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Should ASX investors follow Buffett and bet on oil shares?

rising asx oil share price represented by business man celebrating next to oil barrel erupting with up arrow
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Last year, the legendary investor Warren Buffett supprised the markets by betting big on an oil company. According to reporting in The New York Times,  Buffett, through his company Berkshire Hathaway Inc (NYSE: BRK.A)(BYSE: BRK.B), invested roughly US$10 billion into Occidental Petroleum Corporation (NYSE: OXY), receiving preferred shares for his efforts. This purchase helped Occidental finance a bid for fellow oil producer Anadarko Petroleum, which was successful. 

Buffett has reportedly sold all of Berkshire’s holdings in Occidental, probably due to the impact that the coronavirus pandemic has had on crude oil prices in 2020 so far (crude prices briefly, but infamously went into negative territory back in April). But these were preferred shares in Occidental, which probably influenced his decision when it came to this particular company. And given Berkshire still holds some shares in a Canadian oil company Suncor Energy, I think we can disregard this event in light of a good question today: are oil shares a good long-term buy?

Buffett, a famously long-term orientated investor, seemed to think so last year. This was confirmed with reporting by CNBC, which ran a story at the time quoting Buffett as stating:

It’s also a bet on the fact that the Permian Basin [a large oil field in Texas] is what it is cracked up to be… [but] oil prices will determine whether almost any oil stock is a good investment over time. If oil goes way up, you make a lot of money.

So it’s clear from this quote that Buffett is bullish on a long-term investment case for oil, or at least oil prices. And a high oil price indicates either long-term high demand or low supply.

So, with this in mind, should ASX investors be rushing out to buy Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO), Oil Search Limited (ASX: OSH) or BHP Group Ltd (ASX: BHP) perhaps?

Are ASX oil shares black gold?

Now I have the utmost respect for Warren Buffett. He’s a legendary investor as well as a fantastic teacher. But he is also 90 years’ old. It’s possible that, as a man who has watched crude oil become a massive enabler of road travel and industrialisation throughout the 20th century, Buffett still harbours some 20th-century views on oil. I’m sure the more environmentally-minded of us out there would agree with this statement and wouldn’t endorse his views on black gold.

But again, maybe he’s onto something. Yes, most investors expect electric vehicles like those made by Tesla Inc (NASDAQ: TSLA) to eventually replace internal combustion vehicles powered by oil-derivatives. But the most optimistic Tesla investors think that it might take 5 to 10 years for half of all new vehicle sales to consist of electric vehicles. That’s a decade of strong oil demand from the transportation sector. And then we have plastics, road tar, aviation fuel, kerosene and all of the other uses we now have for crude. Suddenly, Buffett isn’t looking like the 20th-century man he was.

Foolish takeaway

I don’t personally invest in oil shares myself for a variety of reasons (including concerns over climate change). But I do see the bullish case for a higher crude price over the coming decade. I hope that we, as a world, can wean ourselves off black gold, and sooner rather than later. But I also understand there’s something to be said for the ultra-cheap prices oil companies are trading at right now. I won’t be panning myself, but I’m sure there is some dark gold in the oil sector right now. If you’re so inclined, that is.

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Sebastian Bowen owns shares of Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares) and Tesla and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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