Warren Buffett versus the Soccer Moms
US Economy to be rebuilt around rail links?
by Michael Hampton, AKA Dr.Bubb. November 10, 2009
Print"If you need a car to live there, Do not buy there!" - how long before we hear that advice across America?
Last week Warren Buffett's Bershire Hathaway invested $44 billion in a railroad. This represented BH's largest investment yet. Mr. Buffett characterized it as a "bet on America's future." Much of the investment is his own money and so Mr. Buffett must be right about the rationale. But if the investment is a "bet on America", it is a bet on a different sort America than we have today. Dig deeper and you will see that Buffett is betting on higher energy prices and a different transport focus.
Approximately half of Americans live in the suburbs. In fact, this living arrangement, which has received so many trillions of investment from Americans over the past 8 or 10 decades, can be seen as a huge bet on cheap oil prices. This is a bet that many Americans may have feared they were losing when oil prices shot up to $146 last year, and gasoline pushed through $4. Oil prices fell back 12 months ago, only to start rising again when the economy stopped its freefall in 2009. People should be able to see, that if we do have an ongoing recovery, then eventually a recovery will bring back higher oil. Thinking suburbanites must be worried, and the deeper thinking ones, may realize that Warren Buffett's huge investment is a warning that the days of cheap oil are truly ending.
"We live here for our children," is a response that you are likely to hear from many US suburbanites if you ask why they live so far from the cities, and maybe with a long drive to their jobs too. Giving a lawn and space to young children, may seem like the right and caring thing to do, and it involves various sacrifices on the part of the parents, especially the ones who commute. A typical pattern might be where one or both partners drive long distances to work, dependent on a car and regular gasoline purchases for transport to the office. Where there is "a full time Mom," her life maybe be dedicated to chauffeuring her children to school, and various other activities. Hence, she calls herself a "soccer mom", and she may drive an SUV or some other vehicle large enough for herself and her children. This is not the sort of America that Warren Buffett is betting upon. In fact, as James Howard Kunstler has put it, "the American suburban living arrangement has no future," It seems that Buffett agrees. Cars and trucks will be the vehicles that lose out to railroads.
Ironically, those who live in the suburbans may have done a disservice to their children and their grandchildren. An America addicted to foreign oil, is an America with a bleak future. The US now imports almost 2/3rds of its oil requirement, with most of that used for transportation fuel. And that addiction is not going to go away as long as Americans live in the suburbs and commute by car. For the first time in history, the number miles driven fell in 2008. So a recession may seem like a partial cure for the addiction. But we live in a world of global oil demand. The US has 76 times as many cars per capita as China. But new car sales in China are expected to be 29,000 cars per day in 2009, which surpasses the US by about 10%. India, too is showing a big increase in car sales; up 5% to an expected 3,300 cars per day. Once they have a car, the new drivers will need fuel for it, and oil consumption in emerging countries will grow, whatever happens in the US. In a Post-Peak oil world, we cannot afford even one oil consumer on America's scale, let alone two or three.
The real nightmare scenario for America will come when the oil price rises as the dollar falls. A collapse in oil prices is inevitable given the rate at which America is borrowing and spending money from overseas creditors. When the dollar collapse happens, the dollar oil price is going to go much higher. Knowledgeable observers like Matthew Simmons have spoken about $400 oil and $10 a gallon gasoline prices.
Many companies are looking for alternative ways for powering the auto fleet. Hybrids may help, and so may electric cars, but that is not going to change the fact that car owners in other countries will keep pushing the oil price up. The real long term solution is to change where Americans live, and severely curtail the amount of driving that they do. This will mean an end to many American suburbs, especially those in the far away "outer rings." Cities and small town will need to densify around their inner cores, and around their rail hubs.
That is the real bet that Warren Buffet has made. He has bet against the Soccer Moms. The suburban car users had better see that they and their families are losing the bet on cheap oil. The sooner they begin to examine their lives, where they live, and how dependent they are on a scarce global resource, and begin to make the dramatic adjustments that are needed, the greater the chance they and their children will survive the inevitable changes that Warren Buffett has so clearly signaled by his largest ever investment.
Copyright © 2009 Michael Hampton
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