Diesel cows, stable doors and bolting horses

Anxiety over diesel supply has been growing lately with warnings of a shortage multiplying by the day. When one U.S. fuel supplier warned last week that a shortage is coming and it will push up consumer prices for a lot of things, its press release became an instant hit. Obviously, that required a fact check.

I don’t know if you’ve noticed but fact-checking has become a booming industry. There are fact-checkers everywhere, from traditional to social media, righteously reporting that someone’s words were taken out of context and that’s why they sounded stupider than they were meant to sound or that diesel is basically milk but smellier.

"Inventories of diesel and gasoline are down below five-year averages, and if the entire world were to stop, we would have 25 days worth of diesel. But the world doesn't stop. We're not counting on it stopping.

"Your grocery store may have an inventory of three days of milk. That's because they only have three days' worth at any given point. But the cow keeps milking, the farmer keeps sending milk, the dairy keeps delivering."

The above is a quote from a fact-checking CBS report that interviewed a professor of energy economics at the University of Houston named Ed Hirs. According to Hirs, there is little difference between a refinery and a dairy farm, which you must admit is quite a refreshing thought.

In a way, it is also an accurate thought. In both a refinery and a dairy farm you need inputs (crude oil or food) that you process into products (milk or fuels and other derivatives). As long as the amount of milk or fuel produced corresponds to the amount of milk or fuel demanded, all is well.

And this is where the analogy breaks down because right now the situation in the U.S. resembled one where demand for milk is higher than the milk that hypothetical dairy from Hirs’s example can deliver.

There are, in other words, not enough diesel cows because a number of “dairy farms”, that is, refineries, were closed during the pandemic or turned into biofuel refineries in line with the latest political fashion trends and energy policies of the federal government.

This is why some analogies are quite risky. The look attractive, sound like they make sense but a quick look under the surface reveals smelly incongruities that make the analogy misleading.

Indeed, as Hirs notes in the CNBC report, the world does not stop, meaning refineries do not stop all at once, meaning 25 days of supply is not that bad because basically we’ll never need to rely on it.

Mansfield Energy, however, tells a different story. In a release from October 27, the fuel company explained things in pretty simple terms.

With diesel inventories at the lowest since 2008 (cue ominous music), Mansfield said, all it takes for the market to descend into chaos is a “sudden supply outage or a big surge in demand – such as panic buying, cold weather, holiday sales, or industry-specific factors.”

This is what inventories are for, the company continues, and this is why it is important to have a bit more than 25 days worth of supply in the form of diesel inventories.

Two of the factors noted by the company as likely to cause a market imbalance — cold weather and holiday shopping — are only a matter of time as they are every year, and this time is shrinking; it’s already November.

Panic buying may also be on the cards — a few more alarming reports and people will start hoarding. All it would take for chaos to ensue would be another refinery explosion, of which there have been several across the U.S. recently.

So, let’s see if we can fix that milk analogy. A grocery store only needs three days’ worth of milk supply because farms keep sending more every day (and because milk is a perishable). But if some mysterious sudden-onset cow disease strikes those farms, the grocery store will need to go further to secure its three days’ supply, meaning the milk will get more expensive. Especially now, what with diesel prices and all.

In fact, there doesn’t need to be a sudden-onset cow disease to make life difficult for the grocery store owners. Costlier feed would do the trick, too, pushing up the price of the final product, very much like the price of crude oil does with the price of petrol and diesel.

The big difference between milk and diesel is that the latter is not perishable. It can be stored for more than a few days for a time when the going gets tough. Again, this is what reserves are for — to provide a supply cushion in case of a disruption or an outage.

In the absence of cushions we tend to get bruises. Incidentally, last week, U.S. distillate inventories rose instead of falling but by a meagre 400,000 barrels. Production was also up, but also moderately. That grocery store we call the economy is not getting enough milk. There are not enough cows.

Meanwhile, north of the U.S. border the Trudeau administration is being decisive about China. The way it is being decisive is by ordering three Chinese companies to sell their stakes in three Canadian companies with lithium mining activities.

“While Canada continues to welcome foreign direct investment, we will act decisively when investments threaten our national security and our critical minerals supply chains, both at home and abroad,” Canada’s innovations minister with the charming surname of Champagne said.

He did not elaborate on the nature of the threat to Canadian natural security the Chinese companies’ stakes in the three local businesses were but, honestly, it’s enough they are Chinese. Chinese companies are by definition a threat to any national security in certain parts of the world, just ask the British.

The actual issue here, of course, is that Canada, with its friend and neighbour the U.S., is trying to catch up with China in the critical minerals field. No, this doesn’t sound clear enough, so let me rephrase: Canada and the U.S. are trying to do in months what China has been doing for years, i.e. turning into mining and processing centres for critical minerals, called so because without them there will be no transition.

Of course, the fact that the two are trying to do that in an environment of passionate, well, environmental concern that is pretty much the Yin to the mining Yang these two governments want to build is irrelevant in the public discourse. Ambitions and plans are the only thing that matter. In the meantime, China continues working — rather than speaking — to become even more indispensable as a metal and mineral processing hub.

It really doesn’t need to do all that much any longer. All it needs to do and, as far as I gather, it is doing it, is calmly and quietly expanding or strengthening its presence along the mining and processing supply chain. While the U.S. and Canada try to collectively close a metaphorical stable door after all the horses have bolted.

While the newly awakened mining champions yap excitedly how they are going to beat China to become the new leaders of the transition, China just keeps doing what it’s doing and the only way to stop it appears to be to order its companies out.

To be honest, when I first saw this news story it sounded strangely familiar. It took me a while but then I got it. Russia just kicked out Exxon, right? And forced a lot of companies to sell their local operations? But that can’t be right because Russia is bad and Canada is good, and Venezuela, who also forced foreign companies out years ago, is also bad, right?

Obviously, you’d need to be five years old to be really confused about this situation and I’m not even sure about some five-year-olds I’ve had the pleasure of meeting. Canada is playing the good old “If we’re doing it, it’s different” tune and a lot of people are dancing to it. Not China, though. China’s too busy working to increase its global domination in metals processing.

And this is not even the most fun part. The most fun part is the fact that the U.S. and Canada decided to become new mining and processing centres of gravity at a rather inopportune moment.

With shortages looming over the world’s mining supply like storm clouds, miners would be eager to invest in new production… in favourable jurisdictions. This means jurisdictions where there aren’t a thousand and one regulations that in and of themselves are certainly benevolent but would likely make the mining output quite expensive and compromise its competitiveness. If a mine is ever approved.

Some call it madness. Others can only laugh at this clearly paradoxical dissonance between being pro-transition and anti-mining. All I know is that it’s much easier and a lot more instant-gratification-y to protest mines than to sit down and think what the transition really needs, which is metals and minerals, not protesters.