with your inflated profits ride off into the sunset fully capitalized for your next incarnation.

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