I've been told many times that I spend far too much time winding up my articles and not getting to the point. I've also been told that the problem with this is that in this internet generation that readers are only going to give me about two seconds worth of attention before deciding whether to click somewhere else so I need to get to the point quickly.
Darn it, I've probably done it again. Your short attention span has likely taken you elsewhere.
Well, if you are still with me here is what my lead should be. The very wise Charlie Munger just spoke at the annual Daily Journal Annual Meeting (and on CNBC) and he advocates a much different energy policy than our new President. In fact, Munger would have us do exactly the opposite of what Trump is proposing. Probably not a surprise that these two gentlemen differ given what we know about them.
Let's compare the two different views on what America's energy plan should be.
Trump's Energy Plan - An America First Energy Plan
Image Source: Youtube
Donald Trump laid out his "America First Energy Plan" during his campaign. The plan is pretty simple. Trump wants to get the government out of the way and let the oil and gas industry drill as much as possible.
The shale oil and gas miracle that the oil and gas industry provided our country was truly an incredible leap forward in terms of recoverable hydrocarbons. Trump has clearly grasped the huge potential of the shale oil resources that the United States has and how many high paying jobs that the industry could support.
During the election campaign Trump revealed the 7 core elements of his "America First Energy Plan." Each and every one of those elements was tied to the same thing which is exploiting America's new found (or at least newly recoverable) shale resources as fast as possible.
Here is the exact plan:
Source: Trump Campaign Website
It didn't take long to see how serious Trump is about supporting the oil and gas business. Within days of being on the job he issued an executive order that restarted both the Obama stymied Keystone and Dakota Access Pipelines. It was a clear message for oil executives that they should feel free to open up their wallets and get back to business.
The Ever-Rational Charlie Munger - Keep It in the Ground
He is 93 years old and as sharp as a tack. Berkshire Hathaway's (NYSE:BRK.A) Charlie Munger was at the Daily Journal annual meeting (the newspaper he runs) this week and was also on CNBC. While on CNBC specifically Munger made some interesting comments about America's development of natural gas (and oil).
His exact words were:
I wish we weren't producing all this natural gas, I'd be delighted to just have it lie there untapped for decades in the future and have the Arabs pay extra once they use up their oil ... nobody else in America seems to feel my way, but I believe in deferred gratification, I don't think hastening to use our oil and gas is a good idea ... I don't see any advantage.
Munger believes that the United States should have an energy strategy that involves preserving these shale resources until some point in the future when they are much more valuable. This would be a point in time after the OPEC nations have exhausted their oil and gas reserves.
Munger would have us import oil and gas now from OPEC so that we can save our oil and gas for the future when the world is going to have major shortages. That is obviously very different than the Trump plan which is to produce as much shale oil and gas as fast as we can.
Interestingly, this is not the first time that Munger has said this. A few years ago at a conference in China Munger said the following:
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.
Interesting to say the least. Munger said "absolutely certain" that oil would become in very short supply and very high priced. That sounds like a table pounding recommendation to get long oil for the long term.
Where Does This Leave Investors?
Ask me whether I would rather take the opinion of Munger or Trump and I go with Charlie every day of the week and twice on Sunday. Munger is a painfully rational, long-term, widely read, clear thinker. Trump is, well, Trump.
The problem I have on this issue is that while Charlie is exceptionally clear on the fact that he believes oil and gas prices are going to be much higher in the future there is nothing in Berkshire's investment portfolio that shows any commitment to that fact. The only oil and gas company in the Berkshire Portfolio is Phillips 66 (NYSE:PSX), which itself isn't even a direct play on the commodity prices. In this case, Charlie's money isn't where his mouth is. That gives me pause.
Trump's policies are another reason why I'd be reluctant to get overly bullish on oil and gas prices today. If he manages to ramp up drilling that is going to bullish for oil sector jobs, but rising production is bearish for prices. I also wonder if Trump really reigniting U.S. oil production growth might cause OPEC to abandon their recent cuts. Again, very bearish for oil prices.
While getting bullish on oil and gas prices under Trump is tough for me, it is even harder to get bullish on the shale producers that will be increasing production. In the Superinvestor Bulletin, I spend all of my time focused on the stock holdings of the world's greatest investors. I can tell you that it is very rare that I find a shale producer in one of the portfolios of these great investors.
Why the great investors don't hold these shale producers is really not a mystery to me. From what I can tell none of them generate any positive cash flow … ever. Even when commodity prices were much higher.
So what good is knowing Munger's pretty strong view on future oil and gas prices? To be honest, I'm not sure. If I saw that Munger was investing based on that belief, I'd be more inclined to do something with that information. For now I'll just consider it food for thought and keep reading.
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