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In his latest letter to shareholders Warren Buffett said that his company Berkshire Hathaway, given its size and maturity, should “operate with substantially lower risk of permanent loss of capital.” A few pages later, the Oracle of Omaha seemed to contradict himself.
Berkshire Hathaway Energy is one of the largest energy services companies in America. Such infrastructure businesses, Buffett noted, are often operated as natural monopolies for which stock returns are mandated by state regulators. Such a system allows the company to safely make expensive long-term investments in electricity and gas production, as well as transmission equipment. It’s as stable and boring as can be.
Until now. Berkshire Energy’s PacifiCorp faces, at worst, tens of billions of dollars in civil liability for the alleged role its equipment played in multiple wildfires that erupted in California and Oregon in recent years following lightning strikes. Even as Berkshire’s overall operating profits soared in 2023, profits from its energy unit fell more than 40%, which included nearly $2 billion in “estimated probable wildfire losses.”
Buffett hinted ominously at some sort of bailout or regulatory relief, underscoring the conundrum of America increasingly needing more power when liability from climate change could discourage needed investments.
Fortunately, 2023 was a relatively mild year for hurricanes. This helped mitigate any large losses for Berkshire’s all-important property and casualty insurance segment. Profits here have increased. While insurers have benefited from sharp increases in premiums, increased “convective” (severe) thunderstorms or hurricanes are making insurance yet another business facing climate risks on a daily basis.
Buffett in the same letter took a bow for his stake in Occidental Petroleum, a stake he plans to hold “indefinitely.” Oil and gas drillers, he wrote, were essential to America’s energy independence. The role of oil and gas extraction and consumption at the heart of the climate crisis has not been recognised, nor have the risks that come with it.
Two U.S. utilities in the West, PG&E and Hawaiian Electric, have faced severe financial difficulties due to wildfire-related liabilities in recent years. PG&E has filed for bankruptcy and HE may eventually have to do the same to resolve claims efficiently. It would be extraordinary if Berkshire Hathaway Energy were forced into a similar move.
Buffett warned that the costs of climate change to utilities like his could be so large and uncertain that governments, rather than simply regulating private sector companies, could be forced to become operators themselves to fill the void.
Nebraska has always had a sunny vision for the United States and, by extension, its might. Despite the contradictions, his concern about storm clouds on the climate should be treated as an indicator.
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