Buffett’s Bet on Rail: What Does It Mean for Transport and Energy?

The financial world was riveted this morning by billionaire investor Warren Buffett’s move to take full ownership of the Burlington Northern Santa Fe (BNSF) railroad, a $34 billion deal that ranks as the largest ever executed by Buffett’s company, Berkshire Hathaway.

warren_buffett.gifWarren Buffett (Photo: Redfin)

But what does Buffett’s purchase mean for the nation’s energy future? The so-called "Oracle of Omaha" told CNBC today that his decision was "a bet on the country" as well as a bet on the viability of cleaner transportation:

BNSF last year… moved a ton of goods 470 miles on
one gallon of diesel. It releases far fewer pollutants into the
atmosphere. It saves enormously on energy consumption and…
it diminishes highway congestion. Rails last year moved 40 percent,
more than 40 percent, over the country. They moved more than all those
trucks, just the four big railroads. It’s a very effective way of
moving goods. I basically believe this country will prosper and you’ll
have more people moving more goods 10 and 20 and 30 years from now, and
the rails should benefit.

That environmental rationale for Buffett’s deal struck some in Washington as dubious. Frank O’Donnell, president of the green group Clean Air Watch, wrote on his website that the BNSF deal was "the biggest climate story of the day," bigger even than the political maneuverings of the Senate environment committee:

This is a $34 billion dollar bet that coal will remain the
centerpiece of American energy policy in the future. Buffett clearly
believes that coal use will remain strong — and possibly grow. So
he is putting his money on a vision of America with no effective
climate policy at all — or at least one that doesn’t slow coal growth.

BNSF’s reliance on coal is indisputable; the black stuff has accounted for nearly half of its tonnage this year, and MarketWatch estimates that 10 percent of U.S. electricity comes from coal hauled by the railroad.

As coal-hauling railroads go, however, BNSF has made an attempt to distinguish itself on the energy efficiency end. The railroad is developing an emissions-free hydrogen-powered locomotive, and in May started to test-run a group of GE locomotives that cuts emissions by 40 percent over previous, dirtier models.

BNSF also has gotten on board the California High Speed Rail Authority’s plans for an initial route connecting Merced to Fresno, and its CEO has advocated for a national focus on one initial high-speed project, rather than spreading around the Obama administration’s $8 billion investment "like peanut butter."

When putting Buffett’s bet into context, however, the corporate identity of BNSF may matter less than the impact of one powerful investor’s foray into transportation.

At a time when the job-creation potential of infrastructure spending is increasingly propelling the political debate, Buffett’s interest in the transport sector could be a harbinger of greater private-sector involvement to come — thus bolstering Democratic lawmakers as they make the case for more transit, bridge, and road repair money to hasten the nation’s economic recovery.

  • O’Donnell of Clean Air Watch is right. My first thought when I learned of Buffett’s Burlington-Northern buy was that it was a bet that Congress will fail to implement a meaningful carbon price and therefore that nothing will dislodge coal from its dominant role in U.S. electricity. Maybe Buffett also has a side bet going that petroleum products like diesel will come in for a tax at some point to discourage oil imports, which would favor rail over rubber-tire freight hauling. But mostly it’s a coal play.

  • JK

    The story is that Buffet bought a railroad that hauls coal to the coal fired power plants he owns. This really isn’t about transportation or infrastructure. Per Charlie and others, it’s Buffet betting that electricity use powered by coal will continue to rise. Buffet has concluded that the U.S. will not take measures to reduce electricity use or coal use in. In other words, the Copenhagen talks will fail. The only infrastructure angle is that he may also be betting on higher gas taxes to help pay for T4. Either way, hydrogen engines pulling coal trains are eyewash.

  • I disagree. While coal is a large portion, they do haul everything. If oil prices spike again (and they will), trains have a very big advantage over trucks.

  • vnm

    This is a peak oil bet.

    If oil prices rise goods shipment will shift from trucks to trains. BNSF wins, environment wins.

    If oil prices rise electricity generation will rely more heavily on coal. BNSF wins, environment loses.

  • It’s also potentially a play on the HSR/passenger rail upsurge. He’d be in a strong position to leverage compensation and/or money to upgrade his rails. This guy knows how to drive a hard bargain and I’m sure he could profit handsomely courtesy of Uncle Sam.

  • regarding the coal aspect, a significant and increasing portion of the coal that travels on bnsf’s rails goes straight from the rockies to chicago and then onto boat to europe.

    europe has made it a priority to to wean itself off of russia’s natural gas after the recent incidents of them turning the tap off and leaving europe in the lurch. the coal from the rockies is highly sought after by europe for being “cleaner” than the coal dug up from other regions, which is bizarre because we are selling our “clean” coal overseas while using “dirty” coal.

    http://www.eia.doe.gov/cneaf/coal/page/special/exports_imports.html

    anyway, i don’t see this as an affirmation of coal use in the u.s., as some are arguing but for coal use in the rest of the world.

    also, of any railroad that amtrak uses to carry it’s passengers on, it has one of the best working relationships with bnsf and has for years at a time when amtrak is expanding it’s reach into other areas served by bnsf. i’ve travelled cross country via amtrak at least 15 times and have talked with numerous people working for railroads on this. this is a good thing.

    dude has made billions off the railroads, whether directly or indirectly. he is well known for using heavy rail traffic data as his own set of economic indicators and uses this to influence his multi-billion dollar decisions. he is, for all intents and purposes, mr. railroad and for him to buy bnsf seems pretty natural and innocuous to me.

  • Whatever kind of bet you think it is, it’s really a bet that Buffett will make more money. So how can we convince Warren to make some “bets” about active transportation, improving transit, and increasing street safety? Because if viable businesses can be built around doing this, more people will make monetary bets on the things that will build livable cities.

  • Ian Turner

    Steven,

    Buffett makes money on his bets because he selects companies that make money, not the other way around. He’s actually quite open about his investment strategy and you can follow it too if you are so inclined. Convincing him to invest in e.g. bicycles isn’t going to automatically make that industry more profitable, any more than buying government bonds would result in frugal government operations.

    Cheers,

    –Ian

  • Dean

    In addition to transporting goods efficiently, rail companies own a large amount of prime real-estate in and between major cities. Significant profit will be made as cities increase rail use in their transit mix and find all the good routes are already owned by rail companies.

  • he makes money either way here. ports, coal. what we don’t know is how fast the US shifts from interstate trucking.

    it seems to me this investment is consistent with ‘plan b’ http://tr.im/readplanb and such fast-switch proposals.

    it’d be so much fun if that company then advocates electrifying freight rail.

  • Something I haven’t heard much mention of is the rail rights-of-way that come along with this purchase. They would be almost impossible to replace nowadays, and would be valuable in the context of additional transmission lines from distributed generation facilities in the west (solar, wind), which would also play well with Buffet’s stake in MidAmerican energy. Dunno. Just a thought.

  • Ric Tan

    I’m not saying that O’Donnell is wrong, but I do think that Buffet has a lot of flexibility. I agree w/ Zane above, and he beat me to it- With the acquisition, Buffet has flexibility to add energy transmission lines which may help his alternative energy stakes and hopefully down the line- all of us. In the end, I may just like the man.

  • Interesting. Berkshire Hathaway also owns GEICO insurance. I was picking up my son from school one day. I was in the school zone and a car with a GEICO logo blew my doors off, but slowed down enough to give me the finger and to show me with his beet-red face and screaming that he didn’t appreciate me slowing him down. I contacted GEICO about this and was told flat out school zones are speed traps and revenue generators. They do nothing for safety. The driver did nothing wrong. And he closed with a philosophical musing about people today not minding their own business.

    This was my second very bad dealing with that insurance company. The first was when a GEICO customer hit me and the claims adjuster called a “fat mouthed liar”.

    Of course I’m sort of ranting here and this has little to do with rail. I guess my point being I don’t think this move by Buffett is all that significant and I doubt it’ll do anything to improve rail service in North America.

  • Can you even comprehend what that $34 billion dollars feels like? I can’t even fathom one million dollars, let alone 34 billion. What has happened with the railroad since Warren Buffet purchased it? Has it helped the economy or the transportation and energy industries at all?

ALSO ON STREETSBLOG

STREETSBLOG USA

LaHood: Rail Is the Way Forward

|
Last week in Philadelphia, the Obama Administration unveiled its comprehensive plan to connect 80 percent of Americans by high-speed rail. And it wasn’t long before the proposal attracted critics, like Robert J. Samuelson of the Washington Post. Much of the blowback centers around the argument that rail is too costly at a time when budgets […]
STREETSBLOG USA

What Would Meaningful Amtrak Reform Look Like?

|
For the past two years, Amtrak has been under constant attack from House Transportation Committee Chair John Mica (R-FL), who has used his gavel to bully the rail company. He likes to call it a “Soviet-style” monopoly and he goads it for losing money on everything from long-distance routes to food service. His vitriolic diatribes […]
STREETSBLOG USA

Trucking Industry Imposes Up to $128 Billion in Costs on Society Each Year

|
Cross-posted from City Observatory During National Infrastructure Week earlier this month, we again endured what has become a common refrain of woe about crumbling bridges, structurally deficient roads, and a lack of federal funding for infrastructure. This call for alarm was quickly followed by yet another Congressional band-aid for the nearly bankrupt highway trust fund […]