Diesel’s All-Time High

0:01Matt Frankel:The pain at the pump is getting worse. Motley Fool Hidden Gems Investing starts now.

0:09Matt Frankel:Welcome to Motley Fool Hidden Gems Investing. I'm your host today, Jon Quast. I'm joined by my friends and contributors, Tyler Crowe and Matt Frankel. And we have a couple of things on the show today. We're going to talk some Berkshire. We're going to talk a question from the mailbag. But first, we want to hit diesel prices. So as of this morning, diesel prices are at a record high of$6.51 per gallon. That's according to AAA. And that is up 76 % from this exact time last year. And I think that it's possible that maybe some of our listeners out there are saying, I don't see how this applies to me because I drive a gas car.

0:49Matt Frankel:But let me assure you, this does indeed apply to you. This is a story that everyone in the country, I believe, is going to feel very soon. Matt, what are some of the ways and why are we going to see this for everyday consumers?

1:04Jon Quast:Yeah, I mean, diesel prices have pretty widespread economic implications, not just, you know, if you drive a diesel-powered vehicle or have a diesel-powered boat or something like that. Trucking companies, the companies that move everything around the country, everything that you buy, everything I buy, they generally include fuel surcharges when they deliver items to their customers. And they're directly tied to the price of diesel fuels. So when diesel prices rise, and it's been a long time, I think since Katrina, before we saw a six on a fuel price sign in South Carolina, I don't know about where you are, but it's been a while.

1:40Jon Quast:And it's going to cause some pain. I mean, that's a lot of, you said a 78 % increase. That's a lot to be passing on to your customers.

1:50Tyler Crowe:When we talk about diesel, and we could actually expand this out too to like jet fuel as well because you know gas anything that is a refined product is way up obviously diesel is much higher than gasoline in part because of what you said is where diesel is much more of a must-have for shipping for agriculture and things like that it is kind of the lifeblood of the supply chain industry and moving stuff from one place to another like i said jet fuel is also another one we don't talk about as much because jet cargo is a thing And while we're probably not moving commodities and things like that on a jet, right now, jet fuel prices are about$200 a barrel, and that's two times the price it was pre the Iran conflict.

2:33Tyler Crowe:And that's increasing relatively fast as well. So you're seeing those similar fuel surcharges on airline tickets as well. And I would not be shocked if we start to see things pop up in like airline traffic coming in during the holiday season. If we see these airline fuel surcharges really start to climb.

2:51Matt Frankel:Is there anything that we can do about this to bring prices back down? Because, you know, Senator Chuck Grassley coming out and suggesting that we ban the export of diesel fuel. And to me, that idea kind of makes sense because the price is set with global supply and demand economics. And so it stands to reason that if you ban the global demand, that your domestic supply is going to start outweighing your domestic demand and bring prices down. But is that how it works?

3:21Tyler Crowe:You could probably get a short term sort of swing here. But there are so many unintended consequences that would likely happen as a result. Let's just give an example. So we export in total about 5 million barrels per day of refined products, whether that's gasoline, whether that's diesel, whether it's jet fuel, name it, whatever it is. We also import about 2 million barrels per day of crude oil. So on a net basis, we are a net exporter. But the challenge is we actually export a lot more diesel, and we actually are a net importer of gasoline. And so if we were to start banning diesel exports, then the countries that would suffer, mostly Europe is where we do a lot of our gasoline diesel trade with, maybe they start banning gasoline exports.

4:08Tyler Crowe:And then all of a sudden we're in some tit for tat of who bans what where. And yeah, it could probably have some short-term impact, but I would be more worried that it would cause more problems down the road than it would having some sort of short-term salve. One thing to keep in mind, too, is it's not just a ban or whatever of exports. One thing that's really going to be challenging, no matter how we shake it, is the fact that refinery capacity, like the utilization of refining, is at the highest it's been since the early 2000s. the Atlantic Basin. So that's like basically all of our East Coast refineries, in addition to a European refineries are like 97 % utilizations.

4:50Tyler Crowe:It's not just, you know, because of the Iran war, but also we've seen a lot of refineries knocked out in Russia, which is impacting European fuels demand as well. So a lot of things are going on here. And a funny thing we were talking about, if you want to say like a hidden investment, for the longest time, oil refineries in the United States, Valero, Marathon Petroleum, incredible value creators for a lot of people, even in lousy oil environments. I think they were pretty hidden investments. But I think today, when people are seeing the crack spreads or the difference between refined products and crude oil today, it's really changing the thing.

5:28Tyler Crowe:I don't think anyone thinks those are hidden investments anymore. All right.

5:31Matt Frankel:So, Matt, I want to give you the final word here. It sounds from Tyler that it's going to be complicated to get prices down, at least in the near term or even in the medium term, if we can't get these diesel prices down, where are we going to see that ripple through the macroeconomic picture? Yeah.

5:50Jon Quast:So here's one interesting point that is really important. If gasoline prices rise, you see that show up in inflation immediately. Energy costs rise. If jet fuel prices rise, it's a somewhat immediate effect that affects travel inflation very quickly, for example. With diesel, it can be somewhat more of a delayed fuse. It reaches consumer prices a little bit later due to higher freight costs. Companies resist passing on price increases. We've seen this from the tariffs. Companies try to resist passing on price increases until they can't anymore. So it tends to be a little bit more of a delayed fuse.

6:25Jon Quast:And that's exactly what I'm expecting here. We're already seeing the more immediate effects in the most recent inflation data. transportation and warehousing services and truck freight transportation were two of the worst parts of the data. But looking forward, I'm really keeping an eye on a couple or three categories in particular. So food, diesel not only impacts food transportation costs, like, you know, the cost of getting food to the grocery stores, but it affects farm equipment. I mean, farm equipment runs on diesel. The processing equipment that processes food, a lot of it runs on diesel.

6:57Jon Quast:So it affects food prices in a few different ways. Airlines, I mean, Tyler already mentioned that jet fuel was up. That's not a diesel thing, but, you know, airline fares are already up 23 % year over year. That's not the percentage increase of diesel. So I wouldn't be surprised if we saw a little bit more increase in airfares going forward, especially as we head into the holiday season when there's a lot of demand. And then construction, I mean, heavy equipment runs on diesel for the most part. And I mean, it goes without saying that the delivery companies are like UPS and FedEx. I mean, their planes use jet fuel, their trucks use diesel.

7:32Jon Quast:We could see that kind of pass through to the consumer a lot. So there are a few categories where inflation could get worse before it gets better.

7:40Matt Frankel:Well, and of course, if inflation continues to be a persistent problem, that's going to make it really hard for the Federal Reserve to lower rates. So that would be an interesting thing to watch as well. When we come back, we're going to talk some Berkshire Hathaway changes. You're listening to Motley Fool, Hidden Gems Investing.

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9:35Matt Frankel:Welcome back to Motley Fool Hidden Gems Investing. So the Buffett era is officially over at Berkshire Hathaway, or maybe I should say the Warren Buffett era is over because his son Howard is stepping into the chairman role of the company as Uncle Warren is stepping down, according to a letter that released on Friday. And this is kind of an interesting thing here. It does bring up an interesting topic because the change at CEO had already changed. Of course, Greg Abel running the company, but now his son Howard stepping into the chairman role. many companies on the stock market, the chairman CEO is combined.

10:15Matt Frankel:And I think this is an interesting case where maybe we can start to examine what is the difference between the chairman and CEO roles, generally speaking, and how is it going to play out specifically at Berkshire?

10:27Tyler Crowe:As far as the separation, it really depends on the flavor of the company. Obviously, companies where you have like founder leaders tends to be a combination of chairman and CEO, But there is a fair share where it's actually separated. And honestly, I think it's a better sign of good governance to have those roles separated to a certain degree. There are some separate things when it comes to like compensation, when it comes to audits that you kind of want them separated. Now, look, Berkshire has sort of gotten away with some murky governance stuff over the years. I mean, they already had a dual class shares.

11:07Tyler Crowe:But I think we all kind of look the other way with some of the things that Berger Hathaway did with its governance because it was Buffett. And he seemed to always do right by investors. Now, his son automatically getting the executive chair, I think, is another example of slightly murky governance. Is he the most qualified? Maybe. I don't think he is, actually. And even there was an article in the Financial Times over the weekend being like, this was a bad move. So I'm not the only one saying this. The other thing to consider, though, and perhaps the reason why this is the case is more than anything, all of the shares that Warren Buffett owned are going to be transferred to either foundations or family trusts or whatever.

11:50Tyler Crowe:And most of those are owned or operated or run by his children, Howard being one of them. And they're all foundations run by them. And obviously, foundations want to own stock and probably want to maintain as much family control as possible. So that as like the, not the majority, but I guess you could say the plurality shareholder, that's the best case you could make for Howard. Here's the fascinating thing I want to follow is that Berkshire Hathaway's always had a halo effect. Like, you know, Warren Buffett, Elon Musk, Jeff Bezos, valuation, everyone kind of gives them the benefit of the doubt.

12:26Tyler Crowe:How long does that last when Warren Buffett really isn't in the picture anymore?

12:31Matt Frankel:Matt, what do you think about the Berkshire specific way that this is going to play out? because Tyler is mentioning here part of the perhaps motivation behind Warren naming his son Howard is the fact that he is transferring a lot of his wealth to his children and where the company goes over the long term is important to him.

12:49Jon Quast:Well, I mean, my biggest pushback is why didn't the Financial Times publish this article 15 years ago? And the reason I say that is this move has been known. I mean, Warren Buffett said, you know, on TV in 2011 that this was his plan, that his son Howard would move into the chairman role for the specific role, not to play any role in the company, but just to kind of preserve the culture. If a future CEO went rogue, for example, and started micromanaging the operations, which Berkshire prides itself on being a decentralized culture, just as one example, Howard could step in and do something about it.

13:23Jon Quast:That's his sole goal for being there. And I mean, Tyler's right. Maybe he's not the most experienced. He's been on several boards. He's been a director at Coca-Cola. He's been a director at ConAgra Foods. He's been chairman of a few boards throughout his career. To be fair, it's probably because of his name and his connection to Berkshire that he got those roles. But he had them for quite some time. He's been on Berkshire's board since 93. So he's been on Berkshire's board since I was 11 years old. He's got some experience there. He's been in the boardrooms. But yeah, I don't know why this is an issue now when it was kind of a known succession plan for a long time.

14:05Tyler Crowe:Well, I think there's a fair point of like, it's more of a problem now because Howard's already 71. Greg Abel's already 64 years old. And yeah, maybe 15 years ago when it was kind of the executive chairman in waiting, he was 55 and seemed like a relatively reasonable thing here. part of my kind of contention with the idea too is we hit for the longest time warren buffett was always like you know we got ajijain in charge in charge of insurance greg abel's going to take over howard's there to do the executive chairman but these guys are all now already approaching retirement age and there's this assumption that they're going to be you know on the top of their game into their 70s and 80s.

14:47And that was a rarity for Warren Buffett.

14:52Tyler Crowe:He, you know, to use one of his quids, he kind of won the birth lottery, if you will, with, you know, genetics and being able to stay as sharp as he did for as long. There's no guarantee that the people that he has already hired are going to be as good into their 70s and 80s as he was. And if not, where's the bench in the lieutenants after that, because if I was, and I am a Berkshire Hathaway investor, part of me starts to wonder, like, what happens post-Abel, post-Howard Buffett, because that could really

15:22Jon Quast:change things pretty quick. Yeah, I mean, to be fair, that's the best criticism. I mean, Howard isn't young. Him and Greg Abel are both at what I would consider to be retirement age in any world other than Berkshires. So it's, you know, that's my biggest question mark is, I want to see the next steps in the succession plan. I wouldn't be surprised if the next Berkshire shareholder, meaning that's an ongoing question topic that people are asking Greg Abel is what happens next? Because he's not, like you said, not exactly young. Who's going to preserve the culture after Howard? He could retire. He's 71.

15:58Jon Quast:I know there is a bench of Buffett nephews and sons and grandsons who work in the financial industry. But stating the plan would definitely help at this point.

16:12Matt Frankel:Yeah, it's certainly suboptimal when your succession plan already needs a succession plan. But basically what I'm hearing from you guys with this plan that is in place, the idea is for Berkshire to not change, at least in the ways that have made it great. That's what Warren is thinking about. But let's talk about a change that might be for the better, or at least that some shareholders seem to want. And maybe this is the time to do it. Warren Buffett has historically been very averse to paying a dividend. And there is a growing little murmur out there that maybe this is the time.

16:46Tyler Crowe:I think over the next 18 months, they will declare a dividend. And for the most benign reason possible. Again, the Buffett ownership stake is going to foundations and trusts. Foundations and trusts need money. and they'd probably prefer to use dividends instead of having to sell their shares to do so. I think with that much invested interests from foundations and things like that, we could see a push from the board to go towards a dividend to fund those operations at those foundations. Very similar to what we see at Hershey. They're majority owned by the Hershey Trust, which is basically all they really care about is the dividend.

17:25Jon Quast:Yeah, I mean, I'll gladly take the other side of that argument. I don't think Berkshire will pay a dividend within the next five years. And when I say that, that assumes that both Greg Abel and Howard Buffett are going to be in their current roles in five years. So that's a big assumption. You know, Abel has already showed that making investments and buying back shares are his priority. He's making statements about that in his first couple of quarters as Berkshire's CEO. I mean, I'm not saying it's not possible. I'd probably give it about a 20 % chance that Berkshire pays a dividend. And only if the stock traded well above its intrinsic value for a length of time.

18:04Jon Quast:Because after all, both Abel and Howard Buffett are there to preserve the culture. It's clearly stated in Berkshire's Capital Preferences that it will pay a dividend if it exhausts all other options, including buybacks.

18:18Matt Frankel:We'll have to keep an eye on that as Howard steps into that role and time moves forward. When we come back, we're going to hit a question from our mailbag. You are listening to Motley Fool Hidden Gems Investing.

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