Ah, it is that time of the quarter when we get to see what stocks the great money managers of our time have been buying and selling. Yes, the 13F filings came out last week and the most notable stock purchase came from one Warren Buffett.
Buffett revealed his largest new stock acquisition in more than two years when his quarterly filing revealed Berkshire Hathaway (BRK.A) (BRK.B) had accumulated a $3.4 billion position in Exxon Mobil (XOM).
The questions many people would like answered is why Exxon and why now? I'm not sure about the why NOW part as Exxon's shares have been around this price for quite some time, but I think I've got a pretty good idea about the why.
Despite the recent media cries of an American oil glut I think that Buffett believes that oil prices are going higher in the future. How do I know that Buffett thinks oil prices are going higher? His partner Charlie Munger told me so.
Earlier this year I came across a roundtable conversation that included Berkshire Hathaway's eighty-eight year old vice-chairman Charlie Munger. Munger is one of the most rational thinkers the investment world has ever seen and he and Buffett are almost always on the same page.
Here is some of what Munger had to say about future oil prices and what he thinks should be proper energy policy:
"Oil is absolutely certain to become incredibly short in supply and very high priced. The imported oil is not your enemy, it's your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization. And what responsible people do with a Confucian ethos is suffer now to benefit themselves and their families and their countrymen later. The way to do that is to go very slow in producing domestic oil and not mind at all if we pay prices that look ruinous for foreign oil.
It's going to get way worse later ...
The oil in the ground that you're not producing is a national treasure ... It's not at all clear that there's any substitute [for hydrocarbons]. When the hydrocarbons are gone, I don't think the chemists are going to be able to just mix up a vat and create more hydrocarbons. It's conceivable that they could, I suppose, but it's not the way to bet. We should spend no attention to these silly economists and these silly politicians that tell us to become energy independent.
Let me pose a question for you. It's 1930. Oil in the United States is in glut. We have cartels to get the price up to $0.50 a barrel. Everywhere we drill we find more oil in our own country; everywhere we drill in Arabia we find even more.
What would the correct policy of the United States have been in that time? Well, the correct policy would have been to issue $150 billion of very long-term bonds and cart 150 billion barrels of Middle Eastern oil into the United States and throw it into our salt caverns and leave it there untouched until the current age.
It's easy to see that in retrospect, but who do you see who ever points this out? Zero. We have a brain-block on this issue. We should behave now to do on purpose what we did on accident then."
Yes, Munger thinks that oil prices are headed much higher long term despite the unconventional/shale oil boom that is occurring in the United States. I think it is pretty safe to say that Buffett is likely on the same page with Munger on this issue.
This purchase of Exxon by Berkshire and Buffett's continued purchases of Canadian Oil Sands producer Suncor (SU) in recent quarters provide pretty good confirmation of this. Buffett wants exposure to the price of oil.
The IEA Also Predicts A Future of High Oil Prices
Also last week the IEA released its most recent Energy Outlook which predicts that the U.S. shale boom will peak in 2020 and that we are in for a future of higher oil prices.
According to the IEA crude prices will advance to $128 per barrel (in 2012 terms) by 2035. In absolute terms that means that oil prices are going much, much higher.
After 2020 the IEA thinks that OPEC is going to have to raise its game to provide enough increases in production just to offset the end of the shale boom and the relentless rise in oil demand from the emerging economies.
It seems peak oil isn't actually dead. It just looks a little different than many expected.
Implications For Investors
The age of cheap oil is over, in my opinion, and elevated oil prices should make oil producers excellent investments.
As far as which companies to pick, the two fish that seem to be sitting in a barrel in front of us are Exxon and Suncor. Both of these companies pay generous dividends, buy back prodigious amounts of stock and have the blessing of the greatest investor the world has ever seen.