Buffet Bets the Farm on Strong Rail, Cheap Coal, Expensive Oil

(MoneyWatch)  Warren Buffet just made the most expensive investment of his long career as head of Berkshire Hathaway, on a rail company called Burlington Northern Santa Fe (BNI). It's all over the press that Buffet called the investment an "all-in wager on the economic future of the United States."

The U.S. economy is a pretty big thing, though, and not all sectors will prosper. Here's what Buffet really meant: he believes in a future with fewer tractor trailers and higher gas prices, but more American exports and more coal-burning electricity plants.

The first two of those aren't hard to fathom. It's no secret that America's highways and bridges are crumbling, which will be trouble down the road for truck freight. And it's widely forecast that oil prices will rise sharply as the world economy recovers. Truckers are still recovering from 2008's highs.

Buffet's bet on coal through BNSF is a little more nuanced. As the Economist notes, the investment meshes with BNSF's existing business and Buffet's views on climate legislation:

...while the trains themselves are among the cleanest freight transportation around, their cargo is decidedly not. Almost half of BNSF's tonnage last year was coal, and MarketWatch estimates that some 10% of the power generated in America comes from coal hauled by BNSF.

Mr Buffett has other energy company holdings and has previously stated his opposition to a cap-and-trade law, which would increase the cost of electricity from coal-fired plants. In a sense, then, he's doubling down on the carbon-intensive economy, and either betting that a cap-and-trade bill won't pass, or acting with the intention of doing what he can to undermine the bill or secure himself some protection.

The Economist goes on to point out that CO2 regulations could hurt the U.S. coal business, making this a risky bet for Buffet. Or is it? The Washington Post suggests that the coal would be shipped anyway:

China craves the coal and other raw materials that the U.S. produces. Those commodities fuel the great economic engine that is China, which is the factory to the world. U.S. coal and goods are shipped via rail to Pacific ports and then shipped to China. With his round-out purchase of Burlington Northern, Buffett thinks China will continue to be strong.

The real risk for Buffet is that rising energy prices will badly hurt the world economy, and by extension the freight market; BNSF has shipped fewer goods during the current recession, and will only thrive in a strong economy. While Buffet was being patriotic in saying he is betting on the U.S. economy, BNSF will do best if the whole world is thriving.

Of course, there's one more thing Buffet is betting on: his own mortality. At 79, he has to rely on his successor to make Berkshire successful. Now, though, the company is more strongly pegged to the economy, so Buffet won't have to worry as much about who comes after.