Wall Street Journal

November 4th 2009

Warren Buffett on Monday made an offer to purchase all the remaining shares of Burlington Northern Sante Fe railroad in a $26B deal, and has been called by some a massive bet on coal.


November 4, 2009, 9:29 AM ET
Trainspotting: Warren Buffett’s Big (And Safe) Bet on Rail
Is Warren Buffett’s $26 billion purchase of Burlington Northern Santa Fe railroad a bet on 19th-century industry or the 21st-century economy? Neither, it seems—it’s the perfect hedge.

Associated Press
Start your engines
The huge deal by Mr. Buffett’s Berkshire Hathaway was first and foremost described as “an all-in wager on the economic future of the United States,” a continuation of Mr. Buffet’s preference for investing at home. That economic future will include plenty of imports, argues Barron’s, and nothing like railroads to move goods from West Coast ports to the rest of America.
Others see the rail acquisition as the clearest bet yet on two key planks of the Obama administration’s policies: Infrastructure and climate change. Rail got plenty of goodies in the stimulus package, and is in line for more in the next transportation bill.
What’s more, since the administration is eager to reduce greenhouse-gas emissions from transport, including shipping, plenty of folks see a brighter future for rail freight. That’s because trains are more efficient at moving goods than tractor trailers. Even without climate policies, rising oil prices alone made rail more attractive, the WSJ notes:
During the past decade, as rising fuel prices, congestion on the roadways and price wars staggered trucking, railroads re-emerged as a fuel- and cost-efficient means of moving goods — especially commodities such as coal, wheat and lumber, and imported finished goods arriving at major ports.
Note that “coal.” About half of Burlington Northern Santa Fe’s cargo is coal, from the huge coal fields around Wyoming, notes Reuters. Coal accounts for one-quarter of BNSF’s revenue. And coal accounts for about half of the electricity generated in the U.S. today.
That makes Mr. Buffett’s deal basically a massive bet on coal, argues Brad Plumer at The Vine.
But isn’t King Coal dead, or at least being dethroned? Washington certainly wants to clean up the energy mix, which would put coal under pressure. But so far, the energy and climate bills are going nowhere in Congress.
In any event, one key aspect of both the House and Senate energy bills is finding a way to keep coal in the energy mix, by boosting “clean coal” technology. That would enable U.S. power companies to keep using coal—more of it, in fact, since carbon capture and storage technology requires more coal consumption to generate the same amount of electricity.
In other words, whether the U.S. fundamentally resets its economy or continues business as usual, Burlington Northern Santa Fe seems well-positioned for the ride.