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Warren Buffet’s Money Problems, and the Future of Energy

by Langdon on November 20, 2013

Warren Buffet has a money problem.  It’s not the sort of problem that an average person like you or I might have, but it is a problem nonetheless:  He has too much cash.

Specifically, Mr. Buffet’s company, Berkshire Hathaway, is throwing off cash by the billions, and so he is obliged to find homes for it, safe and comfortable investment homes, preferably those that earn very nice returns.

This is a partial explanation for Buffet’s large investment, recently disclosed, in Exxon Mobil.  He recently acquired 40 million shares worth $3.4 billion.  As the world’s second most valuable company (after Apple), one worth more than $400 billion, analysts have commented that this is just the sort of large company that would attract an investor such as Buffet.  Other large companies who are producein stainless steel water bottles in which Berkshire holds significant stock include giants like Coca-Cola, Wells Fargo, IBM, and Wal-Mart.

By investing in the oil titan, Buffet is going back to the roots of the modern world.  In fact, it’s not an exaggeration to say that the transformation of the world economy from an agricultural one to industry has been based on the availability of abundant energy, harnessed for human purposes from many different sources, including coal, nuclear, water, wind, solar, and especially oil.  The industrial revolution came about through the fusion of fossil fuels, metallurgy, and mechanical engineering into great machines that could do the work of hundreds of animals or people.

Fast forward 200 years, however, and the story has changed.  After 200 years of burning fossil fuels, the concentration of carbon dioxide in the atmosphere has reached alarming levels, and a great many scientists, in fact nearly all of those scientists who specialize in the study of the Earth’s climate, attribute global climate change to this increase of CO2.  Killer typhoons and out-of-season tornados, unprecedented heat waves, melting polar ice caps and glaciers, and rising sea levels are all apparently side effects of our significant reliance on fossil fuel energy, especially coal and oil.

So it’s an interesting time for Mr. Buffet to place a multi-billion dollar bet on the oil industry.  He was recently quoted as saying, “A century from now … Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions.”

That statement, however, is more controversial than it might first appear.

Because as the world’s leaders have come to understand the magnitude of the potential climate change disaster, they have created strong incentives to develop other forms of energy to replace fossil fuels.  In a fascinating interview with the San Francisco Chronicle in June 2013, former US Energy Secretary Steven Chu pointed out that the energy market is evolving quite quickly, and this has significant consequences for the nation’s electric utility companies.  Mr. Chu strongly advises them to seek new business models as the old one gradually decomposes.

During his tenure as Energy Secretary, Mr. Chu funded eight research centers that are referred to as “energy innovation hubs,” where scientists are addressing issues such as energy efficient buildings, new battery technologies, and solar cell design.  The underlying goal of all of these projects is to invest millions of dollars of the US government’s money in new energy technologies that will displace oil and coal in favor of carbon-neutral sources.

The underlying transition from fossil energy to other sources will take decades.  The same decades during which Mr. Buffet is expecting Exxon Mobil to be generating its trillion-dollar returns.

What’s especially interesting about all this is that there are quite reasonable forecasts which suggest that well before 2050, the US economy, and indeed the global economy, will not be running on oil at all, but will have switched to solar and wind, and some believe also to nuclear.  If this line of reasoning is interesting to you, I strongly recommend Jorgen Randers’ book “2052,” which lays out a number of fascinating scenarios for our shared future.

Under Randers’ primary scenario, the oil companies will go bankrupt, or nearly so, as their primary asset, oil-still-in-the-ground, is rendered nearly worthless because it has been replaced in the economy by solar energy.

And if that does in fact happen, then the trillions of dollars of assets that Mr. Buffet is counting on from Exxon would have to be written down to a small fraction of their current value, and in that situation the company would no longer be an investment powerhouse, but merely a relic of a past era (our era, admittedly) when the economy was powered by oil.

Which raises another question – How much investment is Exxon Mobil making in non-fossil fuel energy sources?  In Exxon’s very handsome publication called “2013:  The Outlook for Energy: A View to 2040,” which you can download, the firm lays out it’s forecasts for the economy and the energy sector in considerable detail.

Among the many predictions in the report is this one:  “Oil and gas will supply about 60% of global energy demand by 2040, up from 55%in 2010.”  This suggests that company is not putting much investment in solar, certainly not as much as some of its major competitors, which have taken large stakes in solar technology companies.  France’s Total, for example, has invested more than $1 billion in SunPower, a maker of photovoltaic cells.

Randers’ forecasts a future much more in line with Total’s investments than Exxon’s.  In his models, CO2 emissions peak around 2030, meaning that fossil fuel consumption also peaks at that time, and declines rapidly thereafter, and he also forecasts that by 2050, about 90% of global energy demand is met by renewable energy sources, and certainly not by oil and gas.

The trends underlying these issues will take decades to unfold, and in the mean time it’s quite plausible to suppose that Mr. Buffet will have found a happy home for his excess cash.  And perhaps Exxon is making, or will make, many successful investments in non-fossil energy sources and avoid the trap of having worthless assets in the ground.  We’ll all be paying attention to how this one comes out…!


Photo:  Offshore Oil Drilling Platform, owned by Ocean Rig UDW, and leased to Exxon for use in offshore Ireland

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