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Warren Buffet’s Bet on Fossil Fuels

Investment Success

Warren Buffet is arguably one of the world’s most successful investors. As the CEO of Berkshire Hathaway, Warren Buffet has used his business and investment talents to propel companies like GEICO, Dairy Queen, Duracell, Helzberg Diamonds, Lubrizol, Fruit of the Loom, Long & Foster, and Pampered Chef to astounding levels of financial success. As a multinational holding company based in Omaha, Nebraska, Berkshire Hathaway has also taken minority stakes in numerous other American companies like American Express, Bank of America, Wells Fargo, Apple, Coca Cola, and Kraft Heinz. With a total net worth of $88.9 billion listed at the end of 2019, Warren Buffet’s business and investment ventures have enabled him to become the fourth-richest person in the world. While Buffet has stressed the importance of making money through investment decisions based on themes related to ethics, social policy, and politics, some investors and economic analysts are questioning his recent decision to make a significant investment in the fossil fuel industry.

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Energy Ventures

Berkshire Hathaway Energy, which is a subsidiary of the main Berkshire Hathaway business conglomerate, has long been involved in a variety of energy-related investment ventures. Berkshire Hathaway Energy owns a series of coal power plants as part of the western utility PacifiCorp, in addition to Burlington Northern railroad, which depends primarily on coal shipments. In 2019, Buffet also made a massive ten billion dollar investment in the Occidental Petroleum oil company in an effort to provide the company with the financial backing needed to buy Anadarko Petroleum. Through what is known as a preferred stock investment, Buffet would be receiving an annual eight percent dividend from Occidental Petroleum, which amounts in $800 million in annual income for Berkshire Hathaway. Buffet also previously held a financial position in Phillips 66, which is a major American oil refining company.

In addition to being involved in investments in the oil and coal industries, Berkshire Hathaway Energy is also known as one of the global leaders in wind energy. Through the Iowa-based MidAmerican Energy utility, Warren Buffet has spent billions of dollars in an attempt to make the midwestern state the “Saudi Arabia of wind energy.” Berkshire Hathaway Energy has been providing financial support to expand the footprint and capacity of MidAmerican Energy’s nearly 2,600 wind turbines throughout rural Iowa (Mohamed, 2019). With increased financial support in the coming years, MidAmerican Energy hopes to be able to eventually provide Iowans with 100 percent renewable energy. Berkshire Hathaway Energy has also been a primary supporter of NV Energy, which is increasing Nevada’s renewable energy capacity from 24 percent to upwards of 40 percent by as early as 2023 (Rosenbaum, 2019).

Fossil Fuel Stocks

In 2020, the energy sector has underperformed the rest of the stock market. Fossil fuel stocks have taken a beating, cases of bankruptcy are soaring, and governments around the world are pushing for a Green New Deal to incentivize renewable sources of energy rather than fossil fuels. However, as Representative Alexandria Ocasio-Cortez and Senator Edward Markey were sponsoring legislation to move the American economy away from fossil fuels, Warren Buffet was strategizing on how to take advantage of the historic plunge in fossil fuel prices. One of Buffet’s most quoted sayings has been, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” With this in mind, Buffet was eyeing opportunities in the fossil fuel price plunge to be greedy when the rest of the stock market investors were being fearful.

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Dominion Energy Acquisition

In July 2020, Buffet’s Berkshire Hathaway publicly announced that it would seek to acquire Dominion Energy’s extensive network of fossil fuel pipelines, as well as the company’s diverse array of oil and gas storage assets. The deal was reportedly valued at four billion dollars, which would also assume a debt takeover of about $5.7 billion (Dunn, 2020). With a deal of this magnitude, Warren Buffet has essentially signaled that he believes that fossil fuels offer a substantial economic value for the predictable future. Although, many other economic analysts and professional stock pickers have found Buffet’s bet on fossil fuels to be particularly surprising.

In recent years, signals of a broad energy industry transition have started to become increasingly apparent. The incremental changes in the world’s energy market are already being felt, with the rise of solar, wind, and hydropower. While fossil fuels are still critically important for everyday life, the signs of a transition are growing. The strength of the opposing energy industry forces has already started to impact the demand for coal and oil, which are losing their appeal as sources of energy throughout the world’s developed nations. If the world is indeed going through an energy transition, why would one of the world’s most successful investors make a long-term investment in fossil fuels?

Just prior to Warren Buffet’s announcement that Berkshire Hathaway would be acquiring much of Dominion Energy’s pipeline and fossil fuel storage network, Dominion Energy’s CEO announced that the company was looking for an exit from some of its fossil fuel operations for reasons related to both fiscal and environmental sustainability. Similar to a number of other utility companies across the U.S., Dominion Energy has been committed to achieving net zero carbon emissions by 2050, which will require the company to rapidly shift over to renewable sources of energy. Some of the largest traditional fossil fuel companies in the world have also shared a comparable net zero vision. BP and Royal Dutch Shell have both vowed to reduce all emissions by 2050.  

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Net-Zero Initiatives

In a public statement, Royal Dutch Shell’s CEO Ben van Beurden said, “Society’s expectations have shifted quickly in the debate around climate change. Shell now needs to go further with our own ambitions, which is why we aim to be a net-zero emissions energy business by 2050 or sooner. Society, and our customers, expect nothing less” (Dunn, 2020). These statements echo the sentiment of Jim Cramer, a prominent CNBC television host and former hedge fund manager. Cramer has publicly expressed his negative view of fossil fuels as potential investment opportunities. “I’m done with fossil fuels. They’re done,” he said. “The world’s turned on them” (Crowley, 2020). Cramer has also branded fossil fuel stocks “as the new tobacco.”

Following the announcement that Berkshire Hathaway would take over Dominion Energy’s pipeline infrastructure, CEO Tom Farrell II told investors that he was content with selling off the assets because they had become increasingly costly to maintain, while also a cause for concern because of continuous lawsuits. Farrell has said that the lengthy legal battles are “deeply concerning for our country’s economic growth and energy security, is the new reality which threatens the pace at which we intended to grow these assets” (Dunn, 2020). These comments came after the announcement that Dominion Energy, in partnership with Duke Energy, had dropped plans to move forward with the Atlantic Coast natural gas pipeline that would bring natural gas to the heart of Appalachia.

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Pressure from Environmentalists

While Warren Buffet has not publicly expressed his rationale for making such a large investment in fossil fuel infrastructure, he is getting a significant amount of pressure from environmental groups. In fact, the 89-year-old investor has been on the receiving end of climate activist demands for a number of years, as much of Berkshire Hathaway’s businesses and investments have been linked to some seriously high greenhouse gas emissions. Research suggests that the Berkshire Hathaway’s energy and transportation sectors have both directly and indirectly been responsible for releasing 189 million tons of climate-warming carbon emissions in 2018 alone (Metcalf, 2020). To put this into perspective, this level of annual emissions would be equivalent to 24 trillion smartphones being charged or 21 billion gallons of gasoline being consumed (Metcalf, 2020). As a result of his business ties to significant levels of greenhouse gas emissions, Buffest has been called one of the world’s most carbon-intensive billionaires (Dunn, 2020).

Even though Warren Buffet has been taking heat for his investments in fossil fuels, as well as his company’s greenhouse gas emissions, it’s important not to forget that nearly 40 percent of Berkshire Hathaway Energy’s capacity comes from renewable sources of energy (Metcalf, 2020). Therefore, as with many of Buffet’s other investments, his energy portfolio could be considered significantly diversified, with exposure to both fossil fuels and renewable sources of energy. Although, some critics say that his purchase of Dominion Energy’s oil and gas infrastructure will skew his portfolio towards more fossil fuels at a time when the rest of the world seems to be moving away from other long-term fossil fuel investments.

A Fossil Fuel Future?

Despite the fact that headlines are being made about energy companies and even entire nations moving away from fossil fuels, the International Energy Agency says that the world will continue to need more oil, gas, and coal for the foreseeable future. While the global economy has been experiencing a significant drop in fossil fuel demand as a result of the economic impacts from the coronavirus pandemic, economists expect that the demand for energy will bounce back significantly with the rise of the global middle class, industrialization, and continued population growth, especially in the world’s developing countries. Moreover, since much of Dominion Energy’s fossil fuel assets that Warren Buffet purchased were related to natural gas, Buffet hopes that he may be able to capitalize on the continued transition from coal-power generation to cleaner-burning natural gas power generation. In the week following the announcement from Berkshire Hathaway, natural gas prices in the U.S. shot up by over eight percent (Dunn, 2020).

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An Investment in Natural Gas

Once Berkshire Hathaway acquires Dominion Energy’s 7,700 miles of fossil fuel pipelines, Warren Buffet’s company will control about 18 percent of the country’s interstate natural gas transmission lines (Roth, 2020). One other aspect of the deal would give Berkshire Hathaway a 25 percent ownership in the Maryland Cover Point liquified natural gas facility, which is one of only six facilities in the country that is able to export liquefied natural gas outside of the country. When asked about why Berkshire Hathaway may be gobbling up fossil fuel infrastructure at a time when others are trying to get rid of it, an energy analyst from the Institute for Energy Economics and Financial Analysis detailed how Warren Buffet has become famous for buying companies and assets that are down in value. As the fossil fuel industry has been crushed by the economic downturn, Buffet has made a bet that the industry will stabilize in the coming years.

While Buffet may be hoping for a rebound in the fossil fuel industry, Clark Williams-Derry of the Institute for Energy Economics and Financial Analysis says that the energy utility sector is no longer reliably stable investment that it once was previously. Today, utilities are burdened by the prospect of an energy transition, mounting maintenance costs, and climate change lawsuits. These issues have led the Energy and Policy Institute to advise investors that warning signs are flashing about fossil fuel infrastructure becoming a stranded asset in the future.

Sources

Crowley, K. (2020). “A Tale of Two Oil Giants With Two Strategies That Aren’t Working.” Bloomberg.

Dunn, K. (2020). “Warren Buffett’s buy-on-fear strategy will be tested with his latest bet on fossil fuels.” Fortune Magazine.

Dunn, K. (2020). “Shell becomes the largest global energy company to commit to a net-zero emissions goal by 2050.” Fortune Magazine.

McBride, S. (2020). “Warren Buffett Has Started The Biggest Energy Revolution.” Forbes.

Metcalf, T. (2020). “Warren Buffett Is One of the World’s Richest Fossil-Fuel Billionaires.” Bloomberg.

Mohamed, T. (2019). “Warren Buffett is spending billions to make Iowa ‘the Saudi Arabia of wind’ — but climate change isn’t the reason.” Business Insider.

Rosenbaum, E. (2019). “Here’s what Warren Buffett thinks about climate change.” CNBC.

Roth, S. (2020). “Why is Warren Buffett, the ‘Oracle of Omaha,’ betting on a future with fossil fuels?” The Los Angeles Times.

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