May 05, 2008
Warren Buffett And Charlie Munger On Peak Oil

On a day when oil went over $120 per barrel you might wonder which direction production and prices are headed. Well, the richest man in the world (Warren Buffett or WB below) asked his long time business partner (Charlie Munger or CM below) where he sees oil production in 25 years. Charlie Munger sees oil production down in 25 years and Warren Buffett thinks a peak is possible in 5 to 10 years.

WB: Oil wonít run out - it doesnít work this way. At some point the daily productive capacity will level off and then start declining gradually. There is the depletion aspect and the decline curves. We are producing 86m barrels per day or so, more than ever produced. We are closer, by my calculations, to almost our productive capacity, than we have ever been. I think our surplus capacity is less, and quite a bit less, than in past. Whatever that peak is, whether 5 or 10 yrs, the world will adjust, and we will think about it. Adjustments will cause demand to taper off. I donít know how much oil is there, but there are lots of barrels of oil in place. We never recover total potential. We may have better engineering recovery in future. It is nothing like an on and off switch. You may still have enormous political considerations to get access to avail oil since it so important. There is nothing you can do over short period of time to wean world off oil.

CM: If we get another 200 yrs of growth dispersed over the world while population goes up, all oil coal and uranium will run out so you will have to use the sun. I think there will be some pain in this process. I think it is stupid to use up hydrocarbons of world so quickly. Stupid when there are few and limited alternatives. What should we have done? We should have brought all the oil over from Middle East and put it in our ground. Are we doing it now? No. Government policy is behind in rationality. If we have prosperous civilization, we must use the sun.

WB: Charlie, what is your over/under for oil production in 25 yrs?

CM: Oil in twenty five years, down.

I think that's a very easy call. Trying to call the next 5 years is harder because it is hard to guess how much the oil megaprojects will slip from their scheduled completion dates. Generally the big projects have been taking longer. We might already have peaked in conventional crude production. Or maybe a bunch of megaproject production start dates will line up and cause a new record in production.

Given where China is going with its oil demand (way way up) Buffett grasps what this means for prices.

WB: If this is true, that is big number. China is doing 10m cars this year, so down in 25ys is significant.

44 out of 1000 people in China own a car as compared to about 800 per 1000 in America (and some of us own multiple cars). China's car sales grew by 22% in 2007. China is going to bid up the price of oil so high that Americans will get a shrinking slice of the pie. American daily oil consumption might already have peaked.

We need good batteries to let us shift a substantial portion of all cars to electric power. I wonder whether Warren Buffett expects Burlington Northern Santa Fe (one of his investments) to electrify some of its rail lines once oil hits much higher prices points.

Share |      Randall Parker, 2008 May 05 07:54 PM  Energy Fossil Fuels


Comments
cancer_man said at May 5, 2008 11:08 PM:

"China is going to bid up the price of oil so high that Americans will get a shrinking slice of the pie."

Randall,
What kind of cars do you think Chinese will drive in 2025? Why does oil cloud your thinking so much that on this issue 2008 and 2025 are the same technological levels?

Aaron Dunlap said at May 6, 2008 6:56 AM:

You tell me... which estimate seems most likely based on production history?

chart

Jerry Martinson said at May 10, 2008 10:19 PM:

Randal Parker wrote:

"We need good batteries to let us shift a substantial portion of all cars to electric power. I wonder whether Warren Buffett expects Burlington Northern Santa Fe (one of his investments) to electrify some of its rail lines once oil hits much higher prices points."

I doubt the major freight railroads are going to electrify. The price of diesel would have to go up a lot more - perhaps 10x for that to make sense. It costs a lot to electrify a track. It also costs a lot to maintain them. This is slightly offset because electric locomotives are cheaper to maintain. However, electrification only makes cost sense in ultra high-density rail corridors - usually passenger rail corridors where the benefits of faster acceleration are also a big plus. In the US this is pretty much limited to the northeast corridor and in the west to a SF peninsula corridor although adding some passing tracks on some of the lines down in LA/OC/SD might actually make the passenger rail system there practical.

I think it would make a lot more sense to double track in some congested corridors and improve railyard operations so that the speed of cross-country "saladbowl expresses" can get to be time-competitive with trucks. Rail is already a lot more fuel efficient than trucks. The US generally has the best and most heavily used freight rail system in the world but the cross country time is pretty slow.


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