Monday, April 09, 2007

Warren Buffett: Ich bin ein Peak Oiler.

Right scenerio, wrong guys maybe. Ah, so let's try again..

Warren Buffett and Matthew Simmons walk into a bar...

Berkshire Hathaway disclosed over the weekend that it had acquired a circa $3 billion stake in railroad Burlington Northern Santa Fe, and then this morning CNBC reported that there are two other railroads that Berkshire is investing substantial amounts in, to the tune of around $700 million each.

Now, if you take a look at the charts of the various railroad stocks (BNI, UNP, CSX, NSC), you will see that Mr. Buffett isn't exactly acquiring these stocks at rock bottom prices. In terms of historical valuations, they don't look all that cheap either. This is clearly not a prototypical Warren Buffett investment, at least at first glance. But for some reason, Mr. Buffett wanted the railroad industry and he wanted in in a hurry.

The news media is mainly playing this up with the "Warren Buffett believes in the American economy" angle. I think they're all wet.

Now, while I'm sure there is more than one angle to this investment for him, I would wager a large amount of money that as he is more and more aware of the energy challenges the world has, he thus is investing in the cheapest form of long haul shipping that reaches most areas of the country. For one thing, the rails transport much of the coal that's shipped around the country, for another, they are shipping around grains and much of the ethanol (which, in theory, we will see more of in the future). Finally, shipping items by rail verus truck is immensely more efficient, I've read something up to 10 times more efficient.

So while people puzzle over why Mr. Buffett is going gangbusters over the rails, I submit that the following quote from Matthew Simmons has a lot to do with it:

Foreign Policy: Matthew Simmons on Softening Oil Peak Impact.

FP: If you were the secretary of energy right now, what policies would you recommend to President Bush?

MS: If we restructure the way we use fuels, we might be able to get along very well with oil in decline. The single-most energy inefficient way we use oil is large trucks delivering goods over large distances. If you take all the goods that are trucked more than, say, 50 miles, onto railroad tracks, depending on the length of travel, you’d use between 3 to 10 times less energy. If you put them on a marine vessel, it’s even more efficient. So forget about just-in-time inventory. Once you get the large trucks off the road, you make a tremendous dent in traffic congestion, which is public enemy one through five on passenger car fuel efficiency.

P.S. Don't forget his investments in ConocoPhillips, wind power, and ideas about nuclear energy.