2020: Could Buffett on Berkshire's Occidental Petroleum deal?

BECKY QUICK: All right, this next question comes from Jason (Plawner) in New Jersey. “As both a Berkshire and Occidental shareholder I was encouraged to see your investment in the company, but with passing weeks, it became evident that your investment facilitated Occidental management’s ability to avoid a shareholder vote on the Anadarko acquisition, a very shareholder unfriendly outcome.

“This deal proved to be irresponsible and expensive from an OXY perspective, and ultimately, very value destructive for OXY shareholders. In my view, it also permanently hurt Berkshire’s reputation in the marketplace.

“Please comment on this unfortunate outcome and tell me why OXY shareholders and other market observers shouldn’t feel this way.”

WARREN BUFFETT: Well, yeah. We said right from the beginning — although we didn’t certainly expect the degree of what’s happened — we said, essentially, when you buy into an oil — a huge oil production company — you know, how it works out is going to depend on the price of oil to a great extent.

It’s not going to be your geological home runs or super mistakes or anything like that. It is a — it is a investment that depends on the price of oil. And, you know, I — when oil goes to minus $37 — (laughs) — it happened the other day for, I guess, it was the May contract. You know, that’s off the chart, and —

If you own oil, you should only own oil, if you expect these prices to go up significantly. I don’t know whether they’ll go up significantly or not. We’re in the transaction.

Our commitment was made on a Sunday when the management of Anadarko favored Chevron. And Chevron had a breakup fee of a billion dollars and the Occidental people had been working on it for several years.

And it was attractive at oil prices that then prevailed. And it doesn’t work, obviously — it doesn’t work at $20 a barrel — it certainly doesn’t work at minus $37 a barrel — but it doesn’t work at $20 a barrel.

And everything the oil companies have been doing, whether it’s Exxon or Occidental or anybody else, it doesn’t work at these oil prices.

That’s why oil production is going to go down a lot in the next few years, because it does not pay to drill now.

That’s happened at other times in the past. But the situation is, you know, you don’t know where you’re going to store the incremental barrel of oil, and oil demand is down dramatically, and for a while the Russians and the Saudis were trying to outdo each other in how much oil they could produce.

And when you’ve got too much in storage, it doesn’t work its way off that very fast.

Now, you will have production of oil go down in the United States significantly. It does not pay to drill in all kinds of formations that paid before, and it doesn’t pay — it doesn’t pay to have paid the price that oil was trading at in the ground a year or two ago.

And to that extent, if you’re an OXY shareholder, you know you’ve — or any shareholder in any oil producing company — you’ll join me in having made a mistake, so far, in terms of where oil prices went. And who knows where they go in the future.