Buffett’s bet on peak oil

Warren Buffett is lauded as one of the greatest investors of all time, if not the greatest. He's the second-richest person in the world, and known as the "Oracle of Omaha" for his seemingly prescient investments. For example, in the wake of the collapse of Bear Stearns and during the height of the market panic that followed it, Buffett stepped in and negotiated a deal with Goldman Sachs. He acquired $5 billion worth of preferred shares, which would pay him a 10% dividend, as well as warrants with the rights to sell those shares at any time within 5 years from the time of the transaction. As of September this year, those warrants were "in the money" to the tune of $3.1 billion, and that doesn't include the $500 million in premium payments that Goldman pays every year. Those lucrative terms (punitive for Goldman Sachs) left others wondering why the Treasury Department could only negotiate a 5% dividend, but that only added to the mystique and legend of Warren Buffett. At the time, Buffett was quoted as saying "If I didn't think the government was going to act, I would not be doing anything this week," referring to the massive bailout bill which was indeed enacted by the government. It's deals like that that enable one to become one of the richest people in the world. But it's also that background that has some on Wall Street scratching their heads at the news that he was purchasing Burlington Northern railroad. The Wall Street Journal discussed how the acquisition seemingly broke two of Buffett's cardinal rules on investments: 1) buy undervalued stocks or companies, for obvious reasons and 2) don't split your own stocks, as it dilutes the equity of the existing shareholders. Bloomberg quoted a hedge fund principal as saying, "It could be five years before the logic of [Buffett's purchase of] Burlington Northern becomes clear." Even Buffett admits that the purchase was "not cheap" and that it represents an "all-in wager"on the future of the American economy. And there can be no doubt that it is a significant investment-- he's liquidating other rail investments totaling $691.3 million while the Burlington Northern purchase will cost some $26 billion-- an increase in his railroad holdings of some 3,600%. And this bears repeating, he's splitting stock to get it done. This is the first time ever that Berkshire Hathaway (Buffett's investment company) has split shares. He's so reluctant to split shares, the class A shares regularly trade over $100,000 per share, an unheard-of valuation.

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More to the peak oil story

A few weeks ago, I wrote a post entitled "The Unspoken Reality of 'Peak Oil'", in which I tried to convey the scale of the problem we face. "My main motto never changes, the era of low oil prices is over," said Dr. Fatih Birol who is the Chief Economist for the International Energy Agency (IEA). Now we have even more confirmation that peak oil has arrived. Today, the IEA released their 2009 version of the annual World Energy Outlook, in which they attempt to forecast supply and demand through 2030. And once again, the IEA continues to forecast that there will be plenty of supply, if only we can muster the needed capital investments. Unfortunately, the needed capital investments are enormous:

The capital required to meet projected energy demand through to 2030 in the Reference Scenario is huge, amounting in cumulative terms to $26 trillion (in year-2008 dollars) — equal to $1.1 trillion (or 1.4% of global gross domestic product [GDP]) per year on average. (p.43)
As if that weren't bad enough, the release of the report has been almost completely overshadowed by yesterday's Guardian which has alarming allegations from two different whistleblowers within the IEA

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The unspoken reality of “Peak Oil”

THE world will have to find four Saudi Arabias by 2030 if it wants to maintain its oil dependency, the International Energy Agency says. The reality of peak oil is fast approaching, and more must be done to develop and encourage the use of alternatives including solar and nuclear, the agency's chief economist has warned. "My main motto never changes, the era of low oil prices is over," Dr Fatih Birol said.
That's the verdict reported today in The Australian. I thought I'd check to see what other sources had to say about Birol's assertion, but I cannot find a single U.S.- based source reporting it, other than blogs that are dedicated to peak-oil issues. This is rapidly becoming a crisis, and almost nobody is discussing it in America. Not just here, of course-- study groups in Britain have been trying to get their government to begin planning for the reality of peak oil for years, and now they are saying it's simply too late. (see this also).

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How peak oil affects food and everything else

Media Education Foundation has released a new documentary called "Blind Spot" which

explores the inextricable link between the energy we use, the way we run our economy, and the multiplying threats that now confront the environmental health and stability of our planet. Taking as its starting point the inevitable energy depletion scenario known as "Peak Oil," the film surveys a fascinating range of the latest intellectual, political, and scientific thought to make the case that by whatever measure of greed, wishful thinking, neglect, or ignorance, we now find ourselves at a disturbing crossroads: we can continue to burn fossil fuels and witness the collapse of our ecology, or we can choose not to and witness the collapse of our economy. Refusing to whitewash this reality, Blind Spot issues a call to action, urging us to face up to the perilous situation we now find ourselves in so that we might begin to envision a realistic, if inconvenient, way out.

You can watch a ten-minute excerpt here. By watching it, I learned that:
  • The U.S. now has more prisoners than farmers.
  • Corn ethanol is energy negative (making it uses more energy than burning it).
  • It takes 30 calories of energy to bring one calorie of lettuce from California to the average plate.
  • The average item of food travels 1,500 hundred miles to your plate.
  • The concept of peak oil (essentially, that we are running out of cheap oil), is still ignored or rejected by most businesses, governments and individuals.
See the related posts for more information on peak oil, as well as here and here.

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500 ways to save energy around the house

Would you like to save energy around your house. This is the most comprehensive list I've seen. I found this link on the site of Rocky Mountain Institute, and the list is cross-categorized in several helpful ways. BTW, have you seen a gradual shift in the media coverage regarding "peak oil"? Though this term ("peak oil") is still avoided, I've seen many articles and many sources that are now acknowledging that we are in the twilight of the age of oil. Yet go back 5 years, and the thought that we were running out of reasonably priced oil in our lifetimes was mostly scoffed at. I think we have entered the age of resignation, without any official announcement. “First they ignore you, then they ridicule you, then they fight you, then you win” — Mahatma Ghandi.

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