XOM, Buffett, And Why

There are two articles that are "kind of fun" to read -- discussing Buffett's 40-million-XOM share purchase.

The first one focused on the wrong questions: did Buffett repeat his mistake (the well-known COP story)? It can be found over at SeekingAlpha. I found the article rather unenlightening; the contributor focused on the past.

The better of the two articles focused on the why? I agree with the contributor's answer. Street Authority over at Yahoo!Finance is reporting:

Exxon's shares are actually close to all-time highs, and a similar or better entry price could have been had for a long time.

The "Why now?" part of the Exxon purchase stumps me -- but I think I've got a pretty good idea about the why.

It is all about the price of oil. I think Buffett expects it is going to rise over the medium and long term.

The reason I think that is because Buffett's longtime business partner, Charlie Munger, said so.

Of course, Munger didn't tell me that directly. But he did tell anyone who happened to come across a roundtable presentation that the Berkshire vice chairman participated in.
Munger's one of the most rational thinkers in the entire investment world, and he's almost always on the same page as Buffett.

Munger had this to say about future oil prices:

"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. 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.

"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."

This is actually old news. I've actually the blogged the very same thing, and regular readers may remember the post. 

But this article fails to mention something that is even more important to everyone affected by the oil and gas industry (and that would just about be everyone in the universe except those living under the Geico rock). There is one thing that might be more important to the oil industry than rising prices: price stability, or at least less severe volatility.

Regular readers of the blog have now seen several sources (neither of the two linked on this post) that suggest "Bakken" shale has changed "everything." One thing "Bakken" shale changed is a steady source of oil to help minimize / prevent price shocks coming out of the Mideast. Of course, if the Keystone XL had not been killed by President Obama, America's energy security would be even more secure. But I digress.

My thoughts: Buffett saw minimal downside risk to price of oil; at worse, slowly increasing price of oil, keeping pace with the global economy and the "peak oil" bogeyman. But most of all, he saw stability. Having bought BNSF, he probably spent a fair amount of time bringing himself up to speed on the Bakken.

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A Note to the Granddaughters

I always thought the Big Bang WAS the beginning. That was "so yesterday."

• There were problems with the earliest stages as described by THE "Big Bang" theory. 
• Something called "Inflation Theory" has solved "all" the serious problems of the Big Bang theory. 
• The theory explains "cosmic acceleration" which nabbed a 2011 Nobel Prize. Cosmic acceleration is the doubling of the size of our universe, not every split second, but every 8 billion years. 
• Inflation theory says that our Universe grew much like a human baby -- an accelerating growth phase, in which the size of the universe doubled at regular intervals, and then was followed by a more leisurely decelerating growth phase (just as the last trimester of a human fetus is growing less fast than it did in the first trimester).
• What we call our Big Bang wasn't the beginning but the end -- of inflation in our part of space -- and inflation typically continues forever in other places.
• Inflation generically predicts that our space isn't just huge, but infinite, filled with infinite galaxies, stars, and planets, with initial conditions generated randomly by quantum fluctuations.

Those six data points are almost verbatim from a new book on physics. I have an advance copy; it will be published January 7, 2014. It is Max Tegmark's Our Mathematical Universe: My Quest for the Ultimate Nature of Reality.

This is a very, very difficult book to read, and its target audience includes college students, hard-core readers of popular science, and physicists. Different audiences are directed to read different parts of the book.

Despite the title, there are no mathematical equations except the ubiquitous  E = mc², at least to speak of. Even without the mathematical formulas the book is very, very difficult to read, or at least to comprehend. The author writes it in language one can easily understand (assuming one is proficient in English) but the topic almost defies comprehension. Wrong. The topic defies comprehension.

I know there are a few readers of physics in the audience, but I doubt many are up to speed. You will enjoy this book. Watch for it. But be forewarned: it is very, very difficult. I think the best thing will be to plow through it and then go back and re-read it. The author does a great job of providing a summary of each chapter. The data points above are the summary points of chapter 5, "Eternal Inflation."

The "Big Bang" was not the conception, it was the delivery.