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Buffett's biggest gamble put on American railroads


The prime mover

The dark ages of American rail hath come to an end. Thanks be unto the Oracle…of Omaha. Multi-billionaire Warren Buffett has made the biggest acquisition of his storied career by purchasing rail operator Burlington Northern Santa Fe Corp. (BNSF) for $36 billion. Although it is a deal concerned only with freight rail, the ripple effects for passenger rail and the whole transportation paradigm across America will soon be felt in the coming years.

This is a landmark moment for the country, even if it does not realize it yet. Energy policy, transport and the way of American business will be affected by this move by Buffett’s company, Berkshire Hathaway. Why is this a big bang moment? Just look at what the man has already done to see how he has shaped America, be it with Coca-Cola, American Express or the numerous other wildly successful ventures he has undertaken. Simply stated, Mr. Buffett only backs winners.

With this massive investment, Buffett is bringing something to rail that has been lacking in the post-war era…muscle. Powerful special interests (the auto industry, oil majors, airlines) have ganged up and beat down rail to the point where many Americans have totally stopped seeing it as a viable form of transport. With a financial 800 pound gorilla as its protector, they won’t have rail to kick around anymore. "Our country's future prosperity depends on its having an efficient and well-maintained rail system," said Buffett in a statement.

In stating the obvious, politics follow the money. A big factor on Mr. Buffett’s purchase of BNSF was that he and the board of Berkshire Hathaway believe that the Obama Administration will actually try to build rail in the US instead of trying to tear it apart or letting it decay. That would mark a big policy shift from the last administration. This would be a major step in changing the vehicle-based American transportation paradigm. But before we get too ahead of ourselves, it must be said that the rail network in the US is in bad condition and will take much more investment before it gets up to developed world standards be it freight or passenger rail. "While Burlington Northern is highly profitable, US rail -- especially passenger rail -- is kind of the laughingstock of the world," says Joe Weisenthan of the financial website Clusterstock.

Although reinvigorating America’s rail network will be a big plus from this deal, it would be a bit erroneous to label this acquisition as a boost to the green movement. Energy is at the heart of the deal, with Mr. Buffett betting that oil prices will remain high and moving freight by rail will have a competitive advantage. Also, the freight rail service of BNSF will be utilized to carry tons and tons of coal to that will be burned in power plants that are part of Mr. Buffett’s portfolio.

"It's an all-in wager on the economic future of the United States," he added. "I love these bets."