Buffett sees relationship between EVs and coal with BNSF deal

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Warren Buffett recently threw down $34 billion for the Burlington Northern Sante Fe Corporation, his biggest bet yet. (MSNBC) The recent recession created conditions whereby acquisition of the railroad became a deal that could not be passed up.

"I stretched on this one," Buffett said in an interview. “I went to the last nickel.”  He financed the deal by splitting Berkshire Hathaway's Class B shares 50 to 1. (NYT)

Burlington Northern Sante Fe has one of the largest rail networks in the country.  BNSF serves numerous coal fields in the West; estimates are that the railroad has the capacity to haul enough coal to supply electricity to 10% of the country.  While Buffett makes the claim that purchasing the railroad is an environmentally-friendly investment (transporting freight by rail is more efficient than transporting it by truck), some make the argument that Buffett was making a bet against carbon legislation being enacted in the U.S.  It appears that Buffett was right again.

BNSF map of areas served.

Even if carbon legislation did have a chance of passing in the U.S., Buffett's investment would seem sound.  The current versions of the energy bill being debated in Congress include exemption provisions for many existing coal-fired power plants from new pollution standards, "which will enable utilities to keep some of their older, dirtier plants chugging along for years to come".  (New Republic)

In addition, betting on coal for America's future seems like a solid investment, albeit from a totally environmentally irresponsible perspective; but who said Warren Buffett had any moral responsibility to creating cleaner energy for future generations.

Buffett's $232 million investment in China's BYD electric car company pales in comparison to his investment in BNSF . (MarketWatch)  BYD not only makes batteries for cellular handsets, but they have also branched out into the lithium-ion automotive battery market as well as all-electric vehicles at an affordable price.

One can make the argument that if electric vehicles are to make a strong push into American markets, all of that excess demand for electricity will have to come from somewhere, thus pushing coal demand into the stratosphere.  Without a strong solar, wind, or geothermal initiative, we are left to rely on coal for electricity. 

Buffett, then, can be said to be adding to his investment in BYD by purchasing the BNSF railroad.  By owning the electric vehicles that will push up demand for coal, of which he now owns the freight transportation rails to bring the resource to the demand load centers, he is positioned to win from both clean and dirty energy alike.  Perhaps, this is what makes a great investment mind; hedge your bets against each other and if you are lucky, the two will work cooperatively, as it seems they will in Buffett's case.

There is no doubt that Buffett is the type of investor who listens to developments in the energy arena with a cold emotional disposition, not taking sides one way or another.  This is what makes him and his stock holders money; to do anything else would be irresponsible from a financial perspective.

Looking at how the coal industry has been dictating the climate and energy bill in Congress (much like the insurance industry has crafted the healthcare legislation), Buffett was able to discern that no law would be passed in the U.S. that would limit the use of coal no matter how much environmental damage mining it causes, no matter how many people suffer from respiratory illnesses because of it, no matter how many waterways are polluted by it, nor how expensive 'cleaning' it would be. 

“There are folks who would say, ‘Well, let’s just shut down coal-powered plants.’ That is not going to happen,” said Oregon Sen. Jeff Merkley, a liberal Democrat who supports stronger environmental and accountability standards for coal plants. “You are not going to have 60 votes in the Senate to shut down coal.”  There are simply too many lobbyists advocating on behalf of the coal industry that could give a rat's behind about any environmental repercussions their industry causes for humanity in the future.

"Last year, the mining industry spent nearly $31 million on lobbying and gave $6.3 million in political contributions."  (POLITICO)  Buffett could have lobbied Congress by himself for stronger emission regulations instead of purchasing BNSF (albeit in an ideal world).

Buffett's bet on railroads, in retrospect, is a smart one.  Not only will he benefit from increased emission regulations because freight rail is more efficient than trucking, but he will also benefit from no emission regulations because BNSF has the capacity to carry copious amounts of coal to demand centers, assuming coal-fired power plants are allowed to carry on with business as usual.

On the off-chance that electric vehicles make it to market in numbers that increase electricity demand in the near future, Buffett also wins with his railroad purchase because, as of now, the only way to create more electricity is to burn more coal.

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