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Tuesday, Nov. 10, 2009

Dallas Morning News: Warren Buffett's crystal ball

Whenever the legendary Oracle of Omaha tosses his considerable wealth behind an investment, the rest of us should also try to gaze over his shoulder into his crystal ball. Warren Buffett isn't known for placing many losing bets.

But Buffett also is known for extraordinary financial insight, and his multibillion-dollar investment to acquire the rest of Burlington Northern Santa Fe provides an intriguing glimpse into the future of world and U.S. economies.

Some of it is good; some of it is troubling.

For one thing, Buffett expects a booming China to continue to burn coal, despite climate-change concerns, in order to produce the consumer goods Americans have come to rely on. He's also betting that coal will remain a major part of America's energy mix for the foreseeable future as the country's main source of electricity. Taken together, this is an impressive endorsement of America's future economic prowess.

However, if you had hoped the United States would move more swiftly away from its dependence on dirty coal for electricity -- or that China would dramatically clean up its coal plants -- Buffett's move suggests the opposite.

Why? The purchase is a massive wager on coal. About half of Burlington Northern's cargo is coal, and coal accounts for a lot of the rail company's revenue. It's hard to imagine Buffett making this wager if he believed the U.S. economy wasn't recovering or that pending climate-change legislation in Congress would dramatically reduce coal consumption.

There are other implications. If Buffett's investment instincts are right, the rest of us should brace for pain from higher oil and gas prices. As oil and gas prices rise, and road congestion increases, rail becomes an increasingly attractive alternative to long-haul trucking, especially for transporting such commodities as coal, wheat and lumber and imported finished goods from West Coast ports to the Midwest.