2012: What are your views on coal and natural gas?

ANDREW ROSS SORKIN: Thank you Warren. This question comes from a shareholder who works at a coal mining company and he asked the following:

“Burlington Northern and MidAmerican are two key links in a critical supply chain. Can you describe your views on coal and natural gas investments, and can you discuss how the current low-price environments impact the prospect for each of these businesses?

“You seem to have created an elegant hedge. As Burlington Northern suffers from the decline in coal, MidAmerican may benefit from the fire sale in its fuel sources.”

WARREN BUFFETT: Yeah. Well, MidAmerican will never really benefit or be penalized too much by the price of coal, because if coal is cheap, the benefit is going to be passed on to customers, and if it’s expensive, the costs are going to be passed on.

You know, MidAmerican really is a — it’s a regulated public utility. It has several — we have two MidAmericans. We have a MidAmerican Holding and a MidAmerican that operates in Iowa, then we have utilities on the West Coast.

But those utilities are pass-through organizations. They need to be operated efficiently in order to achieve their rate of return, but if they are operated efficiently and in the public interest, whether coal or labor, whatever it is, may go up or down, really doesn’t affect them, although it affects their customers.

Coal traffic is important to all railroads in the United States, and coal traffic is down this year.

This may interest you. This year, in the first quarter, kilowatt hours used in the United States went down 4 percent — 4.7 percent. That is a remarkable decrease in electricity usage, 4.7 percent, and that affected, of course, the demand for coal.

But the other thing that’s happening, as you mentioned, natural gas got down under $2 — it’s a little higher now — but it got down under $2 at the same time oil was $100.

And if you told Charlie or me five years ago that you’d have a 50-to-1 ratio between oil and natural gas, I think we would have asked you what you were drinking.

Did you ever think that was possible, Charlie?

CHARLIE MUNGER: No. And I think what’s happening now is, to use your word, it’s idiotic.

We are using up a precious resource, which we need to create fertilizer and so forth, and sparing a resource which is precious but not as precious, which is thermal coal.

If I were running the United States, I would use up every ounce of thermal coal before I’d touch a drop of natural gas. But that’s — conventional view is exactly the opposite. I think those natural gas reserves we just found are the most precious things we could leave our descendants.

I’m in no hurry to use it up, and the gas is worth more than the coal.

WARREN BUFFETT: Despite the wild things we’ve seen in pricing, particularly this ratio of natural gas prices to oil, you can’t change — I mean the installed base is so huge when you get into electricity generation — that you can’t really change the percentages too much, although there has been a shift in recent months.

Where gas generation is feasible, it has supplanted some coal generation. And certainly in the future, you’re going to see a diminution in the percentage of electricity generated from coal in this country.

But it won’t be dramatic because it can’t be dramatic. You just can’t — the megawatts involved are just too huge to have some wholesale change.

It’s going to be very interesting to see how this whole gas-oil ratio plays out, because it has changed everyone’s thinking, and it’s changed in a very short period of time. I mean, three years ago, people wouldn’t have said this was possible.

CHARLIE MUNGER: Yeah. The conventional wisdom of the economics professors is if it happens in a free market it must be OK. It will work out best in the end.

That is not my view with 100 percent accuracy. I think there are exceptions to that idea. And I think it’s crazy to use up natural gas at these prices.