How Warren Buffett Thinks About Oil Prices Now and Why It Matters

This is the season for Annual General Meetings (AGM) in Singapore.

But there is one AGM that had investors glued to the computer screens on Saturday night. It isn’t in Singapore. Berkshire Hathaway Inc ’s had its AGM in Omaha, Nebraska. Warren Buffett, widely considered to be one of the best investors in our generation, is the Chairman and Chief Executive officer of Berkshire Hathaway.

Buffett had plenty to share during the AGM’s question and answer session. One of his thoughts might be of interest to oil and gas investors.

The guessing game

Oil prices has fallen since mid-2014. In the process, oil and gas companies like Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) has been squeezed by low oil prices. In the past quarter, Keppel Corporation reported profits that shrank by over 40% year on year. SembCorp Marine fared worst, seeing its profit sliced by almost half.

During the meeting, Buffett was asked about the direction of oil prices. It is a relevant question. Berkshire Hathaway has several interests like railways and pipelines that can be affected by oil prices.

Buffett’s answer, though, may surprise investors. Here’s what he said:

“We haven’t the faintest idea what the long-term price of oil will be.”

“But neither they [referring to his investing staff] nor I bought those based on commodity price predictions. We don’t know how to do it and we’re thinking about other things when we make those decisions.”

In short, Buffett is not investing based on where he thinks oil prices will be.

For one, he is looking at other factors in a business that would allow it to survive and thrive. This could be factors like a strong balance sheet and abundant free cash flow. Secondly, Buffett also stated that he has no idea where oil prices will be in the future.

He doesn’t play that guessing game.

Instead, as Buffett implies, we should be spending time looking at the business rather than hoping oil prices will turn in the next weeks or months for our investment to work out. The future direction of oil prices is not within our control, or even Buffett’s control.

As such, we may be better off spending our time away from the oil prices guessing game. We could be spending time looking for strong businesses instead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway.