Why Would Buffett Indefinitely Maintain His Stake in Occidental Petroleum?

Warren Buffett released his annual letter to Berkshire Hathaway shareholders last Saturday, mentioning that “we expect to maintain Occidental Petroleum indefinitely.” At yearend, Berkshire owned 27.8% of Occidental Petroleum’s common shares.

Why would Buffett indefinitely maintain his stake in Occidental Petroleum? The main reason might be that while oil production is declining, oil demand is expected to remain strong for a long time.

Most pundits insist EVs are far more efficient. But GR believes the ICE is clearly the winner once the energetic costs of both the battery and the renewable power required to make "carbon-free" EVs are considered.

Although governments can encourage EVs through either subsidies or ICE bans, these measures will likely fail, as consumers will ultimately refuse to embrace a new technology that sports inferior energy efficiency. Better examples couldn't exist than Ford and Hertz dramatically scaling back their EV initiatives due to lower-than-expected consumer interest.

Policymakers often tout Norway as the ultimate EV success story. Thanks to massive subsidies, EVs made up 80% of all Norwegian new car sales in 2022 and currently account for 20% of the total car fleet.

Although oil demand and carbon emissions have fallen by 15% since 2010, most of this is unrelated to EV sales. Over the period, total oil demand fell by only 34,000 b/d, with gasoline and diesel making up a mere 10% of the decline. Most of the decline came from heating, lighting, and petrochemical demand, which GR estimate collapsed by more than a third. Despite 20% of all vehicles on the road now being electric, Norway's gasoline and diesel demand fell by a mere 4%.

Oil investors turned extremely bearish during the fourth quarter. Worries over perceived strength in US shale production and fears of potential recession-related demand weakness drove prices lower. While everyone is worried about “peak demand,” GR think that “peak supply” is much more likely.

In an unexpected move, Aramco, the Saudi national oil company, announced the Kingdom had directed it to maintain its "maximum sustainable crude capacity" at 12 m b/d and to abandon its longstanding plan of increasing production to 13 m b/d. The financial press took the announcement to suggest the Kingdom expects oil demand will soon peak.

Without the shales, it seemed impossible that US production would continue to grow. From January to December 2022, US crude production rose by a robust 700,000 b/d. GR predicted this growth slow dramatically as 2023 progressed.

The only source of non-OPEC growth is grinding to a halt, GR suggests that oil demand will again surprise the upside in 2024, and inventories, artificially boosted by Strategic Petroleum Reserve (SPR) releases over the last two years, will begin to draw again strongly. Investors will be forced to take notice.

Source: Goehring & Rozencwajg