Two publications this week came out with headlines that Warren Buffett predicted the current oil price crash. Both referenced a 2016 interview of Buffet for CNBC where, the publications claim, he had made his prediction. One of the publications also argued that Buffet might use his billions to bail out U.S. oil. But first, did he really predict the crash?
Not if you take the time to watch the whole interview. What Buffett talks about in the 2016 interview is, plain and simple, the benefits and dangers of low oil prices.
The revered investor says that while oil prices are good for consumers because they get to spend less to fill up their tanks, they are not as good for the producers because capital values begin declining very soon after oil prices fall. This fall in capital values then spreads to other industries that do business with the oil producers.
Also, jobs are lost, Buffett notes in that interview, which may be why Congresswoman Alexandria Ocasio-Corteza deleted a tweet this week in which she rejoiced at the trouble oil prices has inflicted on U.S. oil. Buffett also says another thing that should be common knowledge: cheap oil is good for importers but bad for exporters, which, he says, is something he studied in freshman economics. But where does he predict the negative price of WTI?
Well, he doesn’t. What he says—and what both CCN and Markets Insider quote—is “If oil were free, it would be good for us.” The “us” to which Buffett refers is consumers. This is a statement of fact and not anything even close to a prediction. Now that this has been settled, the more important question is whether Buffett will be buying into oil companies now that the stock is dirt cheap.
CCN’s Kiril Nikolaev thinks so. He quotes Buffett’s “Buy when others are fearful” and references the investor’s $10-billion injection into Occidental when Oxy was trying—and succeeded—to outbid Chevron for Anadarko. No one could expect that this would turn into one of the worst-timed acquisitions in the history of oil and gas.
Aside from Occidental, Berkshire Hathaway also has a stake in Canada’s Suncor. Things in the oil patch in Canada are arguably worse than they are in the United States. For some, this might be the best time to buy oil and buy big. In fact, one energy expert, Peter Bryant from business consultancy Clareo, says that the crisis will see an influx of new buyers in U.S. oil, a lot of which will be private equity firms.
Could Berkshire Hathaway join the bargain hunt? It’s possible.
But as notorious as Buffett is for actually thinking before buying, he may wait a little. The reason: this crisis is like no crisis before it. This adage has already grown old in just a couple of weeks, but this doesn’t make it any less true. No one, not even the Oracle of Omaha, could anticipate the Covid-19 pandemic’s scale and impact on business activity across the world. And when in unchartered land, smart investors don’t run, they tread cautiously.
Of course, one could argue that it would be silly not to take advantage of the slump in oil stocks. In fact, Buffett is already getting a bigger stake in Occidental: the company has no cash to pay dividends, so it is paying in stocks. If he is, as CCN’s Nikoalev says, bullish on oil over the long term, it would make perfect sense to expand now while the stocks are cheap.
The negative-price nightmare is now over. WTI is back to trading in positive territory even if it is a lot cheaper than every producer everywhere in the world would like it to be. But the market is correcting, which may well have been another thing Buffett learned in freshman economics. Sooner or later, without deliberate intervention, fundamentals always find a balance.
The longer oil remains cheap, the fewer producers would be able to produce at a profit. Eventually, with the help of deliberate cuts and the natural adjustment of production in the U.S., supply will fall to a level closer to demand. And sooner or later, demand will start recovering. Warren Buffett knows that.
NB: Irina Slav originally published this at Oilprice.com
