Last week Warren Buffett shocked the market by selling Berkshire Hathaway’s (NYSE: BERK.A, NYSE: BERK.B) entire stake in Exxon-Mobil: (NYSE: XOM), which was worth around $4 billion. The reason Uncle Warren made this move is best explained by our friend John Robb over at Global Guerrillas: the situation in the Middle East.
Persons that pay attention to the news know that the conflict with the ISIS terror army is heating up. ISIS has committed more outrages and is now effectively at war with almost every state around it except Turkey. What readers of this blog know but the national media has ignored is that ISIS is targeting Saudi Arabia, the world’s largest oil producer. Its forces have entered Saudi Arabia, and the Saudis are building a giant wall designed to keep them out.
Exxon-Mobil has no holdings in Saudi Arabia, but it has holdings elsewhere in the Middle East, including the United Arab Emirates and Iraq. It is heavily exposed to the Isis threat at time when the United States has little or no incentive to intervene in the Middle East. The U.S. is now a major oil producer in its own right, and as I have pointed out before, a lot of Americans stand to make a lot of money if ISIS starts torching Saudi oil fields.
Will Saudi Arabia Turn to China?
Mr. Robb notes that the Saudis have three options in dealing with Saudi: hire foreign mercenaries, build a wall to keep ISIS out, or ramp up support for Al Qaeda in hopes of provoking American intervention. Okay, there is a fourth option that Robb has ignored: the Saudis could call Beijing and ask what it would take for Chinese support.
The Saudis would have to be pretty desperate to turn to the Godless communists who are pagan to boot for help, but they could be. This option isn’t that farfetched; the Chinese need oil, and the Saudis have it. The Chinese are already gouging Venezuela, where the economy collapsed because of low of oil prices, by trading loans for oil.
This could lead to two options; first China could send in soldiers but say they are mercenaries. This is an old stratagem for foreign intervention that America has long used. When my dad was in the Army back in the 1960s he was offered “high paying work” in the Belgian Congo by a CIA recruiter; he wisely turned it down. Or second China could loan the Saudis money in exchange for oil and use the money to hire soldiers from other Sunni Moslem countries like Turkey or Pakistan.
China has a strong incentive to keep Saudi oil flowing because it has little oil of its own. The last thing the Chinese Communist Party wants is to be dependent on the United States or Russia for its energy, which is happening now. Beijing could also score a lot of points in the West if its soldiers start killing ISIS thugs and doing what America won’t.
Either way Chinese involvement in the ISIS war would completely destabilize the Middle East. Okay, it’s already been destabilized, but it’ll be destabilized more. The Chinese are officially Communist and atheist, but most of them are actually Buddhists or Confucians, in traditional Islamic eyes—pagans. Some conservative Moslems view paganism as a crime against humanity, which will drive more recruits to ISIS and lead to more pointless slaughter.
Buffett Sees Oil Is Changing
Basically the whole dynamics of the oil industry are changing before our eyes, and Uncle Warren realizes it. That is why he is increasing his stake in Suncor Energy (NYSE: SU), a Canadian company that is heavily invested in Canada’s oil sands. The CBC reported that Buffett now owns 22 million shares of Suncor.
Suncor owns one the largest holdings of the oil sands in Alberta, the world’s third largest oil field. Since the oil sands are in Canada, they are safe from ISIS and international conflict. If ISIS starts burning oil fields, Suncor and Uncle Warren start making a lot of money.
Buffett’s move shows us the future of oil; it’ll be drilled in safe places like Canada while investors leave the Middle East to burn. This does not mean that the world will be a more peaceful place; it’ll actually get more violent because there will be no American military to keep a lid on the Middle East. Instead, we’ll see token actions like drone strikes and commando raids.
So does this make Exxon-Mobil a bad investment? Not necessarily; it has extensive holdings here in the U.S. It should make those with holdings in big oil think twice because the industry is being completely disrupted and changed beyond recognition by the ISIS conflict.