Tuesday, January 24, 2012

Keystone Pipeline Controversy: Warren Buffett Profits from Obama’s Policies

From Bloomberg,

Warren Buffett’s Burlington Northern Santa Fe LLC is among U.S. and Canadian railroads that stand to benefit from the Obama administration’s decision to reject TransCanada Corp. (TRP)’s Keystone XL oil pipeline permit.

With modest expansion, railroads can handle all new oil produced in western Canada through 2030, according to an analysis of the Keystone proposal by the U.S. State Department.

“Whatever people bring to us, we’re ready to haul,” Krista York-Wooley, a spokeswoman for Burlington Northern, a unit of Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in an interview. If Keystone XL “doesn’t happen, we’re here to haul.”

The State Department denied TransCanada a permit on Jan. 18, saying there was not enough time to study the proposal by Feb. 21, a deadline Congress imposed on President Barack Obama. Calgary-based TransCanada has said it intends to re-apply with a route that avoids an environmentally sensitive region of Nebraska, something the Obama administration encouraged.

The rail option, though costlier, would lessen the environmental impact, such as a loss of wetlands and agricultural productivity, compared to the pipeline, according to the State Department analysis. Greenhouse gas emmissions, however, would be worse.

If completed, Keystone XL would deliver 700,000 barrels a day of crude from Alberta’s oil sands to refineries along the Gulf of Mexico, crossing 1,661 miles (2,673-kilometers) over Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas.

I am more convinced that Mr. Buffett’s investing strategy has been overhauled, from value to political entrepreneurship (cronyism).

Considering Mr. Buffett’s age, perhaps his desire to get continued accolades from the investing world by generating exemplary returns on investment, has become the highest priority. In short, I think Mr. Buffett’s ego has been prevailing over his former style. And a higher time preference for Mr. Buffett’s translates to a portfolio with greater exposures on short term positions (theoretically extrapolates to higher risks).

And aside from the narrowing windows of patience, Mr. Buffett perhaps recognizes the potential blowback from the economic medicine analogy which he often uses to justify government’s intervention in the economy.

In his flagship company, Berkshire Hathaway’s 2009 shareholder meeting Mr. Buffett said,

Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.

Such environment would stymie ROIs.

So given the current circumstances, one major way to preserve his reputation would be to take on the political route to squeeze out ALPHA [return in excess of the compensation for the risk borne-wikipedia.org]: lobby and use the government policies to put a kibosh on prospective competition.

At the same time, political privileges not only reduces the short term risks but also provides profits to his company whom has been positioned to profit from policies of 'economic medicines' running on huge dosages (inflationism).

We have accounted for Mr. Buffett’s embrace of cronyism where has previously profited from bank bailouts.

Obama’s policy of “picking winners” in denying the permit for Keystone pipeline project has favored Mr. Buffett’s interests.

And to reciprocate, it’s no wonder the Sage of Omaha has been fervently campaigning for President Obama’s reelection bid, where Mr. Buffett has been one of Obama's major fundraiser.

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