2011: What are Buffett's thoughts on oil?

AUDIENCE MEMBER: Hi, Warren and Charlie. My name is Catherine Brood (PH). I’m from Los Angeles, California.

I invest primarily in commodities and commodity equities. I started out back 2007 buying oil.

In the summer of 2008, we reached the peak of the oil bubble. That’s when I reversed my holdings and started shorting oil.

I made a nice profit.

In 2009, I started buying oil again and oil equities, and I’ve been doing pretty well. But given the status of the world today and the price of oil, I’m questioning my investments.

Is this another oil bubble? Has oil reached its peak? Should I keep my holdings? Should I short oil? Should I exit oil altogether and move into other commodities or other investments?

So my question to you is, what your sentiments regarding oil?

WARREN BUFFETT: Well, I would say you’ve done a whole lot better than we have. (Laughs)

I think the crowd would rather hear from you.

We actually did take a position in oil — I don’t know how many years ago.

CHARLIE MUNGER: A long time ago.

WARREN BUFFETT: A long time ago.

CHARLIE MUNGER: It was $10 a barrel. (Laughter)

WARREN BUFFETT: It wasn’t that long ago though, incidentally. That was in the 1990s, although we’ve seen oil a lot cheaper than that.

East Texas Oil sold for a dime a barrel in 1932.

The — we really don’t know.

I mean, obviously, you’re dealing with a finite resource. I don’t know whether the world is up to 88 million barrels or — it was down around 85 million barrels, but there’s got to be some comeback, so I wouldn’t be surprised if the current figure is getting pretty close to 88 million barrels a day.

That’s a lot of oil to take out of the ground every day. And, of course, there are — new frontiers have been found, but you are — you’ve stuck a lot of straws into the Earth, and it is a finite number.

So, the one thing I can promise you is — almost promise you — is that oil will sell for a lot more someday.

Interestingly enough, how many producing oil wells do you think there are in the United States?

The answer is something like 500,000. You know, there’s these stripper wells, there’s wells out near Charlie that have been going for a hundred years.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: But we have looked in a lot of places now.

And what’s happening, of course, from the standpoint of United States companies, is that the smaller countries where oil is being found now are quite a bit smarter about how they grant their concessions than people were 50 or 75 or 100 years ago, so that they drive much more intelligent deals than was originally the case when we went exploring around the world.

But I have no idea — you know, we — traditionally, BNSF had hedged a certain amount of oil and — because they obviously use huge quantities of diesel — and I suggested to them — although how they run the BNSF is up to them — but I really didn’t think we could guess the price of oil.

And I thought if we could guess the price of oil, we didn’t need to run the railroad. I mean, it was a — took a lot of effort, time to run that railroad. And if we know how to make money just sitting in a room trading oil, why not do that instead?

So I don’t really — we don’t hedge — well, in terms of Berkshire’s parent company policies, we don’t hedge anything in the way of commodities. Some of our subsidiaries do, and that’s fine. They’re responsible for their businesses.

But there are very, very few commodities that I’ve ever thought I was going to — would know the direction of their movement in the next six months or a year.

The one thing I’m quite convinced of, as we talked about this morning, is the fact the dollar will become less valuable over time, so that the dollar price of most things will go up, and maybe go up very substantially.

Whether they go up enough so that you have the same amount of purchasing power after you pay tax on your nominal gains is another question.

I really think that an intelligent person can make more money, over time, thinking about assets that — productive assets — rather than speculating in commodities, or for that matter, fixed dollar investments, but that’s maybe my own bias.

Charlie?

CHARLIE MUNGER: Well, if we’d done nothing but oil from the very beginning, I’m confident that we would not have done nearly as well as we have.

To me, that’s perfectly obvious. So I think what we’ve done is much easier than what you’re trying to do.

WARREN BUFFETT: And we like easy.

CHARLIE MUNGER: We’re not trying to make it any more difficult than we have to.

WARREN BUFFETT: I really don’t know any way to have an edge in that sort of activity.

I mean, if you are going to try and figure out whether when to be long or short oil, or natural gas, or copper or cotton or whatever, I don’t know of people who I feel would have an edge in trying to do that over the next 10 years.

But I do know people where I think they’d have a very significant edge in investing in common stocks, and maybe distressed bonds, for that matter, too.

CHARLIE MUNGER: Yeah, trading oil worked best of all for the people who bribed Nigeria.

That’s not our milieu.

WARREN BUFFETT: Well, that’s an insight I hadn’t heard before. (Laughter)