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How to Hedge the Crude-Oil and Gas `Energy Tax'

Oct. 18 (Bloomberg) -- Record-setting natural-gas and oil prices are tag-teaming to create a winter of discontent for most households.

With crude oil breaking the $50 a barrel mark -- and climbing higher -- it's time to consider how to offset the household ``energy tax'' of higher oil, gasoline, heating-oil and natural-gas prices.

You can't increase the flow of oil from war-torn Iraq nor tell China or India to use less of it. Yet you can protect yourself through your investments and home improvements.

While you move to hedge your assets and decrease home-energy expenses, keep in mind that more peril lies ahead since oil and gas companies are producing as much as they can, and any major supply disruption will escalate prices further.

``We have a fundamental situation of excess demand,'' says Paul Kasriel, chief economist at Northern Trust Securities Inc. ``And the increase in energy prices is like a tax where there's redistribution of income from consumers to producers. The excess demand tells us to economize on energy use and tells producers to go out and find more of the stuff.''

Household Energy Costs

The most visible way that the energy tax hurts household spending is at the gas pump and in heating bills. In a report published by the Consumer Federation of America, author Mark Cooper found that ``domestic energy price shocks have increased household energy bills by 25 percent'' over the past four years.

The U.S. Department of Energy estimates that heating oil prices will increase home heating bills 28 percent in the northeast of the country this winter. Households are expected to spend a record $1,223 on average for the season.

Natural-gas prices are rising, too. Homeowners are projected to have average heating bills of $1,003 this winter, up 15 percent from last year, the Energy Department estimates.

A triple whammy of increased demand for natural gas by power plants, curtailed supply and damage to oil and gas-producing derricks caused by hurricanes in the Gulf of Mexico will keep oil and gas prices rising this winter.

U.S. Federal Reserve Chairman Alan Greenspan has paid particular attention to the natural-gas supply crunch.

Greenspan said on Oct. 15 that he expects gasoline and heating oil prices to ``mirror changes in costs of light crude oil.''

What You Can Do

Since the U.S. lacks a comprehensive energy policy, it's time to implement one of your own.

-- Energy-efficient ``Energy Star'' appliances can trim your bills. Sponsored by the Energy Department, the program promotes energy-stingy products that could save an average household $400 a year.

-- If they need replacing or updating, target the biggest home-energy users: Your furnace/air conditioning, lighting and refrigerators. Replacing old air conditioners and furnaces with Energy Star units, for example, can save 20 percent to 40 percent on your power bills, according to the Alliance to Save Energy ( www.ase.org ), an energy conservation group.

-- Maintain and update your furnace. According to the Energy Department, if you live in a moderate climate and use electric heat, for example, a heat pump can save as much as 40 percent on your heating bill. Clean your furnace yearly and invest in the latest technology to ensure maximum efficiency.

Hybrid Car

-- Buy a hybrid car. A Toyota Prius, Honda Civic and Accord hybrid qualify for a $2,000 federal-income-tax deduction in 2004. Since these vehicles attain as much as 60 miles a gallon, your gasoline bill can be reduced by at least a third compared with a conventional sport-utility vehicle. That means spending only $350 to $450 a year on gas versus more than $1,200 for a conventional SUV.

Want a way to hedge energy-price increases through your investments?

Your main holdings should include mutual funds that include energy stocks. Consider broad-based energy stock funds such as the Vanguard Energy Fund, up 28 percent this year, or Ishares S&P Global Energy Sector Index Fund, an exchange-traded fund that has risen 20 percent in 2004.

Also keep in mind that soaring energy prices contribute to a higher cost of doing business for all companies and cut into the earnings of most non-energy stocks.

An Inflation Hedge

A good basic inflation hedge is available through the Pimco Commodity Real Return Strategy Fund, which combines commodity- linked derivatives and Treasury Inflation-Protected Securities to provide returns when inflation is on the march.

The Pimco fund, up 21 percent this year, is the inflation fighter for my investments.

Whichever course you take, be realistic. Growing energy demand from developing countries combined with political instability, limited production, and terrorist attacks will probably prevent energy prices from sinking to the low levels seen in the 1990s.

Comprehensive energy legislation has been stalled in Washington over the past four years. It's something to remember when you get your next heating bill.

To contact the writer of this column:
John F. Wasik in Chicago at jwasik@bloomberg.net.

To contact the editor of this column:
Bill Ahearn at bahearn@bloomberg.net.
Last Updated: October 18, 2004 00:07 EDT

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