Are Warren Buffett and Natural Gas Killing the Golden Age?

Earlier this month, The Wall Street Journal reported that Warren Buffett's BNSF Railway will initiate a pilot program to investigate the viability of using natural gas to power its locomotives. If the program is successful, it would have wide ramifications, as the company is believed to be one of the largest consumers of diesel fuel in the country, second only to the U.S. Navy. The path from the shale gas boom to improved economic conditions, curtailed oil prices, and a stronger U.S. dollar isn't a simple one, but it does follow a fairly straight series of connections. The ultimate result of this daisy chain of causes and effects is that gold prices are under legitimate pressure for the first time in many years.

The pilot program
While outfitting a locomotive to run on liquefied natural gas, or LNG, is not a simple procedure, it has the potential to result in significant cost savings. The price of a single locomotive that currently sits at roughly $2 million could rise by as much as $1 million for early conversations -- economies of scale would presumably lower costs over time. The company didn't fully disclose how much it would cost to retrofit its 6,900 existing engines.

Against this increase, where a single gallon of diesel went for an average of $3.97 last year, the comparable amount of LNG cost less than $0.50. Given the amount of fuel a locomotive burns, the additional cost would quickly be realized in savings from lower-cost operation. This number doesn't include the necessary cost of cooling the LNG, but the savings are still expected to be significant.

The path from LNG to lower gold prices
Let's start by accepting that the path I am about to describe is necessarily simplified, but it should serve as a good primer to understanding the larger issues. To begin with, as a result of exploding natural gas and shale oil reserves, the U.S. is importing significantly less oil. The Department of Energy has seen the country come off a peak of 60% of net oil imports to an expected 32% next year, and on a smaller number. That not only improves the trade deficit, but it also improves the current account deficit. This figure, which is measured in terms of a percentage of GDP, is expected to fall from nearly 3.6% of GDP down to 1.2% of GDP by 2020.

What all of these pressures mean is that globally, oil prices stabilize and U.S. costs fall. For example, in 2008, it's estimated that we spent $216 billion on natural gas. BofA Merrill Lynch estimates that for 2012, that number had fallen to $76 billion, somewhat driven by the fact that high supplies of natural gas mean that the wholesale price in the U.S. is roughly one-third of what it is in both Europe and Asia.

From low energy prices come Chairman Ben Bernanke's bailout from the certain inflation mess he would create running the Federal Reserve's printing press at a rate of $85 billion per month. While core inflation doesn't account for the fluctuation of energy prices, lower energy prices keep the costs of goods lower than they would otherwise be. Ultimately, these factors combine to make for a strong U.S. dollar. The combination of inflation kept in check and a strong dollar are very bearish for gold. Earlier this week, Barclays Capital slashed its price target on the metal from $1,778 per ounce to $1,646 per ounce. While the firm citing falling demand for the ETF as a major catalyst for the downgrade, gold has been struggling and may continue to do so for some time.

The behavior of the golden age
Since gold peaked late in 2011, the divergence between the commodity, as represented by the SPDR Gold Trust (NYSEMKT: GLD  ) , and gold miners such as Barrick Gold (NYSE: ABX  ) and Goldcorp (NYSE: GG  ) has been significant. Much of the difference can be explained by recessionary pressures that more negatively affect operating companies than the metal itself. As the economy stabilizes -- if that is, in fact, what's happening -- gold miners may begin to close the gap. Barrick reported a net loss for both the fourth quarter and for the full year, based largely on increased production costs and other impairments; Goldcorp faced similar pressures.

Looking ahead
While this is a fairly topical review of some of the complex forces at work within the economy, it illustrates how recent developments have led to significant structural shifts in the commodities markets and the financial markets in general. You shouldn't underestimate the importance of other factors such as sequestration and the political landscape, but at very least, it's important to look far below the surface to understand how these forces can interact. Many global macroeconomic forces still favor higher gold prices, but developments in the energy market should figure centrally in your thinking moving ahead.

Goldcorp is one of the leading players in the gold mining market. For the past several years, investors have been the beneficiaries of several successful acquisitions and strong organic growth. Goldcorp's low-cost production of one of the most sought-after metals in the world continues to make this stock an attractive choice for long-term investors. To learn everything you need to know about this mining specialist, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of ongoing updates and analysis to keep you informed as key news breaks. Click here now to claim your copy today.


Read/Post Comments (13) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2013, at 11:56 AM, dw69129 wrote:

    Lots of talk about cheap natural gas. Wonder if we will ever actually see any - sure hasn't happened yet.

  • Report this Comment On March 17, 2013, at 12:00 PM, gasblogger wrote:

    A great article. Natural gas may save Obama, Bernanke and this foolish administration. Not only natural gas, but oil to. I am an advocate for natural gas over oil, but oil is still the fuel of choice for small engines, and will remain so for a decade or two. The economics are too compelling for new or newer large engines to continue burning petrol, except as a small additive in dual fuel engines. A little diesel helps start and lubricate those engines. About 10% is usually quoted, but they can also run on all diesel if LNG is not available. The dual fuel engines can be used in trucks, ships, locomotives and stationary engines of all kinds. The conversion is not cheap, but the payoff is quick. CNG can also run A class 8 truck by itself in a monofuel system.

    Bifuel pickup trucks and vans run on both, but one at a time. They have about a 600 mile range with both fuels. Large sedans, police cruisers, and any vehicle that is driven a lot of miles make good conversion candidates also.

  • Report this Comment On March 17, 2013, at 12:04 PM, gasblogger wrote:

    dw69129, check out cngprices.com You will find a lot of stations selling a GGE (gasoline gallon equivalent) for about one dollar. Average is about $2.10

    Check out conversion links at: https://docs.google.com/document/d/1Jbs_ljRvSCU7RN4kgoc--D5J...

  • Report this Comment On March 17, 2013, at 12:04 PM, bonsaibean wrote:

    Nat gas has recently been about as cheap as it's ever been, certainly in a while, so I'm not sure what the previous poster is looking for. By my way of thinking, it sure HAS happened.

  • Report this Comment On March 17, 2013, at 12:08 PM, gasblogger wrote:

    Imagine what we could save if the military, all levels of government, and the USPS converted to CNG and LNG. Also imagine how much we could save on the pass down pricing of products by reduced transportation costs, and all the wealth created developing natural gas, pipelines, conversions, maintenance, pumps, etc.

    Ron Wagner

  • Report this Comment On March 17, 2013, at 12:11 PM, dw69129 wrote:

    And if you think the railroad has or will ever pay even close to $3.97 for a gallon of diesel fuel you need to do a little more research. They still hold all of the mineral rights on the millions of acres they were given and are the largest producers of oil in the country. They pay the tiniest fraction of what a motorist pays at the pump.

  • Report this Comment On March 17, 2013, at 12:23 PM, john7thomas wrote:

    this is nothing but rank speculation, the sort of fantasy i expect on yahoo.

    so what... if any... is the practical financial advice?

  • Report this Comment On March 17, 2013, at 12:30 PM, jokerjones69 wrote:

    the only problem I see with drilling for MORE natural gas is the fact that the USA national holding for natural gas is near full capacity and they actually BURN a huge percentage of what is currently pumped out of the ground ...pointless to drill more until they build some natural gas power stations near the current wells to use up all of the available gas first .giving us Americans a much needed cut in energy costs.

  • Report this Comment On March 17, 2013, at 12:53 PM, thomasad65 wrote:

    Natural gas prices will be highly dependent on potential government regulations re fracking. If fracking is significantly restricted, gas prices are headed much higher, with widespread ramifications including gold prices.

  • Report this Comment On March 17, 2013, at 1:14 PM, CapitlalistMike wrote:

    The price of gold is almost always the result of a weakness in the dollar. Natural gas and using our own petroleum resources will help this country realize all it can be with out the restrictionist policies of the Socialist Obama. Start drilling, and quit printing.

  • Report this Comment On March 17, 2013, at 7:51 PM, Zulia007 wrote:

    John7Thomas;

    I will bet you otherwise.

    Many municipalities and other large entities are already switching to LNG.

    All the large O&G companies are examining the possibility of switching to LNG.

    Most of the Car companies are already looking at producing autos that will run on LNG.

    Keep your head in the sand and make a big bet with me!

    PLEASE!!!!!!!!!

  • Report this Comment On March 17, 2013, at 9:11 PM, tropicalbliss wrote:

    I should think that LNG would be perfect for a locomotive. They depend on weight to get traction. Turning them back into something looking more like a steam locomotive with the huge insulated fuel tank full of fuel would give them the weight and storage. Sort of like a big thermos bottle on wheels.

  • Report this Comment On March 18, 2013, at 11:34 AM, dunce1239 wrote:

    Nothing ironic about Buffets natural gas powered trains hauling oil from the Dakotas to refineries on the gulf. Oh, and how about that cost comparison that included diesel fuel taxes.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2316971, ~/Articles/ArticleHandler.aspx, 9/18/2014 5:49:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement