Warren Buffett sees a bright future for fossil fuels

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Warren Buffett’s new letter to Berkshire Hathaway shareholders offers a window into the storied investor’s outlook on the energy transition — projecting a long, bright future for U.S. fossil fuels.

The letter singles out Occidental Petroleum, of which Berkshire owns 27.8%, for special praise, saying the company is “doing the right things for both its country and its owners” by helping to free the U.S. from reliance on imported oil. Berkshire intends to hold stock in the company “indefinitely,” Buffett writes, elevating Occidental to the level of the “truly wonderful businesses” Coca-Cola and American Express.

“No one knows what oil prices will do over the next month, year, or decade,” Buffett writes. “But [Occidental CEO] Vicki [Hollub] does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders and to her country.”

Energy security has long been a focal point for Buffett, and Berkshire’s holdings across the sector show a vision of the clean energy transition unfolding slower than what climate activists would like to see. Buffett is willing to stake out early positions on promising climate technologies — he backed Chinese automaker BYD in 2008 before it had even announced its first plug-in hybrid, and his letter also praises Occidental for its leadership among Big Oil peers on carbon capture. Berkshire’s subsidiary Berkshire Hathaway Energy (BHE) is also one of the country’s largest owners of wind and solar farms.

But Buffett evinces an old-school preoccupation with U.S. energy independence and sees no end in sight for natural gas. Berkshire is one of the few insurers that has not yet set a target to wind down emissions from its insurance and investment portfolios. The problem with Buffett’s all-of-the-above energy transition strategy is that — as some shareholders have complained, and as his letter this weekend itself articulates — the carbon-intensive companies in the portfolio put the value of other holdings that are exposed to climate impacts at risk.

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Buffett’s endorsement of Occidental focuses on the oil market, but it’s clear that he is preparing for a global economy in which oil’s preeminence is replaced by natural gas, Rob Thummel, managing director at the energy-focused investment firm Tortoise told me. Two-thirds of BHE’s assets are gas infrastructure, including two of the country’s largest interstate gas pipelines. It also last year became the majority owner of Maryland’s Cove Point liquified natural gas export terminal, locking in a lucrative piece of the global LNG trade before the Biden administration threw the brakes on that industry last month. Even Occidental’s strategy for the energy transition — to dominate the market for carbon capture and storage (CCS) — implies a long-term market for gas; if gas-burning power plants and factories all switched to clean electricity there would be no need for CCS.

Occidental also meets several of Buffett’s other traditional prerequisites, said Todd Finkle, a professor of entrepreneurship at Gonzaga University and a Buffett biographer. It’s the largest oil producer in Texas, with a commanding position in the Permian shale basin and the efficiency of scale to have a promising future of cash flow from its existing assets, even if the price of oil tilts down over time. The company’s embrace of CCS gives it a moat in scaling up that technology that other companies will struggle to cross. It also demonstrates a savvy use of government subsidies, namely the Inflation Reduction Act’s 45Q tax credit for carbon capture: China’s lavish subsidies for EVs were a major draw for Buffett’s BYD investment. And, as his letter makes clear, he just likes Hollub — confidence in individual managers is a classic Buffett draw.

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