The Oracle of Omaha Looks To The Skies

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Warren Buffett speaking to a group of students...

Warren Buffett speaking to a group of students from the Kansas University School of Business (Photo credit: Wikipedia)

It is noteworthy that Warren Buffett, one of the principal investors of our era, has turned his investment attention to solar energy.  Even if you do not follow the markets you, likely know are familiar with Warren Buffett. Whether it is from the fact that he was the world’s richest man for an impressive period of time or from frequent discussion regarding his famous frugal lifestyle or his witty comments on our nation’s politics, you know two things about him, namely, he is very rich and incredibly successful. As one could imagine, these two things go hand in hand. Mr. Buffett accomplished this by becoming, “arguably the greatest value investor the world has ever seen. His investment holding company, Berkshire Hathaway (NYSE: BRK.A), has averaged a compounded annual gain of 19.8% since 1964”.[1] When Mr. Buffet speaks, the world listens, and when he takes action, we take heed. Mr. Buffet is known, in particular, for his style of investment, the long haul. He will take large positions in companies and hold them for a long time. When Mr. Buffet decides to purchase stock in a company, he is not looking to make a few quick dollars. He is looking for something with inherent value that he feels is undervalued and can produce long term success. That is why many ears perked when it was announced that, “Mr. Buffet’s MidAmerican Energy Holdings Company has acquired two SunPower solar photovoltaic power  plant projects in California for between $2 billion and $2.5 billion. The adjacent Antelope Valley Solar Projects will be built in Los Angeles and Kern counties and will generate 579 megawatts of electricity for utility Southern California Edison. At peak output that’s the equivalent of a big fossil fuel power plant”.[2]

To understand why Mr. Buffet made this purchase, we only need to look at one of his recent purchases and to abroad to understand the future he sees. Let us first look at Mr. Buffet’s purchase of Burlington North Santa Fe Railway in February 2010. When they looked at the railroad industry they saw that, “fuel prices were up 120% since the March 2009 lows[,] unemployment stubbornly hovered around 9% in most areas[,] [and] shipping rates, as measured by the Baltic Dry Index, were 1/10th of their 2008 highs”.1 Many people enjoy quoting FDR’s line, “we have nothing to fear but fear itself”, but do not grasp the context of the words. We recognize the meaning behind the words but tend to fail to see the world to which they were spoken. They were words spoken in the thralls of the Great Depression, reaching out to a world in the grip of compounding fear. Fear, like many traumatizing forces, tends to have a multiplier effect and a perceivable impact on outcomes. People were living in a world where there did not seem to be a light at the end of the tunnel, but what they failed to recognize is that they were the ones who had to dig to the light. Mr. Buffet not only recognized that the light was there, but also comprehended what was necessary to reach that light.  Now he is reaping the rewards: “the freight railway industry is enjoying its biggest building boom in nearly a century…Profit in the industry has doubled since 2003, and stock prices have soared…Fortune has even dropped a “green” gift in the industry’s lap. A train can haul a ton of freight 423 miles on a gallon of diesel fuel, about a 3-to-1 fuel-efficiency advantage over 18-wheelers, and the railroad industry is increasingly promoting itself as an eco-friendly alternative”.[3] What we have found buried in this purchase is a sound decision that showed vision and an in-depth understanding of the intersection of both environmental concerns and the drive for profit. How successful was this purchase for Mr. Buffet? In the first nine months of 2012, BNSF accounted for roughly a quarter of Berkshire’s profits. To put that in context, Berkshire owns roughly eighty companies.[4] When Mr. Buffet undertook this purchase, he followed the wisdom of his own words: “‘In business I look for economic castles protected by unbreakable ‘moats.’’”1 Now he turns his gaze to the solar industry, and to understand why, we must turn our gaze abroad.

We turn to Germany which has been making waves lately with its energy reports. Their numbers from this past summer show us why Mr. Buffet was attracted towards solar:

“Renewables now account for 25 percent of energy production, up from 21 percent last year, the country’s energy industry association (BDEW) said in a statement that reinforced Germany’s position as a leader in green technology…Solar energy saw the biggest increase, up 47 percent from the previous year”.[5]

Germany is no small fish; it is a member of the G8 and has a GDP of $3.479 trillion, with a GDP per capita of $42, 625.[6] As such, Germany is quite comparable and offers a viable alternative for America. As of 2011, renewables only accounted for 9% of US energy consumption, with solar only accounting for 2% of that.[7] Unfortunately for the renewables sector, there are many barriers to entry into the energy market in America. Most notable are the huge subsidies given to fossil fuel companies that artificially lower prices. Despite these obstacles, renewables are making inroads. Science has for the most part always been on their side but now the economics are beginning to adjust as well with, “the cost of PV modules, currently the single largest part of system cost, and [falling] 74% in the last twenty years”.7

Still, however, one must question Mr. Buffet’s wisdom. Why would he invest in solar, which makes up such a small percentage of an already small percentage, when he could invest in oil? Oil, already, accounts for 36% of total US energy consumption 7 and the US is set become a net energy exporter in the next few years.[8] Mr. Buffet recognizes that despite the fact oil production is on the rise, we are no longer simply paying prices based on our demand, but on world demand. As such, we no longer solely determine the price.

So then what do we make of Mr. Buffet’s decision? Mr. Buffet, in my opinion, merely did what he has always done. He saw an undervalued industry that has room for growth and decreasing costs. With his purchase he bought a company which not only, “will build and operate the projects for MidAmerican Renewables, and the energy will be sold to Southern California Edison in accordance with two long-term agreements that have received approval from the California Public Utilities Commission”[9],  but will print the blueprint of a way forward in America. Germany has already shown us that despite the common argument, it is possible to put yourself on a renewable energy track, while maintaining a high standard of living.  We have a castle for a model, but we still need the moats. The moats, of course, are the inherent failures of the fossil fuels, both economically and environmentally. People enjoy stability and control in their lives, and a country whose energy consumption is reliant on fossil fuels can expect neither. In the end, we are left with an industry with growing demand and shrinking costs. Furthermore, we have an administration that has made its support for renewables crystal clear. Mr. Buffet is in this for the long haul and in the long haul, the sun is always going to be there.  Warren Buffett clearly recognizes the economic value of investing in alternative energy that helps us live green, be green.

By Sean Patrick Maguire

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[1] http://www.investmentu.com/warren-buffetts-railroad.html

[2] http://www.forbes.com/sites/toddwoody/2013/01/02/warren-buffett-in-2-billion-solar-deal/

[3] http://www.dispatch.com/content/stories/business/2008/04/30/railroads.ART_ART_04-30-08_C8_5RA29I0.html

[4] http://blogs.star-telegram.com/dfwjobs/2012/11/bnsf-continues-to-be-a-profit-leader-for-berkshire-hathaway.html

[5] http://www.reuters.com/article/2012/07/26/germany-renewables-idUSL6E8IQIA720120726

[6] http://www.gfmag.com/gdp-data-country-reports/268-germany-gdp-country-report.html#axzz2Hh9Mj2kK

[7] http://css.snre.umich.edu/css_doc/CSS03-12.pdf

[8] http://www.aljazeera.com/indepth/features/2013/01/20131514160576297.html

[9] http://inhabitat.com/warren-buffet-buys-worlds-largest-solar-plant-for-just-over-2-billion/

SunPower Corporation

SunPower Corporation (Photo credit: Wikipedia)

The Economic Case for High Speed Rail in America

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An economic case for high speed rail in America: We, as Americans, tend to have an inherent belief that America is the greatest nation on earth. The metric used to arrive at this belief is typically not one based on stats, figures, or data, but on a sincere love for this country. While there is nothing wrong with loving one’s country, there is something inherently wrong with allowing love to blind us from the facts. Across a multitude of metrics, America falls short of the number one spot. Two of those metrics coincide both in reality and in the reason for this blog; green energy and high speed rail. When discussing the implementation of high speed rail in America there are two numbers to take into account: The roughly $2.2 trillion in infrastructure investments[1] neededby America and the unemployment rate for October 2012, which was 7.9%[2].

Before explaining the need to initiate the implementation of high speed rail in America, we first must define the term itself. The definition of high speed rail varies in the international community and within the United States. The International Union of Railways defines it as systems of rolling stock and infrastructure which regularly operates at speeds of 155 mph on new tracks, while only at 125 mph on older tracks.[3] In the United States the definition tends to vary, with the accepted minimum being 90 mph. A major argument that is used against the implementation of high speed rail in America is that the nation is too large and that it would be too costly. However, while a national high speed rail system would be the end goal decades down the line, it is not the main aim of high speed rail. High speed rail would be used as a viable option to connect “mega-regions” throughout the United States. Mega-regions are defined as large-scale economic units of multiple large cities and their surrounding suburbs.[4] The mega-regions within the USA are responsible for over 75% of our economic activity.  These mega-regions extend over vast areas, ranging from Boston to D.C. and from Pittsburg to Chicago. This writer can attest to the pains of driving from NYC to Washington D.C.

The economic opportunity provided by such decreased times is quite obvious at first glance. The most noticeable is Philadelphia becoming a suburb of NYC.  It then would take me roughly five more minutes to travel to NYC by train while only living within fifteen miles of the city. Many will note that the Acela train, operated by Amtrak, already runs the north-east corridor route. The Acela, despite having limited speeds for most of its journey, as well as no dedicated track, can be deemed a success story. From 2000 to 2010, ticket revenues on the Acela line grew by 87%. Furthermore, despite only accounting for 10% of Amtrak’s ridership, the Acela line accounted for 25% of ticket revenue.  It comes as no surprise then that Acela has the best revenue of any of the Amtrak lines.[5] The success of the Acela line demonstrates both the restrained demand for high speed rail and its viability as a transportation system. Still, some question if high speed rail is worth it. Within the Stimulus, the Obama administration guaranteed money for the purpose of the creation of high speed rail. However, in several cases Republican governors refused the funds on ideological grounds. If we are to look back into history, what would we say to any governor who refused the interstate highway system? We would likely call that individual a fool and rightfully so. High speed rail has the opportunity to be the interstate highway system of the 21st century.

My final point is perhaps a bit existential, but nonetheless is one I feel must be addressed. I began this post discussing the notion of America being the greatest nation on earth.  There is a bridge in Trenton, NJ with the following inscription: “WE MAKE IT, THE WORLD TAKES IT”. To those of my generation, this may seem somewhat ironic; however, this was not always the case. America is still a manufacturing superpower, but it has lost ground. Now we must approach this realistically and recognize that a great deal of our manufacturing success came from the devastation unleashed on the rest of the world during WW2. However, we must also recognize that the demise of American manufacturing is not solely due to the rise of the rest of the world. We celebrate the resurgence of the American auto industry and lament the reign on imports over the past several decades. Yet, we are never told that the manufacturing system that caused Japanese imports to dominate world markets was first offered to American manufactures. Our country turned it down and the rest is history. America’s dominance of the global economy has much to do with the timely decimation of others, but just as much to do with what we produce.  When we look back on times of American prosperity, we find that it was the United States that was manufacturing the world’s most advanced technologies, while inventing many of them at the same time. At some point in time this all changed, and we have witnessed the decline ever since. We decry that supposedly all of our good are made in Mexico and China, yet we must recognize that most of those jobs are not coming back. This must be an accepted reality. If people are already frustrated at t-shirts and iPhones made in China, what happens when it’s our nation’s mass transportation system? Around the world millions of people are being pulled out of poverty and nations that were once written off are becoming some of the most economically developed in the world. Within a decade we will see an explosion of people in the middle income range around the world. High-speed rail has already proven to be a success in Europe, Japan, and China. No doubt others will seek to emulate this success. So where will they turn? The answer can be America, and this country will be able to solve a multitude of our other problems, such as unemployment. Americans tend to hold the attitude that if you are not first, then you are last. In the case of the hegemonic power of the 21st century, whoever dominates the green market will keep or gain that mantle.

[1] http://www.infrastructurereportcard.org/

[2] http://www.bls.gov/cps/

[3] http://www.uic.org/spip.php?article971

[4] http://www.theatlantic.com/national/archive/2009/05/mega-regions-and-high-speed-rail/17006/