03 November 2009

Warren Buffett's Big Bet

I wonder what Warren Buffett knows.
Berkshire Hathaway Inc.'s $44 billion deal to buy Burlington Northern Santa Fe Corp. is basically a huge bet on coal, a fuel that powers Warren Buffett's power plants at his MidAmerican Energy utility and plays a major role in the railroad business.

While regulatory delays and uncertainty over climate-change legislation has slowed the addition of new U.S. coal plants, plenty of new facilities are expected to come on line in the United States, becoming prospects for future growth for the railroads.

Nine new coal plants have been permitted in the United States and 25 are under construction for a combined generation capacity of nearly 15,000 megawatts, according to an Oct. 9 report by the National Energy Technology Laboratory.

Moves by the Obama administration to curb emissions in proposed climate-change legislation are also anticipated to push the generation industry toward wider use of carbon-capture and storage technology at coal plants, which still supply nearly half of America's electricity.

With the U.S. economy poised for a rebound, both the coal-fired electricity industry and the railroads that haul the black rock are primed for growth, leading Buffett to describe his huge purchase as "an all-in wager on the economic future of the United States."
Maybe he is paying attention to the cap and trade debate, and the role of coal in it (emphasis added):

The industry estimates that the basin has 100-150 more years' worth of production, based on today's technology. Though most mines are much smaller, there are more than 1,000 of them in the US. The government estimates there are several hundred years' worth of coal to be recovered in the US - the Saudi Arabia of coal, with 27 per cent of the world's known coal reserves. It would take a massive effort to replace coal production. Peabody Energy, which owns North Antelope and is the world's largest private sector coal company, says replacing coal would be a gargantuan task. It would require 2,400 times more solar generation,40 times more wind power, 250 new nuclear plants, almost double the US production of natural gas, 500 hydro plants the size of the Hoover Dam or halving electricity consumption. Even then, the US would have to find a way to meet new demand, given growth forecasts.

Victor Der, principal deputy assistant secretary for fossil energy in the Obama administration, says: "It would be very difficult to move away from it. We believe coal will continue to be in the energy mix."


  1. Excellent find Roger. It completely vindicates your mitigation argument.

    My feeling has always been that full on carbon capture will never see the light of day (so to speak). Based on the fact that jam tomorrow is always a great political ploy. I suspect it will be judged to be too costly. A couple of posts in another thread suggest that may be true.

    However, I could be wrong. How much are they prepared to demand consumers pay for this ?

  2. Excellent point.

    Rail depends on the transport of commodities. To support your point:

    (1) coal prices spiked, and rail stock prices spiked in 2007,

    (2) in 2007 car production had already plummeted. Hence the rail stocks prices spiked regardless of the very week demand in transporting new vehicles,

    (3) It was the demand for commodities, coal being a large component, that was the driver of rail stock prices.

    Another point you might explore is that Railroads are an Oligopoly in North America. There are only a handful of players. Also, when you research Railroads note that this Oligopoly receives plenty of Federal and State tax breaks and/or direct funds from government. That is, its been long argued that North American Railroads are an Oligopoly subsidized by Government.

  3. Buffett likes to invest in businesses that have huge barriers to entry. And he's a huge supporter of the Democrats. Nothing secures a business advantage better than buying favorable legislation from activist government.

    Warren's got it wired.

    A Silicon Valley venture capitalist recently explained that the present business climate is far superior. In the past, venture bets on tech startups were a crap shoot. But now, placing bets on green companies whose profitability will be guaranteed by the government is as easy as printing money.

    Anyone with a room temperature IQ who has paid attention to the stimulus bill, cap and trade, and the health care monstrosity can see that the greatest investment payoffs today come from buying politicians in DC. Why worry about competition and innovation when you can buy govt mandated profits? The country suffers and economic growth stagnates, but those who are connected get wealthy.

    [See e.g. Rahm Emmanuel's 20 million windfall as an "investment banker" despite lacking any skills. Those who sell government favors never run out of inventory.]

  4. You know, Buffet was (and is) a huge Obama supporter. But if you ask him about Obama's policies he doesn't support most of them.

    But he still thinks he backed the right guy...

  5. Stan,

    I know some investors in a local biodiesel company that would disagree that profitability is guaranteed.

  6. Dr. Pielke,
    These folks http://www.netl.doe.gov/energy-analyses/pubs/Bituminous%20Baseline_Final%20Report.pdf who analyzed for DOE seem to be saying things aren't as bad as I had thought, although it's possible I'm just in an optimistic frame of mind today.

    If the assumptions of the study aren't too far wrong electricity from coal will cost about 50% more with very high CO2 capture and storage. That means fossil fuels alone can support recently normal rates of economic growth for a hundred years or more even if the worst fears re global warming are true. If the transition can take place over twenty years it doesn't seem an insurmountable economic problem, if only because many existing uses of electricity are pretty inefficient and the economy will enforce a lot of energy conservation as electicity costs rise. So the actual economic effect of the energy cost change in terms of living standards will be less than a 50% rise.

    And that leaves out the possibility that the public won't eventually get comfortable with nuclear fission, which is operating now at cost levels that must be at least comparable to coal plants without carbon capture (or else it wouldn't be operating). It also leaves out the possibility that fusion will eventually become possible at some cost that's reasonable in the context of that rise in fossil energy costs, and it leaves out wind and solar and biomass and such; but they strike me as nearly trivial next to the bigger sources of energy despite all of the hype.

    The economy commonly reacts to such cost changes, and even worse cost changes, over time without too much disruption if the politicians don't meddle too much, as they did in the 1970's for a time. For instance oil and thus gasoline prices can rise and have risen in the past by more than 50% in a year or two without causing more than moderate pain to the global economy despite all of the whining (only some of which comes from people who get hurt truly badly).

    Am I way off base here?

  7. for a live up-to-date look at the stocks in Warren Buffett's Berkshire Hathaway portfolio, here's another useful resource: