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Ray Unger: Market's 'energy policy' is working its magic

Ray Unger  —  3/14/2008 6:53 am

"Gasoline prices are going higher, and there's no end in sight!" Have you heard that lately? It seems like every news story on energy begins with those fateful words. Then we hear that gasoline consumption fell for the first time in 16 years, and that mass transit ridership is up. I can just hear Robin chiming, "Holy gas guzzler, Batman, what's going on in this market?"

Quite honestly, if you're an economist -- and we all are -- you know exactly what's going on. Individuals are simply making decisions based on their own self-interest, and collectively, those decisions alter the supply/demand equation for energy. Environmentalists who scream for lower energy use may not agree with the market's methodology, but by golly the market sure knows how to get the job done.

Let's see what's happening. First, we all know that the price of gas is now over $3 per gallon, and some pessimistic forecasters think $4 is right around the corner. At the same time, some think consumers won't react to such a price boost. In economic jargon, they say the price of gas in "inelastic." Translation: We're just a bunch of robotic dolts that automatically buy the same amount of gasoline regardless of price. That's not happening.

In a March 3 report released by AOL, writer Joseph Lazzaro begins with the words, "The highly improbable may be happening. U.S. gasoline consumption may be arcing downward." Year-over-year, he wrote, consumption fell for the first time in 16 years.

That dovetails nicely with a Madison Metro announcement in January that ridership on Madison's transit system rose 5.6 percent in 2007, just 700,000 shy of the all-time high set some 25 years ago. And Madison is not alone. All across the country mass transit ridership is rising.

On another front, real estate investment trusts (REITs) are getting into the energy saving game. According to Doug Gatlin, vice president of market development at the U.S. Green Building Council, "If it's not green, in the near future it won't be considered Class A space. Green is a must-have." And REITs like Forest City Enterprises, Duke Realty, and SL Green Realty, announced major green construction programs last fall. These are but a few examples of how consumers, both great and small, have reacted to the skyrocketing price of energy.

But what about oil supplies? According to Nansen G. Saleri, current president and CEO of Houston-based consulting firm Quantum Reservoir Impact, and former head of reservoir management for the Saudi oil consortium known at Saudi Aramco, "The world is not running out of oil anytime soon." In Saleri's Wall Street Journal editorial dated March 4, "The World Has Plenty of Oil," he states, "My view, subjective and imprecise, points to a period (when peak oil production occurs) between 2045 and 2067 as the most likely outcome."

Today's current energy crisis is very reminiscent of the problems and "shortages" we had in the 1970s and 1980s. Yes, consumers were shocked, and yes, it was painful, but the laws of supply and demand worked then, and we're again seeing it play out before our very eyes.

In the short-run -- economists like to delineate between the short-run and the long-run -- when we're standing at the gas pump and cursing under our breadths, we're also conjuring up schemes to thwart those #@%& gas producers. We can: a) buy a more fuel efficient car, b) take a bus to work, c) move closer to your destinations, or d) just drive less. That's precisely how we adjusted in the past. Today our energy consumption is less than half -- on a per dollar of Gross Domestic Product basis -- of what it was in 1970.

The stock market has also punished investors, but it's also given us some opportunities to play the green game. One of the green REITs, in fact, looks very attractive today. Prior to this recent downturn, Duke Realty (DRE $21.70) was trading in the mid-40s, and its annualized dividend of $1.92 translates into 8.8 percent yield. While the market's energy "policy" plays out, we can invest green and make green, too.

Ray Unger is chairman of Unger Capital Management in Madison. He can be reached at 833-9400; e-mail: rayu@ungercap.com

Ray Unger  —  3/14/2008 6:53 am