Charlie Munger on Our Crazy Obsession With Energy Independence

Energy independence is one of the only topics that doesn't incite partisan battles or ideological bickering. People have different ideas on how to get there, but nearly everyone is on the same page: We would be better off if we were less reliant on foreign nations.

Everyone except one of the world's sharpest and most original thinkers: Berkshire Hathaway's (NYSE: BRK-B  ) Charlie Munger.

Here's what Munger said about energy independence at a recent roundtable:

Oil is absolutely certain to become incredibly short in supply and very high priced .. The imported oil is not your enemy, it's your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization. And what responsible people do with a Confucian ethos is suffer now to benefit themselves and their families and their countrymen later. The way to do that is to go very slow in producing domestic oil and not mind at all if we pay prices that look ruinous for foreign oil. It's going to get way worse later ...

The oil in the ground that you're not producing is a national treasure ... It's not at all clear that there's any substitute [for hydrocarbons]. When the hydrocarbons are gone, I don't think the chemists are going to be able to just mix up a vat and create more hydrocarbons. It's conceivable that they could, I suppose, but it's not the way to bet. We should spend no attention to these silly economists and these silly politicians that tell us to become energy independent.

Let me pose a question for you. It's 1930. Oil in the United States is in glut. We have cartels to get the price up to $0.50 a barrel. Everywhere we drill we find more oil in our own country; everywhere we drill in Arabia we find even more.

What would the correct policy of the United States have been in that time? Well, the correct policy would have been to issue $150 billion of very long-term bonds and cart 150 billion barrels of Middle Eastern oil into the United States and throw it into our salt caverns and leave it there untouched until the current age.

It's easy to see that in retrospect, but who do you see who ever points this out? Zero. We have a brain-block on this issue. We should behave now to do on purpose what we did on accident then.

This is smart, and represents the kind of long-term thinking that's missing from today's economy.

But here's a rebuttal.

The most likely event that would cause a country to need its own oil resources right away -- war -- happens fast and usually unexpectedly. You can't just flip a switch and pull domestic oil out of the ground overnight, especially shale oil. It takes technology, infrastructure, planning, exploration, and innovation. That costs a lot of money. Companies like Devon Energy (NYSE: DVN  ) , Chesapeake (NYSE: CHK  ) , and Continental Resources (NYSE: CLR  ) have invested billions and committed years of effort to get where we are today. And they did it so they could profit as soon as possible, not 50 years from now. Keeping energy technology relevant enough to exploit our oil when we need it inevitably means having a profit incentive that lets companies pull it out of the ground sooner than some people prefer.

Still, the world would be better off if more of us thought as long-term as Munger

For more on energy, check out our free report, "3 Stocks for the American Energy Bonanza."  Click here to access the report. 


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  • Report this Comment On August 09, 2013, at 12:47 PM, prginww wrote:

    Munger is right. Look at the UK . . . they had a great treasure with North Sea oil. They drilled it all up and sold it at $20/barrel. Now they have to import oil at $110/barrel. Their strategy now looks pretty short-sighted.

  • Report this Comment On August 10, 2013, at 12:34 PM, prginww wrote:

    "It's easy to see that in retrospect..."

    Well, only if you don't actually push the numbers. That $1.00 per barrel that he said we should have used to buy all that oil in the 1930s grows to the roughly $100 per barrel today at a compound growth rate of about 6%, which is about what long-term debt cost in those days. And, in those days $150 billion was a pretty big bet to make without actually looking at the numbers. Doesn't sound that obvious to me.

    There are also other trends that his analysis omits. It's tempting to say that one of those trends is the progress toward energy sources that don't burn hydrocarbons, but too many politicians are obstructing that one to make it much of a trend. However, conservation has been--and is likely to continue to be--an important (and often overlooked) trend reducing our reliance on both foreign and domestic hydrocarbons. If these trends continue, we can cut our reliance on foreign oil today and never have to go back to them later either, which mitigates his underlying argument that burning ours today will require us to go back to them a higher price.

  • Report this Comment On August 10, 2013, at 12:40 PM, prginww wrote:

    Charlie Munger may be a great investor, but he's pretty lousy at macroeconomics. He would admit himself that what's important to him is the company he is considering right now, not crystal-ball gazing.

    What he's proposing is doubling-down on debt to make a future speculation. It might have worked in the 1950s when the US wasn't already terribly in debt and without much hope of ever paying it back. Right now, a lot more debt without increasing hope of future payback will cause a bond market revolt. But then, Munger is not a bond market guy, is he.

  • Report this Comment On August 10, 2013, at 1:10 PM, prginww wrote:

    It surprise me it took such a long time for some one to come with a such obvious idea. If you ask anybody about golden rules-who has a gold, makes rules, every one knows these rules. Even politicians. To apply them to real life is a complicated for most people. These rules do not apply only to jewelers, it apply to every day life. If you need loan and bank says no, this is application for rules in daily life.

    Sooner or later an oil shall be very important commodity. It will be a mater of survivorship. Make no difference how big is our military, if they have to walk or use horses, they will be greeted with smile and no respect.

    We should have only one energy policy in this country- to close as many oil wells we can on this soil. Lock it and throw away keys. This is our energy independence.

  • Report this Comment On August 10, 2013, at 1:38 PM, prginww wrote:

    The so-called rebuttal is lightweight, unconvincing.

    At an annual meeting Buffett said he agrees with Munger on this topic. That's some pretty weighty combined opinion. Though they both eschew macro predictions, there can be no better commentary on financial/economic topics than theirs.

  • Report this Comment On August 10, 2013, at 3:57 PM, prginww wrote:

    Sure we should be using all the foreign oil we can but what happens if the foreign spigot is turned off for whatever reason?!

    The goal is ENERGY INDEPENDENCE, not just Oil Independence. Natural gas, coal, hydro, nuclear, solar, wind, tide are all energy sources we must develop so that IF the foreign spigot is turned off, it is only a minor nuisance, rather than a full-blown national crisis.

  • Report this Comment On August 10, 2013, at 4:06 PM, prginww wrote:

    Munger is a great investor but he is wrong on this one. Biofuels are the long range answer and that is the way I would bet. Military aircraft have already flown on biofuel so it is now just a matter of cost and scale. And as the cost of petroleum goes up the cost issue will submerge itself. Mid range, LNG, which we seem to be able to produce limitless quantities of, will ease the transition.

  • Report this Comment On August 10, 2013, at 7:23 PM, prginww wrote:

    To not develop some of this resource we have in North America would cause continued undue dependence on the troubled Middle East and African areas. This has not served us well to date, has it?

    However, it does seem wise to disallow a free-for-all on full development.

    I'd suggest rotating the areas of the country where these shale oil plays can be developed over 30 to 50 year blocks of time, with some areas kept in longer term reserve. We can choose which to develop first based on availability of water - or the impact on the water table there - along with economic need and population density. Maybe we could start developing the Dakotas and leave more populated areas alone until we can get the fluid mix for fracking undeniably right so drinking water and agriculture is not affected.

    The problem is that the only forms of government that have been able to carry out long term plans like this, I think, have been totalitarian. And the USA inches ever closer in that direction - giving up freedoms for security - or for other "good" reasons - I think the real question is this: How can we set up the proper means - institutional and constitutional - to carry out long term objectives at the expense of shorter term political thinking and appointments?

  • Report this Comment On August 10, 2013, at 8:11 PM, prginww wrote:

    The amount of misinformation in both the article and comments is discouraging. First, it's not the Dakotas, it's North Dakota, in June there were 176 in North Dakota and 1 in South Dakota. Rather than getting energy information from the peak oil gurus of the last quarter century and the anti-fracing propaganda channel of HBO rather than seek facts, please help yourself, but save yourselves the embarrassment of spewing inaccuracies as fact.

    We have a long way to go to "run out of oil", we have an even longer way to go to "run out of hydrocarbons". Mungers comments about salt caverns is entirely ignorant of reality as well, somewhat akin to saying we could have been using CFL light bulbs powered by nuclear plants before Edison invented the phonograph.

  • Report this Comment On August 10, 2013, at 8:12 PM, prginww wrote:

    176 rigs in ND, 1 rig in SD

  • Report this Comment On August 11, 2013, at 6:21 AM, prginww wrote:

    How many rigs there are in North and South Dakota is not the point. The idea was to choose areas for development and leave other areas undeveloped. The undeveloped areas would be developed later when the technology was more advanced and universally acknowledged to be safe.

    There are no EPA standards for fracking fluids as far as I know, are there? I heard some companies were careful, yes, but others were putting gasoline in with the mix - as the fracking fluid - so it would be stuck down in the water table for a long time. Even if these items are totally false - some states such as Pennsylvania have called a moratorium in order to clarify these news items and put standards in place and monitoring systems. Seems wise, no?

    You may disagree with the article and with Munger, but it is food for thought. Point was, we have no long term plans in place. Aside from saying others have their facts or ideas wrong, sevenheart - do you have a more encouraging plan to put here in the comment area?

  • Report this Comment On August 11, 2013, at 5:23 PM, prginww wrote:

    While I actually agree with Charlie M's logic, extended to lunacy though it be, it strikes me that like many "instant money analyses" there are costs left the military costs of keeping the straights of Hormuz open...hmmm it makes me wonder if either Warren Buffet or Charlie Munger are veterans of combat elements of US Armed Forces, and no I'm not being snide, I really don't know.

  • Report this Comment On August 13, 2013, at 3:22 PM, prginww wrote:

    Munger's logic is tied into the idea that science does not continue to develop. In this case he seems to think that 50 years from now we will still be creating energy by burning fuels or organic material. The environmentalists will gleefully point out the advantages of photo voltaic conversion of sunshine which will probably be economic in another 10-20 years, it is only a short time until the fear of nuclear will disipate the same way our grandparents became comfortable with electricity(as opposed to gaslight) back i the 20's.

    If you add to this the vastly more economical methods of using energy that we continue to develop then I suggest that oil will be more a source of chemical feed stock than a fuel 50 years from now.

  • Report this Comment On August 13, 2013, at 6:36 PM, prginww wrote:

    Energy Independence will come when we build solar arrays on the moon and beam the energy to Earth via microwave. Within 50 years? Probably.......

    Would anyone in 1930 have truly foreseen the car-culture that we have now, 80 years later? Could anyone have predicted that this model would replicate to, first, the entire western world, and, now to the developing world and former third-world?

    Sheez, the best scientific minds of the time figured by now we'd have flying cars, unlimited nuclear power, and teleportation devices. Who would need a car in that world?

  • Report this Comment On August 17, 2013, at 12:07 PM, prginww wrote:

    "You can't just flip a switch and pull domestic oil out of the ground overnight..."

    Bull! In a war, you'd be AMAZED how fast the resources would be provided to do so. Look at how fast America in a Depression geared up for WW2.

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