Insights: Investing

Conservation, distribution and supply are all essential

Mario J. Gabelli, Tim O'Brien
From the Print Edition:
Jeff Bridges, Sep/Oct 01

(continued from page 1)

Unfortunately, the presentation of the plan to the American people was clumsy beyond belief, and this made it easy for the Democrats and the media to slam the plan as all supply, no conservation. With the Democrats now controlling the U.S. Senate, the administration will have to compromise more than it would like. This is likely to lead to an energy policy that, on balance, is better than the original Bush proposals. Whatever happens will probably happen quickly for two reasons. First, people are upset about high energy prices and supply disruptions, and the politicians must be seen to be responsive to public concerns. Obstructionists will be punished at the polls. Second, energy prices will eventually fall of their own accord as producers increase production to cash in on the high prices and energy users reduce consumption to save money or because they have been thrown out of work. So, the politicians must act quickly enough to be able to claim credit.

If there is a flaw in the time-tested free market approach being offered, it is that it will have next to no impact on the current crisis of high prices and supply disruptions. Citizens sweltering in the dark in San Francisco or paying $2.75 per gallon to fill up in Chicago are not likely to be impressed with the Bush plan.

The Democrats are pushing a package of counter proposals that are politically palatable but economically insane. The pillars of the Democratic package are price controls, conservation and incentives for renewable energy production. Price controls would reduce incentives for producers to produce and for consumers to conserve. Controls would take the current problem and turn it into a disaster. Conservation is vitally important, but not a solution by itself. Much of the gains attributable to conservation have come from things that are relatively easy and cheap: better-insulated homes and commercial buildings, more efficient appliances and better automobile fuel economy. Going forward, conservation would involve sacrifice like turning the air-conditioning off or trading in that SUV for a compact car -- the kind of things Americans traditionally resist.

Renewable energy is helpful, but not the answer. After decades of subsidies, tax credits and mandatory set-asides, renewable energy accounts for just 2 percent of U.S. electricity supply and is projected to reach 3 percent by 2020. We've already exploited all of the hydroelectric resources available and just about all of the geothermal. Solar, wind and biomass technologies continue to improve but also have limited potential. Renewables accounted for 7 percent of U.S. energy consumption in 1999, and the U.S. Department of Energy projects that renewables will account for the same 7 percent of consumption in 2020. About 55 percent of renewables are used for electricity generation while the balance are used in heating and cooling, cogeneration and transportation (ethanol fuel blending, heavily subsidized by federal tax credits). Renewables will become increasingly important, but are only a small part of the solution to our energy needs.

The president should have stressed conservation and renewables much more aggressively in his proposal because they are politically popular (if economically questionable). If Bush would embrace and promote conservation and renewables, his proposals for new supply and an improved energy infrastructure (90 percent of any legitimate long-term solution to the energy crisis) might gain some political momentum.

The implications of the Bush plan, or a compromise version for investors are fairly clear. Owners and developers of clean, modern and efficient gas-fired electricity generating plants are going to see plenty of opportunity for years to come. (All prices as of July 16.) Clear beneficiaries include El Paso Corp. (NYSE-EPG-$51.92) and Calpine (NYSE-CPN-$43.75) among others. Gas turbine and power equipment makers will continue to see growing order books. Among these are General Electric (NYSE- GE -$46.22) and Shaw Group (NYSE-SGR-$37.65). The pure play for automotive fuel cells is Ballard Power (NASDAQ-BLDP-$44.55), although the stock is wildly overpriced relative to near-term prospects given its multibillion-dollar market valuation and next to no revenues. Major beneficiaries of the solar cell tax credit extension include AstroPower (NASDAQ-APWR-$47.91) and Unisource (NYSE- UNS-$22.80). Drillers and drilling equipment and service companies too numerous to mention should see ongoing improvement in their outlook, with volatility along the way. These companies are only a handful of the long list of potential beneficiaries.

We all look forward to the day when fossil fuels are history. But, scientists have been working on things such as nuclear fusion and fuel cells for decades, and although we are seeing progress in these fields, we may be decades or more away from making these technologies economically competitive with coal, oil and natural gas. In the interim, a national energy policy addressing supply, energy distribution and conservation is essential.

Also in this issue: