Why Buffett Keeps Buying Oil and Gas Companies’ Stocks – R Blog


Berkshire Hathaway (NYSE: BRK.B) bought shares of Occidental Petroleum Corporation (NYSE: OXY) in the first quarter of 2023 again. Recall that Warren Buffett’s fund has been investing in this company for the fifth straight quarter. Following the deal, Occidental Petroleum Corporation became the sixth largest company in the fund’s portfolio by the volume of investments. Moreover, Berkshire Hathaway acquired the stock of Chevron Corporation (NYSE: CVX) which is also involved in the oil and gas sector.

Today we will try to explain why the Oracle of Omaha is investing in these companies while green energy is gaining in popularity and attracting more and more investments and the oil and gas sector is getting considerably lower investments. We will take a look at the energy sector and analyse how much demand for conventional energy sources has declined given that there are more environment-friendly and efficient options.

Contents

Most popular energy sources

According to BP Statistical Review of World Energy and Our World in Data, worldwide energy consumption has increased 15.3% from 152.96 to 176.43 TWh (terawatt per hour) from 2010 to 2021 inclusive.

Energy consumption in 2010

Energy consumption in 2021

Worldwide behaviour of coal demand

Out of the energy sources listed above, coal is one of the oldest and least environment-friendly. In addition, more efficient alternatives have emerged with time. Having that in mind, it can be assumed that demand for coal should have decreased. But according to the International Energy Agency (IEA), the level of worldwide coal consumption is going up: this figure was 70,160 PJ (Petajoule) in 1978, while in 2020 it has increased to 157,164 PJ.

Worldwide coal consumption chart
Worldwide coal consumption chart

Note that since 2002 coal consumption in China has seen a sharp increase. At the same time, the Celestial Empire has actively started to mine coal: over the last 30 years coal output has increased from 1.04 billion to 3.69 billion tons. Moreover, the country still continues to work new coal mines.

Why is the demand for coal growing?

Hydrocarbons and nuclear power, which are more environment-friendly, did not reduce the use of coal to zero but supplemented the list of energy sources. This has probably happened due to the growth of world GPD and the planet's population. These factors boosted global energy demand.

According to World Bank national accounts data and OECD National Accounts data files, world GDP has grown from 10.9 trillion to 86.8 trillion USD from 1960 to 2021 inclusive.

World GDP growth chart
World GDP growth chart

If world GDP continues to grow, renewable energy sources will also most likely be unable to replace today’s main sources and will be used along with them.

Investments in the oil industry

If world GDP continues growing, it means the need to at least keep future oil production at current rates. This will help avoid oil shortage while energy consumption rises.

To maintain the production capacity, it’s necessary to invest in the development of new deposits in order to avoid depletion of available reserves and meet demand. But given a trend for renewable energy sources, financing of new oil deposit development has reduced over the past few years.

According to the Secretary General of OPEC Haitham Al Ghais, the oil and gas sector requires investments of 500 billion USD per year, while the incoming amount is much less. Based on the IEA data, the volume of investments in the oil and gas sector is at the level of 366 billion USD per year, which is 24% less than the amount for 2018.

Chart of investments in the oil and gas sector
Chart of investments in the oil and gas sector

The situation with drilling rigs also confirms that the volume of investments in the oil and gas sector is declining. For example, their number in the US has dropped 37% since 2018.

The number of crude oil drilling rigs in the US
The number of crude oil drilling rigs in the US

What can reduce the demand for hydrocarbons?

Renewable energy has a serious drawback: it is unstable and depends on the environment. Innovative technologies are being developed to minimise the impact of these factors, but they make power production more expensive. In the future, nuclear fusion energy may become an alternative. Its main advantages:

However, the use of nuclear fusion as a commercial energy source is still a challenge for mankind: it is expensive, requires the development of innovative technologies, and has not been scaled up yet. Scientists and engineers do not have accurate information on how much time it will take to implement this project.

Summary

Berkshire Hathaway first bought Occidental Petroleum Corporation stock in 2019 and added Chevron Corporation shares to the portfolio in 2020. A decline in investments in oil production became noticeable already in 2019, with the trend continuing over the following years. Since then, Occidental Petroleum Corporation shares rose 24% and the stock of Chevron Corporation gained 97%.

However, the fund does not lock in profits but continues to buy stocks of these companies. It can be assumed that Warren Buffett counts on further growth of these shares which is possible if oil prices remain the same or rise. Such a scenario is possible due to continuing growth of world GDP and reducing investments in the oil industry.

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Material is prepared by

He has been in the financial market since 2004. Since 2012, has been trading stocks in an American exchange and publishes analytical articles on the stock market. Actively participates in preparing and delivering RoboForex educational webinars.



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