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Sunday, September 11, 2005 - Page updated at 12:00 AM

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Ways to temper energy pain from hurricane

Bloomberg News

The devastating winds of Hurricane Katrina have blown ashore a new energy crisis.

As residents of four states mourned their losses and try to recover, the hurricane's damage to the oil and gas infrastructure in the Gulf of Mexico resulted in a temporary spike in already record-high prices of crude oil and gas.

That needn't prompt feelings of helplessness. Energy inflation can be offset through savvy investing and consumer purchasing.

Don't think that buying an oil stock or two will make up for your gushing energy bills. Investing in a single security concentrates risk in one company and doesn't give you the total performance of the sector, which includes several industries that produce, transport, refine and manufacture energy-derived products.

You won't save much money shopping for cheaper gasoline, either, yet you can ease the pain of larger fill-up bills by adding inflation-hedging funds to your holdings.

A useful vehicle for investing in most of the energy industry is an index fund like the Vanguard Energy Index Fund (VENAX), which replicates a basket of stocks in the MSCI US Investable Market Energy Index.

Inflation protection

Don't just focus on energy prices, which are a relatively small component of the larger inflation picture. General inflation is the larger, often unrecognized enemy, because it erodes your purchasing power across the board, especially if your income is not keeping up with higher consumer prices.

While overall consumer inflation including food and energy costs is running around 3 percent, if your portfolio isn't outpacing this number, you're losing money in real returns.

Inflation also erodes the prices of most bonds. In contrast, Treasury Inflation-Protected Securities, or TIPS, are debt instruments that reward you when inflation is rising.

One of the most efficient ways of owning TIPS is through the PIMCO Real Return fund (PRRDX). Not only does the fund compensate you for higher inflation through a variety of U.S. and foreign TIPS, it serves as a hedge when stock prices fall due to rising consumer and energy prices.

In the tumultuous month of August, when inflation threats were cited as the main force depressing the stock market, for example, the PIMCO fund gained 2.1 percent versus a decline of 1.1 percent in the S&P 500.

Still obsessing over fuel prices? If you need to replace a vehicle or upgrade your home, there are plenty of energy-saving options. Thanks to new national energy legislation, Congress is offering tax breaks to those who own efficient vehicles.

Through the end of the year, the maximum tax credit for buying a hybrid car is $2,000. Next year, tax credits will range from $1,700 to $3,000. The largest credits will go to the cars that burn the least fuel.

Mileage savings vary widely on the hybrids, so shop carefully. The bigger the vehicle, the less money you will save. The Ford Escape HEV hybrid, an SUV, averages about 30 miles per gallon, according to the U.S. Department of Energy estimates. That's more than double the efficiency of the largest SUVs, yet is about the same as a standard subcompact.

If you're considering a compact, the Toyota Prius averages almost 49 miles per gallon.

Can you downsize the car you use for commuting?

If you switched from an SUV such as a 22-mpg, six-cylinder Ford Escape to an ultra-efficient Honda Insight — averaging 83 mpg under ideal conditions — you could easily save more than $1,000 a year on gasoline.

Compare various makes and models by fuel consumption estimates at www.fueleconomy.gov.

To blunt the cost of higher heating and cooling bills, make your home more energy efficient. Tax credits will be available for installing solar heating, high-efficiency central-air conditioning and exterior windows.

Credits range from $150 for an efficient furnace to up to $2,000 for solar hot-water heaters, starting in 2006.

More efficient furnaces, lighting, insulation, windows and air conditioners are proven ways of lowering your heating and cooling bills and are worth considering when remodeling or building.

The most sensible approach to energy inflation is to take a holistic view. Start in your home by using appliances that are energy misers.

The U.S. Department of Energy labels appliances by measuring energy use and awards its "Energy Star" rating to the most efficient units.

At the very least, ensure that your portfolio has inflation protection through TIPS or TIP mutual funds. If your employer doesn't offer them in your retirement plan, ask that they be added.

There's no reason to fret about inflation when you can save energy across the board and profit by doing so.

Copyright © 2005 The Seattle Times Company

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