A story at Bloomberg published Tuesday reports that billionaire investor Warren Buffett is continuing to raise his stakes in oil and gas companies in conflict with the prevailing media narrative that claims the oil and gas industry is a dying business segment.
“Warren Buffett’s multibillion-dollar purchases of oil and gas investments early in the pandemic paid off when the sector cranked out record earnings in 2022. But instead of selling out for a huge profit this year, the Oracle of Omaha wants more,” says the tweet amplifying the story, in apparent wonderment that such an astute investor could still be buying up stocks in U.S. drilling and fracking giants like Oxy, Chevron and ConocoPhillips.
“Buffett’s recent purchases of major stakes in oil and gas companies are an indicator of his optimism for the sector. General sentiment and positioning in oil and gas has lagged, as indicated by energy’s small portion of the overall equity market versus historical levels,” Young says, referring to the chart below:
“And while Buffett is known to prefer investments with stable, predictable, and growing cash flows, and not cyclicals, he has intermittently owned and done well with oil & gas equities—particularly in inflationary periods much like the present,” Young continues, illustrating the point with this chart:
So, why is one of America’s smartest, most successful investors continuing to bet Berkshire Hathaway’s capital on an industry the U.S. government under Joe Biden has clearly and unambiguously said it wants to disappear within the next ten years? What about the vaunted “energy transition?” What about the “stranded asset” theory which hypothesizes that companies like Chevron and Oxy and ConocoPhillips will be forced to leave a huge portion of known oil and gas reserves in the ground as the transition marches on?
The simple reality is that no one really believes that stuff, least of all senior executives in the oil and gas business itself or smart investors like Warren Buffett. The world is not now embarked on any sort of real energy transition that would eliminate the need for fossil fuels and replace them with renewable energy and electric vehicles. What we see taking place today is in fact an unprecedented diversification in energy sources and a massive addition to global energy creation capacity.
That reality is clearly illustrated by OPEC’s report this month that global primary energy demand is likely to grow by 23% between now and 2045. “Global primary energy demand is forecast to increase by a significant 23% in the period up to 2045, which means we will need all forms of energy,” OPEC Sec. General Haitham Al Ghais said at a petroleum conference in Nigeria, as reported by Reuters.
Al Ghais added that, to achieve the needed level of growth of reserves and production, the industry would need to invest more than $12.1 trillion over the next 22 years, and the industry is not on track to reach that level of investment. “All industry policymakers and stakeholders need to work together to ensure a long-term investment-friendly climate, with sufficient finance available. One that works for producers and consumers, as well as developed and developing countries,” Al Ghais said.
This outlook for under-investment during a time of projected rising demand for crude, natural gas and associated petroleum products tells investors that oil markets are likely to be tight for years to come and tight markets tend to create high commodity prices. Higher prices mean stronger profits, which tend to lead to enhanced share values for investors.
To succeed in the investing world, investors must view opportunities from a standpoint of reality, and that often means ignoring prevailing narratives in a modern world pervaded by talking points and media propaganda. No investor in the U.S. in modern times has done a better job of seeing the world for what it is, rather than what activists and politicians want it to be than Mr. Buffett.
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