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Warren Buffett Shareholder Letter – It Appears Peak Oil Was Part of the Burlington Northern Investment Thesis
Canadian Value, GuruFocus
… My thinking was that Buffett believed the railroad game had changed from 20 years ago. Once a capital intensive low margin business. Now a business with a huge moat around it. What is the moat ? High oil prices. The main alternative to moving goods around the country is trucking, and high oil prices make moving goods by rail much more attractive.
In 2007 and 2008 Buffett built up big positions in both Burlington Northern and Conoco Phillips which I thought was a pretty clear signal that he believed in high oil prices remaining going forward. But then after the price of oil collapsed in the great recession Buffett greatly reduced his Conoco position. I thought that this selling was likely due to the tax benefits involved with quickly realizing the loss but couldn’t be certain.
… Today in his annual letter Buffett let us in on his reasons for buying Burlington and how he now feels about the transaction:
“The highlight of 2010 was our acquisition of Burlington Northern Santa Fe, a purchase that’s working out even better than I expected. It now appears that owning this railroad will increase Berkshire’s “normal” earning power by nearly 40% pre-tax and by well over 30% after-tax. Making this purchase increased our share count by 6% and used $22 billion of cash. Since we’ve quickly replenished the cash, the economics of this transaction have turned out very well.
Both of us are enthusiastic about BNSF’s future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs.
Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.
Over time, the movement of goods in the United States will increase, and BNSF should get its full share of the gain. The railroad will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required. However slow the economy, or chaotic the markets, our checks will clear.
Earlier I explained just how important railroads are to our country’s future. Rail moves 42% of America’s inter-city freight, measured by ton-miles, and BNSF moves more than any other railroad – about 28% of the industry total. A little math will tell you that more than 11% of all inter-city ton-miles of freight in the U.S. is transported by BNSF.
Given the shift of population to the West, our share may well inch higher.
All of this adds up to a huge responsibility. We are a major and essential part of the American economy’s circulatory system, obliged to constantly maintain and improve our 23,000 miles of track along with its ancillary bridges, tunnels, engines and cars. In carrying out this job, we must anticipate society’s needs, not merely react to them. Fulfilling our societal obligation, we will regularly spend far more than our depreciation, with this excess amounting to $2 billion in 2011. I’m confident we will earn appropriate returns on our huge incremental investments. Wise regulation and wise investment are two sides of the same coin. “
(27 February 2011)
Spain to lower speed limit as oil prices rise
AP, Guardian
Spain will lower motorway speed limits, cut train ticket prices and use more biofuel under an emergency energy-saving initiative because of soaring oil prices brought on by unrest in Libya, an official said Friday.
(25 February 2011)
On the rebound (Jevon’s effect)
Editorial, Nature
The ghost of William Jevons has haunted energy researchers in recent months, provoking debates on whether our best efforts to use less energy will merely lead us farther down the road of consumption. Jevons, a British economist, suggested in 1865 that increasing energy efficiency could backfire because it would allow further resource exploitation. He was thinking about coal at the time. And, indeed, as people got better at converting this black rock’s energy into useful work, the work itself expanded.
The ‘Jevons paradox’ has persisted ever since. Today, the notion that there could be some modest ‘rebound’ effect that negates gains in energy efficiency is well known. For example, drivers of fuel-efficient vehicles might be inclined to drive more often, simply because they can afford to do so. It takes energy to create and install energy-efficient equipment; and money saved on energy could be spent elsewhere, so ultimately contributing to economic activity, which drives up energy consumption and greenhouse-gas emissions. (Indeed, one reason for the strong support for energy-efficiency measures is that they give people more money to spend, not necessarily to save.) According to another rebound effect, if fuel-efficiency regulations for vehicles in the United States and Europe curb petrol consumption, that should suppress the price of oil and encourage its use in other sectors or countries.
… The debate indicates that there must be deeper study of what energy efficiency could do if systematically deployed across an entire economy. The world cannot solve all of its energy and climate woes with energy efficiency alone; low-carbon energy technologies must be developed as well. But there seems to be no fundamental physical or economic reason that countries can’t decrease their overall energy consumption while maintaining growth, and thus put the ghost of Jevons to rest.
(23 February 2011)
Suggested by EB contributor ML: “Feel free to go and add more comments to this free-online editorial by Nature. You will need to sign up but it is no big deal. (I seem to be posting critical comment on a Nature editorial every week now. It is not because I love the sight of my own words but Nature is so ridiculously uncritical about economic issues that they leave themselves wide open to attack.) The more people keeping pointing out the baselessness of Nature’s optimism on future growth etc. the better.”
Decent Poverty Report: The Guaranteed Income
Roger Smith, Paul Goodman Changed My Life
Well, folks, here comes the austerity, with asperity. …
I wrote in a previous post that Paul Goodman’s 1960s writing and thinking was deeply influenced by the economic conditions of that moment in time—an anomalous moment, as it turned out, since it was the peak of the greatest economic boom in U.S. history. These days, the political discourse is making contrary assumptions—it’s obvious that things are bad and we’re all assuming they’re going to get much worse. The federal budget discussion, and Wisconsin, reveal these grim premises (or gleeful ones, if you’re a Republican) all too clearly.
So it’s refreshing to read sixties-era Goodman and see the rather expansive underlying notions of what’s possible. With his anarchist attitude, Goodman rarely had anything good to say about existing government programs. Nor, to be honest, could he find much to praise in many of the solutions proffered by the left. And his own policy ideas (packaged in the 1962 book Utopian Essays and Practical Proposals) tended to sound so off-the-wall that even when you were convinced of their merits it was hard to conceive of them coming to pass in the real world.
But there was one economic reform he was unabashedly for: the guaranteed annual income. In this scheme, the government would supply every American family an economic floor; those whose work income didn’t reach the threshold would be paid the difference. This proposal squared perfectly with Goodman’s concept that decent poverty should be possible in a decent society. Here’s how he put it at a 1967 conference on rural poverty in Knoxville, Tennessee:
In the first place, I’m for the annual income. Probably because it puts more money in poor people’s pockets which is always a nice thing. You know, the chief defect of the poor is that they don’t have money. But I am even more interested in it because it allows for the development of small cooperative enterprise. A number of people want to go into a business. Now you can’t risk the little money you have, if you know that is going to be the end. But if there is a guaranteed income, and you know you have to be a little badly off for the next period, then you’ll be back on keel a little after that, there’s a great opportunity to pool that little income you have with other people and start some business.
Leave it to Paul Goodman to take one of the most socialistic of all welfare programs and present it as a boon to entrepreneurship!
Goodman was hardly a lone voice on this issue. He dovetails here with Martin Luther King, Jr., who, toward the end of his majestic final book, Where Do We Go From Here: Chaos or Community? (1967), singles out the guaranteed income above other progressive goals as the simplest, most direct, and therefore most effective means to confront the nation’s most pressing problems.
Actually, although nothing like the guaranteed income ever materialized in the USA, it’s pretty surprising how far the idea got. At a certain point in the late sixties the idea had some serious bipartisan support. President Richard Nixon’s Family Assistance Plan, proposed under the influence of his aide Daniel P. Moynihan, passed the House twice, in 1970 and 1971, but in the process of concocting a compromise version that could get through the Senate, the bill lost support from both the left and the right.
(23 February 2011)
