Recently, billionaire investor Charlie Munger (Trades, Portfolio) took part in an interview with the Australian Financial Review after making a substantial investment in one of his favorite private Australian companies.
As usual, the interview was full of informative tips for investors, and one of the topics discussed was the role of hydrocarbons in the global energy system. Munger's comments on the topic seem to shed some light on Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) current interest in oil companies, specifically Occidental Petroleum Corp. (OXY, Financial) and Chevron Corp. (CVX, Financial).
Munger on oil companies
When he was asked about the role hydrocarbons play in the global energy system, Munger said he thinks "we're going to be using fossil fuels for a long time ahead, because we have to."
He went on to add:
"If you stop to think about it, the present population of the world couldn't eat if we didn't use natural gas to create nitrogen fixer fertilizer. We're not going to get rid of fossil fuels, we're just going to use less of them."
One of the biggest publicly traded oil and gas companies is the giant Chevron, where Berkshire already owns a multibillion-dollar position. The American company owns Western Australia's Wheatstone project, the North-West Shelf LNG operation. It also has an interest in the massive $54 billion Gorgon gas project, which Munger called a "brilliant feat of engineering."
The billioniare continued:
"Chevron is very good at that kind of engineering and it was very desirable to Australia to get that wonderful natural gas...But it required a certain amount of patience on Chevron's part. That thing was very expensive."
And on the topic offer renewable energy, Warren Buffett (Trades, Portfolio)'s right-hand man declared:
"I think we'll be using fossil fuels for a long time ahead. And I also think more of the world's power generation will come from renewables. Both things are going to happen.Berkshire is one of the biggest creators of renewable energy in the United States. In Iowa, where we own most of the electric utilities, way more than half of all electricity generation comes from renewables."
There are three main takeaways from these comments.
First of all, we can see why Munger and Buffett decided to invest such a large chunk of Berkshire's cash in Occidental and Chevron (in fact, it is still buying Occidental).
The two investors believe the world is not going to move away from oil and gas anytime soon. With that being the case, they have taken advantage of Mr. Market's short-term mentality to buy a significant stake in one of the most efficient oil producers in the U.S. at a discount price.
It is likely this mentality also formed the basis of the decision to buy a $25 billion position in Chevron (according to Berkshire's first-quarter 13F filing, the company may have increased the holding in recent months).
However, based on Munger's comments, it also seems likely that Buffett pulled the trigger on Chevron due to its experience constructing large projects, which will only become more critical as the global economy expands and the need to get more energy out of the ground at a lower cost increases.
Chevron is also a leader in liquefied natural gas, which is likely to become an increasingly important component of the energy mix as the world tries to wean itself off hydrocarbons.
The third and final takeaway is the fact that while Munger, Berkshire and Buffett might be investing in oil and gas, they also recognize the power of renewable energy.
That is why the conglomerate is spending so much to increase its renewable energy generation (as Munger said, it is one of the largest investors in the U.S.). This reflects the billionaire's belief the world will use more renewable energy but also continue to use hydrocarbons.
