How Falling Oil Prices Could Hurt & Help Warren Buffett

During the last time the price of oil fell below $50 a barrel, Warren Buffett certainly showed his guilt. At the time Buffett purchased shares of Conoco Phillips for billions of dollars while it was nearing its peak in 2008, then out of nowhere crude oil prices and the energy company shares fell in value as the recession got worse.

“I still believe the odds are good that oil sells far higher in the future than the current US $40-$50 price,” wrote Buffett in his 2009 letter to shareholders. “But so far I have been dead wrong.”

Oil is once again testing those low levels after beginning to fall in July 2014 from US $100 a barrel. The drop in prices will at least let Warren Buffett save money at the gas station. He purchased a Cadillac XTS last year that only gets 18 miles per gallon when driving in the city.

Here are many of the various ways that lower prices in crude oil could hurt and also help, Berkshire Hathaway, his company based out of Omaha, Nebraska:

  1. Berkshire Hathaway is one of the largest shareholders in Walmart and they also own a stake in Costco, and both of these companies are trading near their all-time highs. Lower gas prices will benefit retailers because it should boost consumer spending during the year.
  2. In October 2014, Berkshire agreed to purchase Van Tuyl Group, which is currently the biggest privately owned auto dealership network in the United States. Lower gas prices have helped auto sales increase and this could certainly provide a benefit to Warren Buffett’s newest addition to his empire.
  3. Costs of diesel fuel and jet fuel have also dropped, and this will undoubtedly reduce the expenses at NetJets, Berkshire Hathaway’s luxury aviation business, as well as its trucking company, McLane.
  4. Lower gas prices are undeniably convincing people to drive more. The frequency of accidents will increase and car insurers are going to pay higher prices. This will unquestionably help Geico since they are the second largest auto coverage company in the United States.
  5. This surging production in oil is indisputably a good thing for Burlington Northern Santa Fe Railroad, a Berkshire Hathaway subsidiary. They have been able to increase the amount of oil carloads coming from the Bakken region in North Dakota and spent generously in order to accommodate this increase. This demand may diminish if oil prices stay low for any lengthy period of time.
  6. In 2013, Warren Buffett purchased a great deal of shares in Exxon Mobil Corp., which ultimately amounted to $3.74 billion. They own roughly 1% of the company. Shares initially went up in value after first learning about the stake, but they have since dropped to about the price near where Warren Buffett purchased them.
  7. Weschler and Combs most likely underperformed the S&P 500 index during 2014 partly because of their energy company bets. National Oilwell Varco and Suncor Energy both continue to fall in value going into 2015. Just yesterday Suncor mentioned that they are going to lower their capital budget and cut jobs in order to hang on through the falling oil prices.
  8. Lubrizol, owned by Berkshire Hathaway, increased its capacity to make chemicals for the oil industry back in December and agreed to purchase two units from Weatherford International PLC. James Hambrick, CEO of Lubrizol, mentioned in December that he didn’t feel threatened by short-term declining oil price effects on these businesses. He even expects demand to rise with time.

One Comment

  1. Wouldn't Burlington Northern Santa Fe Railroad ship more carloads of oil if oil consumption went up because oil prices went down?
    While the value of the oil being shipped would diminish, the demand for the quantity of oil would increase and not diminish so therefore BNSF would ship more oil and not less oil.
    If demand for oil transportation did go down wouldn't this just free up trains for grain transportation and give BSNF time to bring online it's new trains and cars that are in the pipeline (no pun/fun intended)!
    If demand does drop on oil transportation, this might be a blessing in disguise for Berkshire/BNSF as it will get the agricultural lobby and regulators off it's back for now and by the time the next oil price spike happens Berkshire/BNSF will be in a position to take full advantage of it.

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