Low oil prices mean producing states under severe pressure
OMAHA, Neb. _ Billionaire Warren Buffett said the U.S. economy appears weaker than he thought it would be as recently as last fall, but that doesn’t change his optimistic long-term view of the country’s prospects.
Buffett appeared on CNBC Monday and addressed a variety of topics after releasing his annual letter to Berkshire Hathaway shareholders over the weekend. The more than 90 companies owned by Berkshire give Buffett a complex and detailed view of how the economy is affecting different U.S. sectors.
“Business is a little softer in many places than I anticipated four or five months ago. That doesn’t mean it’s in reverse,” said Buffett, who is Berkshire’s chairman and CEO.
The economy continues growing slowly, and Buffett is confident the U.S. economy will improve over time, but low oil prices have had a significant impact.
Thousands of jobs have been lost in the oil industry, the budgets and local economies of producing states have come under severe pressure and energy companies have had billions shaved from their market value. Yet Buffett said that the benefit for the vast majority of Americans trickles in slowly every time they fill up their gas tanks.
“The country will grow in value over time,” he said.
Over the past six months, Berkshire has built up a 14 per cent stake in oil refiner Phillips 66. Buffett said it’s wrong to think of that investment as a bet on oil prices because refiners, who are paying a lot less for the crude they turn into gasoline and other fuels, can turn a huge profit when oil prices fall.
But one of Berkshire Hathaway’s operations has been damaged by those plunging prices.
Because gas prices are so low, people are driving more, and the number of vehicle accidents spiked.
The National Safety Council recently estimated the number of traffic deaths in the United States rose 8 per cent from 2014 to 2015, the largest year-to-year percentage increase in a half-century.
Underwriting profits at auto insurer Geico, which is owned by the conglomerate, plunged from $1.16 billion in 2014, to just $460 million last year.
In addition to the millions of additional road miles that are being logged, Buffett said distracted drivers are as serious problem.
And that could offset some of the savings Americans are seeing at the gas pump.
Auto insurance rates, Buffett said, are going up this year.
Buffett said he can’t predict how the current era of low interest rates will affect the economy because it has never happened before, but they could distort prices and encourage more borrowing.
He said Berkshire has to keep billions of euros in banks in Europe, and the low rates could have a negative effect there.
“We would be better off if we had a big mattress in Europe that we could stick all the stuff in,” Buffett joked. “If I could just find a person who I trusted to sleep on the mattress, that’s what we would do.”
Buffett said he understands why regulators cut interest rates to help Europe recover, but there’s no way to know how that will affect business. He said Berkshire paid more for its recent $32.36 billion acquisition of aircraft parts maker Precision Castparts because rates are so low.
Buffett’s letter, which reviews the operations of the conglomerate over the previous year, is widely read. Berkshire posted a $24 billion profit last year, up from $20 billion in 2014.
The Canadian Press