Streetwise Professor

April 30, 2014

Don’t Get Conned By Buffett’s Kindly Grandfather Shtick. He’ll Profit From the Increased Regulation He’s Advocating.

Filed under: Commodities,Economics,Energy,Politics,Regulation — The Professor @ 7:40 pm

There was another fiery derailment of a train carrying crude oil, this one in Lynchburg, Virginia. Some of the cars plunged into the James River, spilling oil into the stream that runs through Virginia via Richmond to the Chesapeake.

This is just the latest of a spate of such accidents. This is, to some extent, the inevitable consequence of the oil boom in the Bakken and Texas. The boom means that more oil has to move, and rail can adjust most rapidly to accommodate that need. Pipelines are cheaper and safer, but they take a while to build. Unfortunately, regulatory obstacles had impeded the more rapid buildout of pipelines.

To give an idea of how unexpected the oil-by-rail movement is, note that the US government (namely the Energy Information Agency) does not collect data on the volume of rail shipments. It tracks shipments by barge and pipeline, but not rail. Because oil by rail volumes were basically rounding error until the shale oil boom.

The recent spate of accidents has led Warren Buffett to call for stronger regulation, most notably, a requirement for safer rail cars. ¬†Buffett’s Berkshire Hathaway of course owns the nation’s second largest rail carrier, BNSF.

That Warren, always looking out for the public interest, and willing to sacrifice the interests of one of his major holdings to benefit us hoi polloi.


First, it’s long been known that some firms in an industry can benefit from the imposition of more stringent safety regulations. Yes, these regulations raise everybody’s costs, but some firms’ costs rise more than others. The less-impacted firms have an incentive to press for the regulations in order to raise their rivals’ costs. This raises market price. The effect on price more than offsets the effect on cost for the less cost-impacted firms.

Which means: always look askance at people like Buffett who are calling for regulation of their industry.

And this goes double for Buffett. For in addition to BNSF, Berkshire Hathaway owns the Union Tank Car Company, one of the largest manufacturers of oil tanker railcars. Meaning that some of the costs from requiring the purchase of more robust railcars goes from Buffett’s BNSF pocket into his UTLX pocket. He is, effectively, hedged against the rise in BNSF’s costs that would result from regulations requiring the use of safer cars. What’s more, his UTLX also pockets some of the costs incurred by his rivals. That’s a double win for Buffett. His rivals’ costs go up, raising prices for rail freight which benefits BNSF, and Buffett also books as profit (at UTLX) some of the higher costs his rivals incur.

Great work if you can get it.

So yeah, Buffett’s call for more stringent regulation of oil carrying railcars is totally altruistic. Totally.

It never ceases to amaze me how Buffett’s kindly grandfather shtick fools the world. He is utterly cynical in his actions and public statements. He demonizes derivatives, but engages in some huge exotic options trades. He claims he supports the estate tax out of interest of fairness and equity, not mentioning that his insurance businesses profit immensely from the estate tax (and that he can of course largely circumvent the tax). He has manipulated the silver market. And he poses as a defender of public safety, not mentioning his very strong economic interests in such regulation.

It’s not surprising that Buffett conceals his interests. What’s more surprising, and more discouraging, is that none of the media stories on his calls for tougher regulation that I have seen mention his economic interest. Reporters are either intimidated, ¬†gulled by his shtick, or shockingly ignorant of how Buffett would benefit from rules requiring railroads to upgrade their car fleets.

Just because reporters are credulous dupes doesn’t mean you have to be. Don’t fall for the Buffett shtick. Don’t pay attention to what he says. Evaluate the costs and benefits of increased safety standards on oil-by-rail shipments on the merits.

And don’t limit your analysis to rail shipments alone. Consider too the effects of expediting the approval and building of oil pipelines. Pipelines aren’t perfect, but they have a much better safety record than rail. Not that Grandpa Warren will tell you that.

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  1. Regulation makes Buffet’s “moat” bigger …
    So what’s Tom Steyer’s cynical play to make
    money blocking Keystone XL?

    Comment by mudakych — April 30, 2014 @ 9:48 pm

  2. All this may true, but you did not address the possibility that stricter safety regulation would reduce the risks of accidents whose incidence is now rising.

    Comment by aaa — April 30, 2014 @ 11:23 pm

  3. @aaa

    regulations are evil socialism, don’t you watch Fox News and read Murdoch’s broadsheets?

    Comment by keepupthegoodwork — May 1, 2014 @ 4:52 am

  4. I have run railcar loading racks. Beastly job, and a real PITA for significant volumes (10,000+ B/d) because you only get around 600 Bbl oil into each car.
    That said, I’m appalled that light crude oil is shipped in such flimsy cars — the stuff is only slightly less flammable than gasoline, and much more so than jet fuel. But it is only a marginal help, because a fast-enough crash will break any tankcar.
    A much bigger deal is why Buffets opposition to Keystone XL brings delays that just give BNSF more ton-miles.

    We might need rail for shale (small, dispersed wells), but it does not need to be long rail, thousands of miles to refineries. Why not a hundred to a pipeline terminal? Safer and cheaper.

    Comment by Robert in Houston — May 1, 2014 @ 7:14 am

  5. The point being made isn’t that one needs or does not need regulation, but that Buffett has historically been an extraordinary hypocrite – a free marketer operating in one of the most highly and inefficiently regulated markets in the US – Insurance. Why would we assume that this is not the case in mandating new Rolling stock? Doesn’t he have positions in GE, a major supplier?

    He is always in public taking “virtuous positions” that end up lining his pocket. It is truly astounding that he has gotten away with this crapola for so many years. In addition to the huge positions in derivatives while publically bewailing them, let’s not forget that General Re was on the other side of the supposedly fraudulent trades that got Hank G tossed from AIG. The use of RAP to cover his “heads I win tails we defer the losses” strategy with preferred stock purchases in Wells and others are notorious.

    His carefully crafted exterior of “Gramps” and the sage of Omaha is based on reality, but is also a very, very carefully constructed armor that seems to make him immune to criticism or lawsuits. He has fought off the insurance regulators on the value of investments for years, and almost no one seems willing to even consider that a great deal of his fortune comes form a profound understanding of regulation, particularly insurance regulation and how to profit from it.

    In summation, what he says may be right or wrong, but you can be sure that his self interest is almost always involved.

    Comment by Sotos — May 1, 2014 @ 9:41 am

  6. @aaa. What @sotos said.

    @keepupthegoodwork. Get a grip.

    The ProfessorComment by The Professor — May 1, 2014 @ 10:26 am

  7. Good post, I’ve been hoping you’d address this point for a while now. It’s a shame that when Warren Buffet was speaking out against drilling in the deep water sectors of the US Gulf of Mexico, nobody in our esteemed media pointed out that he had invested heavily in the Brazilian deep water developments, which stood to benefit from a ban in the US GoM. Given how many commentators see nefarious capitalists under every bed in hock with the government, it’s surprising how many actual rent-seekers they miss. I also it have a sneaking admiration for Buffett for the way he’s played everyone, your description of “grandfatherly schtick” is bang on.

    Comment by Tim Newman — May 1, 2014 @ 11:03 am

  8. @Tim-thanks. Wasn’t aware of the USGOM vs. Brazil issue. Another one to add to the list. Thanks for pointing that out.

    The ProfessorComment by The Professor — May 1, 2014 @ 2:59 pm

  9. @Tim-it would seem that the biggest benefit for Buffett from shutting down offshore US GoM development would not be through the effect on the supply/price of oil, but through its effect on cost. Less competition for offshore drilling equipment, speciality steel, pipes, skilled labor, etc.

    The ProfessorComment by The Professor — May 1, 2014 @ 3:51 pm

  10. Excellent post.

    One thing I’d like to clarify, though. I’ve followed the rail industry for years both as a hobby and for business. As far as I know, the bulk of the North American tank car fleet– off the cuff, maybe >80%– is owned by someone other than the Class I railroads themselves: refiners, leasing companies, and the like.

    So in that sense, Buffett with his Burlington hat on is agnostic- the Burlington will make the same amount of money whatever sort of car the oil is hauled in. If stricter regs on tank cars keep the public happy and keep that oil on the rails, so much the better. Now, Union Tank Car, as both a builder *and* a major leasing company, on the other hand, and one with access to ultra-cheap BRK capital, will pretty unambiguously benefit from regs that require a replacement tank fleet, especially if it forces less-well-capitalized players out of the business.

    You don’t become a multi-billionaire by being a kindly old duffer from Omaha…

    Comment by Brendan in NY — May 1, 2014 @ 6:06 pm

  11. You are absolutely right on Buffet being a great hypocrite and manipulator.

    Comment by Stan Ho — May 1, 2014 @ 8:11 pm

  12. I have to say that I think you are way off base in your criticism of Buffet here. The problems with shipping oil, Bakken crude in particular directly impacts BNSF should it get shut down. With the number of derailments and fires plus the Lac Megantic disaster the ability to rail crude is coming under increasing attack. It could also threaten the pace of drilling and the business of railing in materials including frac sand. Further, BH undoubtedly is insuring any number of companies in all phases of the business and Finally, at what level can a BNSF (hence BH) be held liable?

    Railing is critical, crude is hardly the most dangerous cargo hauled by rail (propane, butane, chlorine & ammonia all come to mind) however, these are shipped under several hundred pounds of pressure so the tanks are extremely thick walled just to hold the pressure. This means they can take very severe hits and not be ruptured. Crude at atmospheric pressure is shipped in much thinner wall tanks. Not as structurally sound by nature.

    I have never heard of Buffet calling for deep GOM drilling ban (or supporting the moratorium). And I think @Tim should provide a link. And besides GOM deep water drilling is now higher than ever and the Bonding requirements are much higher;-) From a quick search, I can’t see that he is invested as an interest owner in Brazilian deep water investment. The only thing I found is that he has invested in deep water drilling as a supplier (National Oil Well Varco). This would be typical of Buffet – invest in the Gold Rush Suppliers. Buffet famously never had a problem with investing in Tobacco companies and for the right price he’d invest in Keystone XL (actually Trans Canada has hosed that up politically in every way possible; their public policy incompetence has been incredible).

    The only thing looking back on your post is that he is not being altruistic. Did Buffet claim to be altruistic? If others are making that claim, they are misguided and self delusional. There is self interest and there is “enlightened self interest”. Rail cars blowing up after they derail and killing scores of people and doing hundreds of millions of damage threatens much more than a trivial supplier of rail cars.

    Comment by JavelinaTex — May 2, 2014 @ 6:18 am

  13. Professor,

    Thanks. I share your frustration over the public fawning over Buffett’s understandable but constant rent seeking and I’m glad to see your post. My blood pressure could use lowering from time to time!

    Comment by Methinks — May 2, 2014 @ 10:51 am

  14. So you are mad not at the increased spillage that the magical free market will fix magically but at Buffet’s fame and ability to run a rail road better than his competitors? You should really consider counseling, its unhealthy to be this embittered by someone who is your better.

    Comment by d — May 2, 2014 @ 12:15 pm

  15. That Buffett called for a drilling ban during Macondo was one of the stories that was doing the rounds at the time, I didn’t check it myself. Maybe it is bollocks, I don’t know. But his opposition to the Keystone XL pipelines whilst owning rail crude transport companies is real enough.

    Comment by Tim Newman — May 2, 2014 @ 3:36 pm

  16. @d. What a crock. I said nothing about the “magical free market.” Don’t put words in my mouth/pixels on my blog.

    The point is-obviously-to discount Buffett’s opinion as fatally compromised. As I say at the end of the post, when evaluating the costs and benefits of regulation, do so on the merits. If I believed in the free market unicorn, no analysis would be required.

    Not bitter. Just calling bullshit on a poser who plays chumps for fools. If you are one of them, my condolences.

    The ProfessorComment by The Professor — May 2, 2014 @ 5:03 pm

  17. @Methinks: Did the post raise or lower your BP?

    The ProfessorComment by The Professor — May 2, 2014 @ 5:03 pm

  18. @JavelinaTex. If Buffett has liability/reputational concerns, he can address those unilaterally by upgrading his own fleet. End of story. No need to call for regulation which applies to competitors: that’s what raised the red flags in my mind. With respect to insurance, if he charges the right premium that varies with the cars that his insureds use, he can provide an incentive for other shippers to take the appropriate precautions.

    And yes, obviously Buffett poses as an altruist.

    The ProfessorComment by The Professor — May 2, 2014 @ 5:17 pm

  19. @Brendan. Lease or own, doesn’t matter. More rigorous regulation of rail car safety would result in higher costs for BNSF’s competitors, either through higher capital costs or higher leasing charges. And more rigorous regulation would lead to increased sales for UTLX, either outright sales or leases of new rail cars.

    The ProfessorComment by The Professor — May 2, 2014 @ 5:24 pm

  20. Your posts generally lower my blood pressure. This one was no different! Buffett is so rarely called out and so richly deserves to be.

    Comment by Methinks — May 3, 2014 @ 4:55 am

  21. @Methinks. Glad to hear. Wouldn’t want a coronary on my conscience.

    This is a blood pressure raising weekend, though, because this is the Berkshire Hathaway annual meeting weekend, and everywhere I turn all I see is TigerBeat coverage. Meh.

    The ProfessorComment by The Professor — May 3, 2014 @ 5:57 pm

  22. LOL. Nicely put, Professor. You see, humour is a pretty good antidote. It’s the reason we survived in Soviet Russia.

    Comment by Methinks — May 3, 2014 @ 8:19 pm

  23. […] Craig Pirrong exposes the tactics of Warren Buffett and many others throughout history (link): […]

    Pingback by Using Government Regulation as a Weapon Against Competitors | Global Economy Observer — May 19, 2014 @ 12:01 pm

  24. “He has manipulated the silver market.”

    Can you (or anyone) expand on this? The only other person who I’ve seen really mention and comment on Buffett’s (and Gates’) buying of Silver is Martin Armstrong (whom I take with a salt flat, but read because I believe in reading things that I think are wrong/crazy).


    Comment by P White — June 13, 2015 @ 3:30 pm

  25. @P White. I expanded on it over three years ago.

    The ProfessorComment by The Professor — June 13, 2015 @ 5:40 pm

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