If oil were free it would be good for us: Warren Buffett predicted $0 oil would help consumers but clobber industries

Mario Anzuoni/Reuters

• Oil prices plunged below $0 for the first time in history on Monday.
• Warren Buffett predicted the economic impacts of free oil in a CNBC interview in 2016.
• “If oil were free it would be good for us,” the billionaire investor said, as the US was a net importer of crude at the time and consumers would benefit from cheaper gas.
• Buffett warned that $0 oil would immediately hammer producers’ market capitalizations, cripple their ability to repay bank loans, slash their purchases from oil-equipment suppliers, and cause job losses.
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The price of oil plummeted below $0 for the first time ever on Monday, reflecting a supply glut as the novel coronavirus pandemic continues to sap demand for fuel.

As ever, Warren Buffett was ahead of the curve, predicting the economic impacts of free oil during a CNBC interview in 2016, when crude prices were at what was then a 12-year low.

“If oil were free it would be good for us,” the billionaire investor and Berkshire Hathaway boss said. The country would save money as it was a net importer of crude, he explained. 

US petroleum exports have surged since then, making America a net exporter for the first time in decades, according to government data. However, Buffett’s arguments still ring true.

When crude prices plunge, he said, the oil industry immediately suffers while consumers gradually save money on gas over the course of months or years.

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Buffett described the short-term pain in the interview. He estimated the US oil sector produced 10 million barrels of oil a day that sold for $100 each, earning it $1 billion in revenue a day or $365 billion in a year, and giving it a market capitalization of $2 trillion.

“Now all of a sudden you take it down to where you’re not making money, and the $2 trillion of capital value disappears very quickly,” he told CNBC. “The bank loans against it get sour very quickly, [oil producers] quit buying from the service companies very quickly.”

“All of those things contract very quickly, people lose their jobs in the producing areas,” Buffett added. “Some very tough things happen to the economy fairly quickly and the benefits just keep kind of flowing through slowly.”

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Buffett also described the potential impacts of free oil on Berkshire Hathaway, which owns MidAmerican Energy and holds stakes in other suppliers such as Occidental Petroleum.

“It would clobber us in certain areas initially, and housing would be bad, and Houston, and all kinds of things,” he told CNBC.

The investor gave the example of Star Furniture in Houston, which had “done the worst” among Berkshire’s furniture companies due to a slowdown in the city’s crucial oil industry.