Hotter temperatures are causing climate-change concerns to intensify, and countries across the world are scrambling to reduce their carbon dioxide emissions. So are major corporations. Wind and solar energy are now often more cost-effective than coal, natural gas, and oil in generating electricity. Some governments are incentivizing the adoption of electric vehicles.
It shouldn't be surprising, therefore, that the conventional wisdom says the demand for fossil fuels will decline in the coming years. Not everyone agrees, though. Warren Buffett is betting nearly $35 billion that this conventional wisdom is wrong.
Buffett's biggest contrarian bet
Chevron (CVX +0.05%) ranks as Berkshire Hathaway's fourth-largest holding, with the conglomerate's position worth nearly $19.1 billion. Buffett began buying the oil and gas giant in the fourth quarter of 2020 when the energy industry was on the ropes due to the COVID-19 pandemic.
NYSE: CVX
Key Data Points
Sure, Buffett trimmed Berkshire's stake in Chevron by 2.5% earlier this year. However, that move followed a purchase of 15.8 million shares of the oil company in the previous quarter that boosted Berkshire's position by 14.4%.
Chevron isn't on board with the view that the demand for fossil fuels will drop. The company increased its worldwide production of oil and gas by 12% year over year in the first quarter of 2024. It projects even higher production over the next three years.
Because of its optimism, Chevron has invested in several major projects in the Gulf of Mexico with start-ups in 2024 and 2025. It's also investing to increase production capacity at the Tamar gas field in Israel.
Nipping at Chevron's heels
Occidental Petroleum (OXY +1.82%) trails behind Chevron as Berkshire's fifth-largest position. The conglomerate's stake in Occidental Petroleum is worth nearly $15.7 billion. I predict the oil producer will become a bigger part of Buffett's portfolio.
NYSE: OXY
Key Data Points
Buffett proclaimed Occidental as one of eight stocks he expects Berkshire would "maintain indefinitely" in his annual shareholder letter earlier this year. The legendary investor praised the company's CEO, stating, "Under Vicki Hollub's leadership, Occidental is doing the right things for both its country and its owners."
After two years of aggressive buying, Berkshire now owns 28.8% of Occidental. It holds warrants that allow it to further increase its stake at a fixed price.
Buffett noted in the shareholder letter that he isn't interested in fully owning Occidental. However, in 2022, Berkshire obtained regulatory approval to acquire up to 50% of the oil company.
Like Chevron, Occidental is focused on expanding production. The company's pending $12 billion acquisition of Midland-based oil and gas producer Crownrock is a case in point.
Has the "Oracle of Omaha" made a smart wager?
Buffett is widely known as the "Oracle of Omaha," but he readily admits he makes mistakes. Is his big bet against the conventional wisdom about fossil fuels one of them -- or is it a smart wager?
I think it's the latter. And I believe Chevron and Occidental are playing key roles in ensuring the long-term viability of oil and gas.
Both companies have invested heavily in carbon-capture technology. Hollub told NPR in December 2023 that if this technology fulfills its potential, "there's no reason not to produce oil and gas forever."
Buffett knows he's taking a risk. He told Berkshire Hathaway shareholders, "[T]he economic feasibility of this technique [carbon capture] has yet to be proven." However, Buffett has made big bets in the past that paid off handsomely. I suspect this one will, too.
