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Buffet and Munger on peak oil, coal, biofuels, mass transit
Warren Buffet and Charles Munger, Berkshire Hathaway via Reflections on Value Investing
2008 Berkshire Hathaway Shareholder Meeting: Detailed Notes
Berkshire Hathaway Annual Meeting, Omaha NE 2008
May 3, 2008
Typewritten notes courtesy of Peter Boodell
(As is standard, no recording equipment was used to reproduce these notes. As a result, these notes are recollections only – not quotes, and should not be relied upon. -PB)
… Q29: Doug Hicks, Akron Ohio. Oil will run out this century. Considering US policy is to do nothing until last second, will we face World War III? Will oil companies go to zero?
WB: Oil won’t run out – it doesn’t work this way. At some point the daily productive capacity will level off and then start declining gradually. There is the depletion aspect and the decline curves. We are producing 86m barrels per day or so, more than ever produced. We are closer, by my calculations, to almost our productive capacity, than we have ever been. I think our surplus capacity is less, and quite a bit less, than in past. Whatever that peak is, whether 5 or 10 yrs, the world will adjust, and we will think about it. Adjustments will cause demand to taper off. I don’t know how much oil is there, but there are lots of barrels of oil in place. We never recover total potential. We may have better engineering recovery in future. It is nothing like an on and off switch. You may still have enormous political considerations to get access to avail oil since it so important. There is nothing you can do over short period of time to wean world off oil.
CM: If we get another 200 yrs of growth dispersed over the world while population goes up, all oil coal and uranium will run out so you will have to use the sun. I think there will be some pain in this process. I think it is stupid to use up hydrocarbons of world so quickly. Stupid when there are few and limited alternatives. What should we have done? We should have brought all the oil over from Middle East and put it in our ground. Are we doing it now? No. Government policy is behind in rationality. If we have prosperous civilization, we must use the sun.
WB: Charlie, what is your over/under for oil production in 25 yrs?
CM: Oil in twenty five years, down.
WB: If this is true, that is big number. China is doing 10m cars this year, so down in 25ys is significant.
… Q31: Arizona. Food shortages, trends in next decade?
CM: I said last year that policy of turning American corn into motor fuel was one of dumbest ideas in future of the world. I fly here with a head of academics – he agreed, it was stunningly stupid. It is probably on its way out.
… Q43: Scottsdale AZ. Coal industry? Does cost advantage outweigh environmental?
WB: In short term world will use more coal. There is an environmental disadvantage to it. We will slowly figure out ways to do things coal does now that are environmentally more friendly. But it won’t happen fast. If you shut down coal plants, we wouldn’t be able to hold this meeting. At Mid-American we have put in a lot of wind capacity, probably more than anybody. But we are dependent a LOT on coal, and now it is cleaner than it was. It is worldwide problem, with the Chinese building a lot of coal plants. Per capita Americans have done a lot of negative things to this planet so it is hard for us to preach. It will take a leader who can lead on this.
CM: People who are very against coal, so I ask, which would they rather use up first, coal or hydrocarbons? Coal is less desirable as chemical feedstock to feed the world [into fertilizers]. There is an environmental reason for being pro-coal use. Most people don’t think this way, but I do.
WB: Charlie doesn’t take comfort in numbers.
… Q53: Future of mass transit?
WB: Passenger traffic? [Yes.] The American public generally doesn’t like mass transit. Americans’ love affair with car, which translates into an aversion to mass transit, one person to a car seems to be popular method for moving around. We are unlikely to see expansion in mass transit. American public is genetically averse to mass transit. Seems to be human nature that people want to drive even if they have to pay $4 a gallon on gas and double on parking. I wouldn’t be optimistic about something that has long trend in human nature and that it would reverse all of a sudden.
CM: You have a more optimistic view of it than I have.
Q54: Tom Nelson, North Oaks MN. If you were in charge of country, how would you handle climate crisis.
CM: I’m in awkward position of agreeing with Al Gore, we shouldn’t be burning so many hydrocarbons. But his brain doesn’t work the way mine does, and you’ll have to judge for yourself.
(5 May 2008)
Related: Oil and energy – Berkshire bosses weigh in (Financial Post)
Herman Daly: Towards A Steady-State Economy
Herman Daly, The Oil Drum
… [This post is] adapted from a paper from last week’s Sustainable Development Commission written by Herman Daly, who popularized the term “Steady State Economy” over 3 decades ago. While it doesn’t discuss energy per se, it does get at the heart of how we value and use energy – for growth – and the systems underlying this growth.
It is doubtful we can adequately inform energy policy without addressing the linkages between equity, finance, taxation, and our end goals. I post this on theoildrum not only because Herman is one of my tribal elders but because his eloquence, courage and foresight on these issues have historically been, and continue to be, ahead of the curve. During his resignation speech from the World Bank, Herman recommended the Bank take “a few antacids and laxatives to cure the combination of managerial flatulence and organizational constipation giving rise to such a high-pressure internal environment.” To improve interactions with the external world he prescribed “new eyeglasses and a hearing aid.”
Nearly 15 years later, here is Professor Daly’s current synopsis of the state of economics and his prescriptions for change. -TOD Editor Nate Hagens
… We have lived for 200 years in a growth economy. That makes it hard to imagine what a steady-state economy (SSE) would be like, even though for most of our history mankind has lived in an economy in which annual growth was negligible. Some think a SSE would mean freezing in the dark under communist tyranny. Some say that huge improvements in technology (energy efficiency, recycling) are so easy that it will make the adjustment both profitable and fun.
Regardless of whether it will be hard or easy we have to attempt a SSE because we cannot continue growing, and in fact so-called “economic” growth already has become uneconomic. The growth economy is failing. In other words, the quantitative expansion of the economic subsystem increases environmental and social costs faster than production benefits, making us poorer not richer, at least in high consumption countries.
… The IMF-WB-WTO ( Washington Consensus) contradict themselves in service to the interests of transnational corporations. International capital mobility, coupled with free trade, allows corporations to escape from national regulation in the public interest, playing one nation off against another. Since there is no global government they are in effect uncontrolled. The nearest thing we have to a global government (IMF-WB-WTO) has shown no interest in regulating transnational capital for the common good. Their goal is to help these corporations grow, because growth is presumed good for all-end of story.
… The SSE will also require a “demographic transition” in populations of products towards longer-lived, more durable goods, maintained by lower rates of throughput. A population of 1000 cars that last 10 years requires new production of 100 cars per year. If more durable cars are made to last 20 years then we need new production of only 50 cars per year. To see the latter as in improvement requires a change in perspective from emphasizing production as benefit to emphasizing production as a cost of maintenance.
… While these transitional policies will appear radical to many, it is worth remembering that, in addition to being amenable to gradual application, they are based on the conservative institutions of private property and decentralized market allocation. They simply recognize that private property loses its legitimacy if too unequally distributed, and that markets lose their legitimacy if prices do not tell the whole truth about costs. In addition, the macro-economy becomes an absurdity if its scale is structurally required to grow beyond the biophysical limits of the Earth. And well before that radical physical limit we are encountering the conservative economic limit in which extra costs of growth become greater than the extra benefits.
Ten Point Policy Summary
1. Cap-auction-trade systems for basic resources. Cap limits to biophysical scale according to source or sink constraint, whichever is more stringent. Auction captures scarcity rents for equitable redistribution. Trade allows efficient allocation to highest uses.
2. Ecological tax reform-shift tax base from value added (labor and capital) and on to “that to which value is added”, namely the entropic throughput of resources extracted from nature (depletion), through the economy, and back to nature (pollution). Internalizes external costs as well as raises revenue more equitably. Prices the scarce but previously unpriced contribution of nature.
3. Limit the range of inequality in income distribution-a minimum income and a maximum income. Without aggregate growth poverty reduction requires redistribution. Complete equality is unfair; unlimited inequality is unfair. Seek fair limits to inequality.
4. Free up the length of the working day, week, and year-allow greater option for leisure or personal work. Full-time external employment for all is hard to provide without growth.
5. Re-regulate international commerce-move away from free trade, free capital mobility and globalization, adopt compensating tariffs to protect efficient national policies of cost internalization from standards-lowering competition from other countries.
6. Downgrade the IMF-WB-WTO to something like Keynes’ plan for a multilateral payments clearing union, charging penalty rates on surplus as well as deficit balances-seek balance on current account, avoid large capital transfers and foreign debts.
7. Move to 100% reserve requirements instead of fractional reserve banking. Put control of money supply and seigniorage in hands of the government rather than private banks.
8. Enclose the remaining commons of rival natural capital in public trusts, and price it, while freeing from private enclosure and prices the non rival commonwealth of knowledge and information. Stop treating the scarce as if it were non scarce, and the non scarce as if it were scarce.
9. Stabilize population. Work toward a balance in which births plus immigrants equals deaths plus out-migrants.
10. Reform national accounts-separate GDP into a cost account and a benefits account. Compare them at the margin, stop growing when marginal costs equal marginal benefits. Never add the two accounts.
Herman E. Daly
School of Public Policy
University of Maryland
College Park MD 20742 USA
(5 May 2008)
Long, important article. Many comments at original. -BA
Yes Virginia. This Is A Recession.
Ronald R. Cooke, The Cultural Economist
A preliminary report from the United States Department of Commerce, Bureau of Economic Analysis (BEA), claims [that] … although “Real” GDP growth in the first quarter of 2008 was very weak, the American economy is not in a recession.
Nonsense.
The declining value of the dollar increases the price of goods and services. It does not, however, increase the production of goods and services (which is what GDP is supposed to measure). Furthermore, a declining dollar inflates the price of goods and services purchased from foreign nations. In order to trust the BLS numbers, we have to believe they have not been inflated by the declining value of America’s currency.
(5 May 2008)
Ronald R. Cooke is an EB contributor.
