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Insights: Investing

Conservation, distribution and supply are all essential
Mario J. Gabelli, Tim O'Brien
From the Print Edition:
Jeff Bridges, Sep/Oct 01

In early June, the Bush Administration unveiled its long-awaited national energy plan. Predictably, the plan was greeted with outrage by environmentalists, scorn by Democrats and confusion by the public. Leaving politics aside, we have long advocated some form of economically sensible national energy policy. We asked Tim O'Brien, portfolio manager of the Gabelli Utilities Fund, to critique the Bush plan and the Democrats' counter proposals, and offer some suggestions as to how investors might profit.

--Mario Gabelli

President Bush's recently announced energy policy made me so angry I left my air-conditioned office in a three-story glass building, jumped into my 12-mile-to-the-gallon SUV, drove to my 4,500-square-foot-air-conditioned home, booted up my PC and sent e-mails to my congressman and senators demanding that we focus on energy conservation rather than increased energy supply. After expressing my outrage at the Bush plan, I grabbed a bottle of Chardonnay from my elevator-sized refrigerator and fired up the hot tub for a long soak. This is the response of typical Americans to the Bush energy plan. They talk the talk when it comes to energy conservation, but don't walk the walk, and the inconsistency bothers them not at all.

As the top chart, U.S. Energy Consumption by Category, reveals, America's energy consumption has expanded dramatically and is expected to continue rising through 2020. The percentage of energy consumed by residential customers has held relatively steady at about 20 percent of the total. On a percentage basis, commercial use has risen while industrial use has declined, reflecting the transition from a manufacturing- to a service-oriented economy. The percentage of energy consumed by transportation has trended higher, a reflection of the failure of mass transit in car-loving (or now perhaps more accurately, SUV-loving) America.

The bottom chart, U.S. Energy Consumption by Source, reveals that the use of oil has remained around 40 percent of the total and that renewable energy has held steady at around 7 percent. The use of coal has declined substantially and the use of nuclear power has been halved -- both reflections of environmental concerns. The big jump has been in natural gas, now the preferred feedstock for generating electricity.

Ever increasing demand for electricity is a big part of the growth in energy consumption. Since 1978, the number of homes in the United States with seven or more rooms has risen from 22 percent to 29 percent of the total. The percentage of U.S. homes with air-conditioning has risen from 56 percent to 73 percent. With the fastest U.S. population growth in the South and West, this trend is not going to change. Our appliances have gotten more energy-efficient, but we are now buying bigger ones and more of them. In 1978, space heating accounted for 66 percent of U.S. residential energy consumption while appliances accounted for 23 percent. By 1997, space heating had fallen to 51 percent of residential energy consumption while appliances (bigger refrigerators and the proliferation of PCs) had grown to 27 percent. The average PC consumes around $100 per year of electricity. The commercial use of PCs also has soared -- another reflection of rapidly increasing commercial energy consumption.

Every year the United States produces less energy and imports more than it did the year before. No amount of conservation will change that. No amount of new resource development will change that, either. However, a balanced mix of conservation initiatives and new resource development can have a meaningful impact and is certainly better than doing nothing.

Judging from the public's response to the Bush energy plan, the concept of energy conservation is wildly popular, while developing new energy supplies and beefing up our energy infrastructure is very low on the average American's priority list. Incentives for increased exploration and production are perceived as a political favor for ìBig Oilî and another blow to environmentalism. Despite the obvious need for more electric generating capacity and more efficient systems for distributing power, state and local politicians won't play ball. California has become a B.A.N.A.N.A. Republic -- Build Almost Nothing (particularly not an electric generating plant or more transmission lines) Anywhere Near Anyone -- and, in the middle of the second year of rolling blackouts, the average Californian still does not believe that there is a real problem. Instead of dealing with the real issues, California Gov. Gray Davis has spent the past year peddling increasingly bizarre conspiracy theories while his state's largest utilities¼bled cash and entered or approached bankruptcy. If we could harness the energy content of all the hot air being expended by the politicians on the energy crisis, we wouldn't have one.

The Bush energy plan is a good, albeit not perfect, plan, and a better plan than has been portrayed in the media. It focuses on new technologies to increase energy supplies (low impact drilling, clean coal and pebble-bed nuclear\; increased emphasis on expanding and upgrading energy infrastructure (incentives and fast-track approvals for natural gas and electricity transmission networks); and incentives and mandates for conservation (tax credits for hybrid and fuel-cell vehicles, and requiring higher fuel economy for cars and SUVs).


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