The Energy Crunch — Investors Demand More

By Matthew Schmidt
Analyst, mPower

In This Story Poor Infrastructure Solutions: Republicans vs. Democrats Energy Demand Will Increase New Fuel-Efficiency Standards Your Portfolio

"We're short on energy and this administration is concerned about it." President George W. Bush's recent comments sum up what seems to be a growing concern for many Americans: There is not enough energy to go around.

While it's not yet clear that we truly have an "energy crisis," there is little argument that the prices for heating oil, electricity, and gasoline have increased dramatically in the United States in recent years. The last three recessions in the United States were tied to rising energy prices, and growing evidence supports the idea that a similar fate currently awaits the U.S. economy. What exactly is happening now, and where are we headed?

minute: read this article at a glance.

Technical Terms Inflation Sector

Poor Infrastructure

Escalating energy prices are a result of energy demand outstripping supply in recent years. On the supply side, there has been insufficient growth in energy infrastructure in the past two decades. During the 1980s there were meager investments in refineries, power plants, drilling rigs, pipelines, and other sources supporting energy generation. According to Morgan Stanley Dean Witter analyst Douglas Terreson, the most recent oil refinery was built in 1983, 20 years after the previous new facility was completed.

Electric utilities have also been slow to invest in new power plants and transmission lines, as they've been stifled by environmental regulations and deregulation problems. In California, where these issues have been prominent, no power plant has been built since the late 1980s. According to Cambridge Energy Research Associates (CERA), the California economy has grown 29 percent over the past five years as electricity consumption has increased by 24 percent over the same span. As demand has increased and supply has remained stagnant, the inevitable result has been an energy shortage.

Poor investment returns also hampered growth, as years of low commodity prices contributed to lackluster stock performance for many energy and utilities companies. Natural gas, for example, which currently fuels about 25 percent of U.S. energy needs, witnessed years of declining prices. CERA reports that residential natural gas prices fell 30 percent between 1985 and 1990, adjusting for inflation.

And as supply growth has been paltry, there has been increasing demand. "It is clear from first analysis that demand for energy in the United States is increasing much more so than production is," Bush said in a recent speech. The U.S. Energy Information Administration predicts that world oil demand will increase from 75.5 million barrels per day in 1999 to 117.4 million barrels per day in 2020, or 1.3 percent per year.

"Escalating energy prices are a result of energy demand outstripping supply in recent years. On the supply side, there has been insufficient growth in energy infrastructure in the past two decades." — Matthew Schmidt, analyst at mPower Advisors, LLC.

Solutions: Republicans vs. Democrats

Proposed solutions to this problem vary. President Bush has primarily supported efforts on the "increase-supply" side. His administration supports increased domestic production of oil, power and natural gas while decreasing the United States' dependence on foreign energy sources.

Many Republicans contend that former president Clinton failed to establish a clear energy policy during his tenure and neglected the country's long-term energy needs. The Bush administration has said that the United States can meet long-term demand by opening up new land to development and loosening environmental restrictions.

One of the president's most controversial proposals involves a plan to open 1.5 million acres in the Arctic National Wildlife Refuge in Alaska to drilling exploration and coal mining. Bush maintains that safer drilling techniques make it possible to support oil exploration in the refuge while preventing environmental disasters like those of the Exxon Valdez tanker.

Democrats generally form the "reduce-demand" camp, and vehemently oppose drilling in the refuge, citing environmental concerns. Traditionally, proponents on the Democratic side have maintained that effective energy policy starts with reducing demand as opposed to increasing supply.

Senator Jeff Bingaman, D-N.M., recently proposed legislation that focuses on energy conservation and development of renewable energy sources. The legislation would recognize the need for new infrastructure by streamlining the approval process for pipelines and power transmission lines but would require greater conservation measures in schools and government buildings.

Democrats have also been more vocal about supporting alternative energy sources, such as wind and solar power. President Bush recently outlined a plan in which he recognized the need for alternative renewable energy sources, but tied funding for development of those sources to revenues from Arctic drilling.

Renewed debate about energy policy, including increased recognition that energy demands are not being met by current supply, has created investor interest in the energy and utility sectors. Energy Secretary Spencer Abraham said in March that growing demand for electricity will force the United States to build up to 1,900 new power plants over the next 20 years.

Energy Demand Will Increase

Calpine Corporation, for example, one of the largest power producers in the U.S., said it expects to have four new plants up and running this summer. Other power producers, including Duke Energy, AES, Constellation Energy and Mirant, are responding to demand by planning new projects.

"In response, energy companies are building more power plants and refineries, drilling in new areas, and supporting the creation of new alternative energy sources. ... California's solar rebate program, in particular, saw participation increase by 500 percent in January of this year; likely a response to the state's power problems." — Matthew Schmidt, analyst at mPower Advisors, LLC.

In a recent Wall Street Journal article, Mark Stevens of Fluor Corp., an engineering and construction firm, was quoted as saying, "We're seeing a lot of strong business in electric power, oil, and gas and highway construction." Investors have recognized that there are increased opportunities in the industry and stock prices have followed suit. Last year, energy sector stocks rose 11.6 percent, and the utilities sector was the top performing sector in the S&P 500, up a whopping 54.3 percent for the year.

What could changes in the energy industry mean for the average investor? While the outcome of current legislation will help determine which side of the increase-supply vs. reduce-demand debate will come out ahead, signals point to steady demand growth for oil, natural gas and electricity in coming years.

The International Energy Agency forecasts that worldwide energy demand will grow by 57 percent over the next 20 years. While there is also greater public focus on energy conservation, long-term solutions point toward the need for greater supply.

In response, energy companies are building more power plants and refineries, drilling in new areas, and supporting the creation of new alternative energy sources. Wind and solar power generating systems have become increasingly popular. California's solar rebate program, in particular, saw participation increase by 500 percent in January of this year, likely in response to the state's power problems. Other areas, such as fuel cell technology, have received increased attention in recent years.

New Fuel-Efficiency Standards

New initiatives promoting conservation are also likely to flourish. Higher gasoline prices in the last year have focused attention on automobile fuel-efficiency standards. Senator Bingaman has proposed legislation that calls for new limits on fuel consumption for trucks and sport-utility vehicles.

Bingaman's efforts certainly aren't new. In response to surging energy prices in the 1970s, the Corporate Annual Fuel Economy (CAFE) law was passed, which imposed higher fuel economy standards for new cars. Currently, all new cars sold in the U.S. must have an average fuel consumption of at least 27.5 miles per gallon, while new light trucks, pickups, vans and sport-utility vehicles must average 20.7 mpg. Automakers who fall short of these standards are fined. Bingaman's legislation would implement even stricter standards on trucks.

Your Portfolio

Related Reading The Lights are Falling, Not the Sky Utility Investing — The Grinch of Darkness? OPEC and Your Investments — The Effects of High Oil Prices

Overall, energy policy is complex. Supply and demand issues are often perceived differently by the energy and utilities sectors. OPEC policies, government and state legislation, industry competition, and individual company fundamentals are the primary factors that influence energy issues. The Bush administration's stated objective of establishing a policy that takes into account all of these issues will be difficult to achieve.

Despite the complexity of these issues, there will be a greater spotlight on the industry in the near future, which will likely create growth opportunities in both the energy and utilities sectors. Investors should keep an eye on legislative developments in particular to get a sense of how these opportunities may affect their portfolios. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

The Energy Crunch — Investors Demand More

By Matthew Schmidt
Analyst, mPower

In This Story Poor Infrastructure Solutions: Republicans vs. Democrats Energy Demand Will Increase New Fuel-Efficiency Standards Your Portfolio

"We're short on energy and this administration is concerned about it." President George W. Bush's recent comments sum up what seems to be a growing concern for many Americans: There is not enough energy to go around.

While it's not yet clear that we truly have an "energy crisis," there is little argument that the prices for heating oil, electricity, and gasoline have increased dramatically in the United States in recent years. The last three recessions in the United States were tied to rising energy prices, and growing evidence supports the idea that a similar fate currently awaits the U.S. economy. What exactly is happening now, and where are we headed?

minute: read this article at a glance.

Technical Terms Inflation Sector

Poor Infrastructure

Escalating energy prices are a result of energy demand outstripping supply in recent years. On the supply side, there has been insufficient growth in energy infrastructure in the past two decades. During the 1980s there were meager investments in refineries, power plants, drilling rigs, pipelines, and other sources supporting energy generation. According to Morgan Stanley Dean Witter analyst Douglas Terreson, the most recent oil refinery was built in 1983, 20 years after the previous new facility was completed.

Electric utilities have also been slow to invest in new power plants and transmission lines, as they've been stifled by environmental regulations and deregulation problems. In California, where these issues have been prominent, no power plant has been built since the late 1980s. According to Cambridge Energy Research Associates (CERA), the California economy has grown 29 percent over the past five years as electricity consumption has increased by 24 percent over the same span. As demand has increased and supply has remained stagnant, the inevitable result has been an energy shortage.

Poor investment returns also hampered growth, as years of low commodity prices contributed to lackluster stock performance for many energy and utilities companies. Natural gas, for example, which currently fuels about 25 percent of U.S. energy needs, witnessed years of declining prices. CERA reports that residential natural gas prices fell 30 percent between 1985 and 1990, adjusting for inflation.

And as supply growth has been paltry, there has been increasing demand. "It is clear from first analysis that demand for energy in the United States is increasing much more so than production is," Bush said in a recent speech. The U.S. Energy Information Administration predicts that world oil demand will increase from 75.5 million barrels per day in 1999 to 117.4 million barrels per day in 2020, or 1.3 percent per year.

"Escalating energy prices are a result of energy demand outstripping supply in recent years. On the supply side, there has been insufficient growth in energy infrastructure in the past two decades." — Matthew Schmidt, analyst at mPower Advisors, LLC.

Solutions: Republicans vs. Democrats

Proposed solutions to this problem vary. President Bush has primarily supported efforts on the "increase-supply" side. His administration supports increased domestic production of oil, power and natural gas while decreasing the United States' dependence on foreign energy sources.

Many Republicans contend that former president Clinton failed to establish a clear energy policy during his tenure and neglected the country's long-term energy needs. The Bush administration has said that the United States can meet long-term demand by opening up new land to development and loosening environmental restrictions.

One of the president's most controversial proposals involves a plan to open 1.5 million acres in the Arctic National Wildlife Refuge in Alaska to drilling exploration and coal mining. Bush maintains that safer drilling techniques make it possible to support oil exploration in the refuge while preventing environmental disasters like those of the Exxon Valdez tanker.

Democrats generally form the "reduce-demand" camp, and vehemently oppose drilling in the refuge, citing environmental concerns. Traditionally, proponents on the Democratic side have maintained that effective energy policy starts with reducing demand as opposed to increasing supply.

Senator Jeff Bingaman, D-N.M., recently proposed legislation that focuses on energy conservation and development of renewable energy sources. The legislation would recognize the need for new infrastructure by streamlining the approval process for pipelines and power transmission lines but would require greater conservation measures in schools and government buildings.

Democrats have also been more vocal about supporting alternative energy sources, such as wind and solar power. President Bush recently outlined a plan in which he recognized the need for alternative renewable energy sources, but tied funding for development of those sources to revenues from Arctic drilling.

Renewed debate about energy policy, including increased recognition that energy demands are not being met by current supply, has created investor interest in the energy and utility sectors. Energy Secretary Spencer Abraham said in March that growing demand for electricity will force the United States to build up to 1,900 new power plants over the next 20 years.

Energy Demand Will Increase

Calpine Corporation, for example, one of the largest power producers in the U.S., said it expects to have four new plants up and running this summer. Other power producers, including Duke Energy, AES, Constellation Energy and Mirant, are responding to demand by planning new projects.

"In response, energy companies are building more power plants and refineries, drilling in new areas, and supporting the creation of new alternative energy sources. ... California's solar rebate program, in particular, saw participation increase by 500 percent in January of this year; likely a response to the state's power problems." — Matthew Schmidt, analyst at mPower Advisors, LLC.

In a recent Wall Street Journal article, Mark Stevens of Fluor Corp., an engineering and construction firm, was quoted as saying, "We're seeing a lot of strong business in electric power, oil, and gas and highway construction." Investors have recognized that there are increased opportunities in the industry and stock prices have followed suit. Last year, energy sector stocks rose 11.6 percent, and the utilities sector was the top performing sector in the S&P 500, up a whopping 54.3 percent for the year.

What could changes in the energy industry mean for the average investor? While the outcome of current legislation will help determine which side of the increase-supply vs. reduce-demand debate will come out ahead, signals point to steady demand growth for oil, natural gas and electricity in coming years.

The International Energy Agency forecasts that worldwide energy demand will grow by 57 percent over the next 20 years. While there is also greater public focus on energy conservation, long-term solutions point toward the need for greater supply.

In response, energy companies are building more power plants and refineries, drilling in new areas, and supporting the creation of new alternative energy sources. Wind and solar power generating systems have become increasingly popular. California's solar rebate program, in particular, saw participation increase by 500 percent in January of this year, likely in response to the state's power problems. Other areas, such as fuel cell technology, have received increased attention in recent years.

New Fuel-Efficiency Standards

New initiatives promoting conservation are also likely to flourish. Higher gasoline prices in the last year have focused attention on automobile fuel-efficiency standards. Senator Bingaman has proposed legislation that calls for new limits on fuel consumption for trucks and sport-utility vehicles.

Bingaman's efforts certainly aren't new. In response to surging energy prices in the 1970s, the Corporate Annual Fuel Economy (CAFE) law was passed, which imposed higher fuel economy standards for new cars. Currently, all new cars sold in the U.S. must have an average fuel consumption of at least 27.5 miles per gallon, while new light trucks, pickups, vans and sport-utility vehicles must average 20.7 mpg. Automakers who fall short of these standards are fined. Bingaman's legislation would implement even stricter standards on trucks.

Your Portfolio

Related Reading The Lights are Falling, Not the Sky Utility Investing — The Grinch of Darkness? OPEC and Your Investments — The Effects of High Oil Prices

Overall, energy policy is complex. Supply and demand issues are often perceived differently by the energy and utilities sectors. OPEC policies, government and state legislation, industry competition, and individual company fundamentals are the primary factors that influence energy issues. The Bush administration's stated objective of establishing a policy that takes into account all of these issues will be difficult to achieve.

Despite the complexity of these issues, there will be a greater spotlight on the industry in the near future, which will likely create growth opportunities in both the energy and utilities sectors. Investors should keep an eye on legislative developments in particular to get a sense of how these opportunities may affect their portfolios. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.