If you look at Buffett’s major acquisitions since 2008, you will find something in common— oil. Let’s take a look.
1, ConocoPhillips: an oil company.
2, Lubrizol: a specialty chemical company producing mainly additives to fuel, engine oil and other products. Lubrizol thrived during 1970s oil crisis “because high gasoline prices encouraged automakers to design new, energy efficient cars, and these design modifications required new fuel additives, transmission fluids, and gear lubricants”.[i] And it gets even better: they can apply for patents for new additives.
3, BNSF Railway: high gas prices force people to turn to mass transportation
4, BYD: a Chinese company making batteries, cars (including electric cars) and solar panels—renewable energy.
5, MidAmerican energy buying a solar project from First Solar: renewable energy
6, IBM: IBM has been developing a system called “Smart Grid” which can be used for electric car charging.[ii]
Signs of Peak Oil:
Demand is increasing: China, India and population. World demand for oil is projected to increase 21% over 2007 levels by 2030.[iii]
Supply is decreasing:
1, the existing 116 giant fields which account for 50% of the world oil production are experiencing diminished capacity.[iv]
2, the rate of discovering new fields has been decreasing and annual production exceeded new discoveries in 1980s.2
3, the era of “easy oil” has ended1. Oil companies have increasingly been drilling wells in remote, unfriendly and riskier places and the exploration costs have increased by three-fold over the last decade. [v]
4,the problems with unconventional oil (oil sands, extra heavy oil and shale oil): the estimated oil production from oil sands in Canada is 3.3 million barrels per day in 2020, which is around 3% of the world consumption. [vi] This is not enough to cover the gap between the demand and supply of oil. In addition, the prospect of the commercialization of extra heavy oil and shale oil is still uncertain because few big projects comparable to oil sands projects in Canada are up running. Moreover, it’s more expensive and need more energy to produce oil from unconventional oil resources and the environmental issues are even worse than traditional oil production. [vii]
Short term trigger/catalysts for oil shock:
US attacking Iran. Why? Because:
1, Iran is allegedly developing nuclear weapons.
2, Iran has lots of oil
3, Iran is geopolitically important: if Iran becomes “friendly” to US, then US can control Azerbaijan, which according to Dr. Zbigniew Brzezinski is a “cork” controlling the access to the “bottle” that contains the riches of the Caspian Sea basin and Central Asia. [viii] And why we listen to him? Because he orchestrated the plan to draw Soviet Union into Afghanistan war in 1980 which directly contributed to the fall of Soviet Union in 1989.[ix] In 1981, Zbigniew Brzezinski received the Presidential Medal of Freedom for his role in the normalization of U.S. Chinese relations, and for his contributions to the human rights and national security policies of the United States. It is interesting to see that a national security adviser received a Presidential Medal of Freedom from his boss, President Jimmy Carter.
4, timing of the war: when US starts deploying Bunker Busters. Iran president Mahmoud Ahmadinejad was a civil engineer and he likes to build underground structures and put those nuclear weapons there.
5, the benefits of oil shock to US: High oil prices can help president Obama push through his new energy plan. It’s also a chance to teach China a lesson—China imports around 8% of its oil from Iran.
Other short term variables that could affect oil prices:
1, Euro debt crisis
2, possible Japan debt crisis
3, possible China hard-landing
UCO, USO, UNG
The big trend is that governments all over the world keep printing money and in the meantime the resources like oil are becoming increasingly scarce. Therefore we need to prepare ourselves for the upcoming crisis.
[iv] Rising Powers, Shrinking Planet, Michael Klare,2008.
[viii] The Grand Chessboard, Zbigniew Brzezinski,1997