While Congress considers legislation to impose a cap-and-trade regime on emissions of carbon dioxide and other greenhouse gases, Warrne Buffet makes “a huge bet on coal.” Either Buffet’s made a blunder, or he realizes any cap-and-trade legislation that can pass Congress will do little to reduce coal consumption. (HT: Roger Pielke Jr.)
Categories: Climate Change, Energy
Randy says:
He also just bought an entire railroad company because he believes that fuel prices will rise in the future, and because railroads are a good way to get trucks off the roads, which consume much more fuel that trains.
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November 4, 2009, 11:27 pmSteve says:
If only Buffett had the good sense to read Jim Lindgren and realize that the cap-and-trade law would set our economy back to the 18th century, if not earlier.
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November 4, 2009, 11:31 pmJames N. Gibson says:
I have suspected that if Cap & Trade goes through there will be a large scale effort to convert our rail stock to total electric. Right now the system is diesel electric which isn’t that green when you think about it. The French trains however are all electric, the electricity coming primarily from nuclear units. If the US goes under the Cap & Trade requirements in a very short time nearly everything will have to be electric and the electricity coming from non-carbon sources. Cars and trucks are going to be difficult to convert, and aircraft will be impossible. Something will have to make up the difference and the best option will be electric trains for both movement of goods and of people. Large electric trains for moving goods and high speed rail lines to move people. All taking their power from either solar, wind, nuclear or hydro sources.
Now the person who owns the tracks can in turn set the price for moving the goods and people, and tell the government what it will cost to convert the rail lines to these uses. The creation of the high speed lines will also require government help in condemning the right of way to make way for the high speed lines. Buffet will probably become a three figure billionaire if this comes to pass. The whole issue rides however on passage of Cap & Trade.
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November 4, 2009, 11:51 pmsubpatre says:
Not so. Buffet bought an entire railroad company
because he believes that fuel prices will rise in the future, andbecause railroads area good way to get trucks off the roads, which consume much more fuel that trainsthe only practical way to transport coal.Quote
November 4, 2009, 11:53 pmJames N. Gibson says:
By the way, I believe trains came into existence in the 19th century so Buffet may be banking on the economy going backward only one century instead of two.
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November 4, 2009, 11:58 pmPinandpuller says:
BNSF carries a lot of coal out of the Powder River Basin in Wyoming. I used to have to deliver propane and propane accesories to the remote switch heaters along those lines.
I don’t see the practicality in changing trains from diesel to electric across western states that are typically larger than European countries.
I’m just waiting for Buffett to marry Dagney Taggart.
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November 5, 2009, 1:31 amwkwillis says:
Coal is tangible. You can sell it overseas for real money, hard currency, after the dollar renormalises.
You need the coal mines, the railroads to transfer the coal, and the coal loading ports, to do this.
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November 5, 2009, 5:21 amRegolith says:
Yup. It would be extremely difficult to do so, and would require a large amount of electricity to pull off. The only way to get that electricity would be to build more coal plants, which would defeat the purpose of switching to electric trains in the first place, or build nuclear plants, an option that the environmentalists don’t seem to want to back (even though it’s pretty much the only way to produce the electricity our society needs while simultaneously cutting back on greenhouse gasses).
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November 5, 2009, 5:30 amsk says:
It is because, if Cap and Trade comes to pass, we will convert to an electric economy. And the only two ways to get electricity are coal and nuclear (wind, solar, ethanol? Magic pixie dust? You are dreaming. Take a few engineering classes). And nuclear takes too long and is heavily regulated. And coal can be used cleaner (albeit more expensively) by installing better scrubbers in coal-fueled power plants. It won’t be greener, but it will fulfill the requirements of Cap n’ Trade.
In other words, coal is going to replace petroleum products. It will be more expensive, but the coal generator/producer doesn’t pay the additional expense-the end user (you or I) does.
Sk
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November 5, 2009, 7:51 amBen P says:
Hmm, interesting that the first article I read on Buffe buying BNSF missed this angle completely.
Buffet’s been right a lot of times before, and this seems pretty plausible.
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November 5, 2009, 9:51 amOrson Buggeigh says:
Railroad electrification requires an great deal of capital outlay. To do this requires either a government railroad, where cost vs revenue will not be a consideration, or a high traffic density to justify the capital outlay. Russia has placed virtually its entire Trans Siberian line under wire, and the Chinese are extending electrification on much of their system. In the USA early efforts at electrification in the west proved to be economically impractical. The traffic volume just was not there to make economic sense. Arguably, the electrification of 660 miles of the western end of the Milwaukee Road in Montana — Idaho — Washington hastened the bankruptcy of the company in the 1920s. The volume of freight traffic is up, but so is the cost of electrification.
I’m not sure electrification makes economic sense yet, except in densely populated areas with very high traffic density. The Pennsylvania railroad’s electrification of what we now think of as Amtrak’s Northeast Corridor (Washington DC — NYC)in the depth of the depression 1930s actually was a very good move. Pennsy took advantage of lower labor and material costs, and it had the traffic base on this trackage to make it profitable.
Buffett has made a bundle by being smart, and making conservative investments. His decision to buy BNSF is interesting, to say the least.
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November 5, 2009, 10:00 amDexter Westbrook says:
Mr. Adler can’t manage to spell Warren Buffett’s name correctly (either first or last). Interesting.
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November 5, 2009, 10:24 amRandy says:
Here is the quote from the Washington Post. “Our country’s future prosperity depends on its having an efficient and well maintained rail system, ” said Buffett in a press release.
Art Hogan, Jeffries managing director, said “Buffet is making an elephant-sized bet on three things here and all are related. He things the economy in the US is getting better and will continue. He believes that energy prices will continue to rise and that trains will be more productive than trucks in that environment, and third, and most important, he sees BSNF as chea with a longer term investment time horizon.”
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November 5, 2009, 10:28 ampmorem says:
An alternative view is that BNSF’s market and the impact of “Cap and Trade” was already priced in to BNSF’s stock, and that Buffett thinks his political influence is sufficient to enable BNSF to out-perform current pricing by a wide enough margin to be worthwhile.
In other words, he’s cashing in on his political influence.
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November 5, 2009, 11:09 amDanInAustin says:
What about natural gas? It’s cheap and plentiful and, like coal, we won’t have to import it. I could see a shift away from coal to natural gas.
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November 5, 2009, 12:21 pmAmerican Psikhushka says:
pmorem–
An alternative view is that BNSF’s market and the impact of “Cap and Trade” was already priced in to BNSF’s stock, and that Buffett thinks his political influence is sufficient to enable BNSF to out-perform current pricing by a wide enough margin to be worthwhile.
In other words, he’s cashing in on his political influence.
Buffett has been making profitable investments for many years now, long before he had significant political influence. What’s the explanation for the early years?
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November 5, 2009, 12:53 pmAmerican Psikhushka says:
Also, the investment hinges on an engineering problem: Rail makes more efficient use of diesel fuel than trucks. That fact remains no matter how much political influence you have and who is in control of the government.
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November 5, 2009, 12:55 pmAnthony says:
No near to mid term future carbon restrictions will cause intercity trains to be electric — once you count in transmission costs, the CO2 emissions from a diesel-electric train aren’t interestingly higher than the CO2 emissions from an electric power plant running an electric train, so until we have enough non-CO2 emitting electric power generation to displace all existing coal power plants, there are other places you target first, and it’s quite possible you never convert; depending on the direction of tech advances, it may be easier to convert to biodiesel.
Cap and Trade (or routine increases in the price of oil) could easily cause trains to gain relative to trucks, however; trains use much less fuel per ton-mile, so anything that raises fuel prices favors trains. This makes trains in general a sensible investment if you think C&T will actually happen and have an effect, or just if you think oil prices will spike.
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November 5, 2009, 2:51 pmSandy MacHoots says:
Much of Buffett’s early success was due to what would now be considered “insider trading.” It was not illegal at the time. He was able to uncover significant nonpublic information that allowed him to buy seriously undervalued companies.
I don’t think he’s really trading on his political influence as much as he’s predicting that cap-and-trade will be a massive transfer of wealth from consumers to those who know how to play the trading game, and having big stakes in both ends means he’s going to be in a position to profit. The country may suffer, but the insiders will make a very nice living if it goes through.
If it doesn’t go through, of course, then coal and railroads are likely to do pretty well. It’s a win-win.
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November 5, 2009, 6:19 pmroguestage says:
Or it could be a huge bet on corn, since hauling corn constitutes roughly 50% of BNSF’s freight — at least according to my local ag radio station.
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November 5, 2009, 6:41 pmSteve says:
Buffet will put money in any company that promises returns of 8% and more. Transportation is a demand business. When demand for products goes down, shipping decreases. During periods of high demand, shippers can raise rates as the market is elastic. Their customers will compete to get their products shipped first. When the demand decreases, lowering rates is not always an option as the elasticity decreases. Right now demand is at an all time low and shippers are in a desperate need for cash, making a buying opportunity if you want to get into the business. Guess who has money, loves to buy low, and loves steady returns.
America also has a high demand for energy. The thing to remember about energy companies is that they do not pay for their capital investments. If the government shut down all “dirty” coal power plants that supplies energy to your state. Then you will be paying higher energy prices to import electricity, modernize your “dirty” power plant to “clean”, and/or build a new power plant. Any upcoming energy bill will only shorten the life of older “dirty” power plants to 20 years instead of 30 years and force new power plants to meet newer standards. Coal power is going to be the future for American energy, it’s just going to be cleaner and cost you more.
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November 5, 2009, 7:40 pmTokyoTom says:
Well, we know Buffett can‘t be trying to aid the fight against climate change by choking off access to Western coal (the feds own most of those fields and are hooked on the royalties).
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November 6, 2009, 9:54 am