You Should Know What Warren Buffett Knows
In March of 1931 Thomas Edison once said to Henry Ford and Harvey Firestone “I'd put my money on solar energy. I hope we don't have to wait till oil and coal run out before we tackle that.” He was of course referring to generating electricity. Why did Tom (an ‘energy’ man) tell this to Henry and Harvey, a pair of ‘automotive’ men? What was he thinking?
Whatever it was, I think Warren Buffet agrees with him. But why did Warren sell his stock in PetroChina -- for an eight-fold profit -- and buy $230,000,000 worth of stock in an electric car manufacturer and not just invest it in solar power? Does he know something more that Thomas didn’t?
Even today the debate continues to rage over the economics of gas cars verses electric cars. You can find facts and figures that at any given time will steer you one way or the other, and Lord knows there are enough opinions about the subject matter to make even Albert Einstein’s head spin. More often than not most of these opinions boil down to emotions, and it seems only a handful of the people who have an opinion want to be burdened with the facts. And whether you agree with him or not, Warren just gave us his opinion.
I have a theory about his opinion. First, let me define what I mean by ‘theory’ and then see if you agree. A theory is what you have when you have enough facts to get you past a ‘hypothesis’, and a ‘hypothesis’ is what you have when you have enough facts to get you past a ‘belief’. After ‘theory’ you end up at ‘fact’, but more often than not you only get to fact after the event occurred. So here’s my theory (based on the facts) what Warren is predicting: electric cars are inevitable, they will outnumber gasoline powered cars, and much sooner than later.
(Don’t stop reading here because this isn’t what I promised you in the title of this article. Let me connect the dots before I present you with that tidbit of knowledge.)
First, about the ‘facts’.
Facts are a funny thing… they can tell you with certainty what is (or was) but they cannot be 100% accurate about what has not happened, in so as far as the future is concerned they cannot be ‘facts’, only speculations. Depending on the facts, and the scope of these facts, predicting the future can be easy or it can be fraught with risk. Talk to most economic analyst and you’ll find that they predict the future more with opinions, and not facts, because facts don’t know the certain future; they can only point to it. A lot of their speculation is a mixture of previous facts and their ‘gut feel’.
However, if you get enough facts together they can point to the future quite accurately. Sometimes these facts don’t seem related, but an astute investor will correlate enough of these facts to point to a certainty that is worth investing in. That’s what Warren does. But I digress…we all know what Warren did, those are the facts; you want to know what Warren knows and why he did what he did.
Besides investing in electric cars, Warren also has significant investments in electric power stations, both here (in the US) and abroad. It might make sense that if you own power companies you might want to sell things that use them (like electric cars), but only if these investments make sense; like for instance, investing in toasters. You’ll always need them and they can only run on what he sells: electricity.
But right now most of the ‘facts’ about the economics of buying electric cars may tell you otherwise; it’s still may not be a good investment today because in most economies the cost of ownership (and the cost of operation) are still in favor of the gas car. Sure there are those like Thomas Edison that considered the facts that gas (and coal) will run out, but improved efficiency and other forms of supplemental energy will likely extend their economic life.
So, the economics of these energy improvement measures will continue to fuel the debate between “gas or electric?”. But not for long…
Here’s what I think that Warren knows, and why he predicts that most of us will soon be driving electric cars: Investing in an electric automotive transportation system whose fuel costs will continually increase, along with all other forms of energy (such as gas, coal or nuclear that make it’s fuel) doesn’t make much sense... unless you consider that in the near future (10, maybe 20 years tops) electricity may be virtually free.
At this point in time (while you wipe the tears of laughter from your eyes and/or contemplate shooting your computer monitor) I’m going to hide behind George Bernard Shaw’s quote “All great truths begin as blasphemies.”
Now, I’m not going to sit here and claim that I have predicted a great truth just yet, but the facts sure point that way.
About a year ago I crossed what I called the ‘energy transition’ point; it was the point at which I could finance a wind, solar and heat-pump system for my house that would in effect take me off the entire power grid AND save me money (I use electricity to cool the house, and gas to heat it.) This ‘point’ was the time where my average month fuel bills totaled up to more than what the 10-year cost of ownership would be for owning my own personal wind and hot-water solar heater. (And “No”, my bills are not that huge; combined they average about $350 to $400 a month.) Of course, after 10 years of ownership [beyond the warrantee period] my only cost of energy would be that of maintenance and/or upgrades to the equipment.
My electricity would be virtually free.
Right now your energy bill [on average] consists of mostly two parts: 20% for the maintenance of the equipment and/or overhead costs of the power company, and 80% for the fuel. When I say electricity will be ‘virtually free’, it will still cost in dollars that 20% to deliver it, but as more and more utilities companies (and private homeowners such as myself) jump in the fracas, competition for your energy dollars will get fierce, and the dollar amount for this ‘20%’ will continue to go down, just as the cost of the equipment has. Good old capitalistic economics will see to that.
Herein lays the crux of my theory, the theory the Warren is predicting to be true:
If he or I can put up ‘power plants’ today (albeit small ones at first) that can economically generate electricity from free fuel anywhere in the world, any time I want to, then why can’t you (or any other utility company) for that matter?
And, if the fuel for these power plants is always free (and unburdened by politics or geography) then the only economic part of the equation is the cost of the equipment.
Remember what I just told you about the cost of the equipment and which direction it’s headed? No one doubts that the cost to buy fuel to produce energy is going to keep going up, but most don’t consider that the cost to produce the machines that make electricity from wind and solar power will continue to go down. The timing for the economic cross-over of these two slopes in strictly based on the scale of the power plant. But even on a large scale, they will eventually cross and I think Warren knows this.
With that being said, city folks won’t be able to buy all of this equipment for some time, and maybe none of it at all (depending on location) so they may still have to buy their electricity from the utilities, but the utilities are not immune to laws of diminishing returns and the smart ones know it.
I think Warren knows it.
Now it’s a prediction based on time and economics. If you collect enough seemingly random facts, and if you can piece them together, you can predict the future with certainty. The facts predict with very high certainty that the utilities are soon to be in competition to sell us a commodity that (if we chose) many of us can get at a lower cost today and probably almost for ‘free’ in 10 to 20 years time.
So I ask you: If you knew the facts, would you choose to invest in an automotive fuel company (like gas or oil) or the car itself?
Before you answer consider this: if the fuel for these cars can generate fuel from a power source that is inexhaustible, virtually immune to political problems, free to anyone and everyone, free from taxes, surcharges and environmental legislation, it can be converted economically today, and if you knew it will be even cheaper tomorrow, could you make a sound investment in both?
Here at EV World we have known that answer for over 10 years: electricity and electric cars. Thomas Edison knew it over 80 years ago. T. Boone Pickens has some inkling of it, but now I think Warren knows it for sure, and I think he also ‘knows’ that electricity will eventually start to go down in price, not up. Sure, it may cost more each year for a few more years, but I have faith in technology; I think Warren does too.
Why else would you invest in both?
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