Fix energy in tangible form

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As I've mentioned before, I think that energy is going to be more expensive in the future. I wrote one article about tactics for dealing with the issue--making sure that your budget had contingencies for a spike in fuel prices. This article is about longer-term strategic moves to deal with future high energy prices.

They key problem with energy is that it's really hard to store. The Bank of Gasoline notwithstanding, it's tough to buy energy now and use it later. Most energy storage techniques lose a large fraction of the energy; others are expensive and dangerous.

The only really efficient way to store energy is to go ahead and use it to create something of lasting value. So my key suggestion is to store some of the current cheap energy in the form of things you need.

Invest in Embodied Energy

Things that produces energy

If you've got the money and a location that will support it, the pinnacle of this strategy would be to acquire things that actually produce energy: windmills, solar power systems, and so on.

Using locally-generated energy means that you don't have to buy energy from the utility. A decision on installing local power generation is often evaluated on a pay-back basis--how long will it take before the cost of the avoided purchases adds up to the cost of the system. Economies of scale make utility-generated power quite cheap compared to locally-generated power, so these payback calculations tend to steer people away from local power generation (except where you're off-the-grid and the cost of hooking up to the utility would be prohibitive). If my analysis is correct, though, and energy is going to get much more expensive in the future, a lot of these investments will be profitable sooner than a simple-minded calculation would suggest.

Things that let you use less energy

Even if you can't afford to generate your own power, anyone can invest in things that let you use less energy: a sweater, weatherstripping for your windows, extra insulation in your attic, a house that's closer to work, a bicycle, a more efficient car, furnace, air conditioner, or lightbulb. Anything that lets you live your life well with less energy falls into this category.

Things that embody energy

Take advantage of current cheap energy prices to invest in any long-lasting item that you're going to need. Most things--both items from the list above and ordinary stuff like dishes, tools, garden implements, toys and so on--are as cheap as they have ever been. And as the energy it takes to make them gets more expensive, they will get more expensive.

Think ahead. Figure out what you're going to need long-term. When you budget for acquiring things in this category, give a preference to the items that embody the most energy, because those are the things that are going to get more expensive faster.

That analysis is actually a huge topic of its own. It's hard to calculate the life-cycle energy requirements for an object, because there is not only the energy involved in making the object--aluminum and glass, for example, embody more energy than iron--but there is also the energy involved in the infrastructure. The energy embodied in the the silicon of a computer chip is dwarfed by the energy it takes to build and maintain the refineries needed for the raw materials, the wafer fab that made it, and the schools and universities that trained the people who build and run them. But a seat-of-the-pants sort of analysis will generally be good enough to let you put items like this into roughly the right order.

Anything that takes a lot of energy to make will be more expensive going forward. If you need one, work it into your budget to buy it soon, while it's still cheap.

Caution on Investing in Energy Companies

I put investing in companies that produce energy in another category altogether.

A lot of people have made a lot of money in the past few years by investing in companies that either produce energy (such as the major oil companies) or else use energy more efficiently than their competitors (such as railroads). I think a lot more money will be made in companies like these over the next few years as well, but a lot of money will also be lost. Making money in big companies depends on a lot of other things going right. The overall economy needs to hum along reasonably well, or else these companies will tank along with the stock market in general. The government needs to refrain from tagging these companies with price controls, excess profits taxes, and other profit-sapping measures.

Unless you have good reason to be confident in your forecasts of economic conditions and government actions, I'd limit your investments in these areas.

I'd suggest the same general policy for investments in things like energy futures. I don't doubt that a lot of money will be made in energy futures over the next few years, but here too, a lot of money will also be lost. Prices never move in one direction forever, and a fairly small zig or zag can easily wipe out many years of profits in a matter of days, and you can't count on the government or the markets to play by the rules when conditions get disordered.

Conclusion

I think the safe and easy win here is in just buying the stuff you're going to need anyway, giving a priority to the things that produce energy, save energy, or take a lot of energy to make. If you buy stuff you need, you can hardly lose. And if you prioritize things as I suggest, you'll come out well ahead.