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The age of abundant oil is rapidly coming to an end. As companies like Transocean (NYSE:RIG) and SeaDrill (NYSE:SDRL) explore the vast oil reserves of the ocean deep, there are two principles being established: One, we need an alternative to oil, and two, we haven't found it yet. However, there are options that are becoming more increasingly viable. Take, for instance, natural gas and biofuels. Seen as the most practical clean fuel alternatives to oil, the two fields are often compared against each other in conversation when it comes to finding the next oil replacement.

The natural gas industry has fundamentally changed in a sustainable way here in America. Through the introduction of hydraulic fracturing and horizontal drilling, an abundance of supply has allowed for a lasting cheap energy source. Now that we've been given the ability to tap into shale rock formations, technology has revealed stockpiles of easily accessible energy reserves right in America's own backyard. So abundant are these reserves that demand has yet to keep up. In January 2012, natural gas producing giant Chesapeake Energy (NYSE:CHK) took the bold step of cutting back its drilling operations and turning off the free-flowing spigot in light of falling prices that had become unsustainable.

At the same time, biofuels are also becoming more viable. Although it's still trying to shake off past negative connotations with regard to raised food prices, the advanced biofuels industry is now pursuing strategies that bypass the need for a reliance on consumed feedstocks. Fuels and products can now be made from cellulosic sugars derived from non-competitive materials such as wood chips, switchgrass, and even municipal waste. More importantly, the fuels being made are looking more and more like true oil replacements with regard to energy content, cloud point, and other important characteristics.

However, both industries have problematic issues that they'll have to overcome:

Natural gas

  • Contamination Fears. Hydraulic fracturing has created environmental concerns that claim it has led to the contamination of underground water reserves. Despite being touted as a cleaner alternative to oil, the jury is still out on evaluating the process of extracting it.
  • Infrastructure Woes. Switching to natural gas requires a massive buildup of new infrastructure needed to support the energy source: vehicles, pipelines, compressors, storage, etc. Far beyond billions of dollars, a society running on natural gas the way we rely on oil will likely need numbers in the trillions of dollars.
  • Transportation Complexities. As a gas, transportation of this kind of energy becomes increasingly more difficult. Gas requires more space, and this affects everything from the storage space in natural gas-powered cars to compressing stations for pipelines. Compression technology is going to be heavily relied on in order to effectively transport the gas around.

Biofuels

  • Developing Technology. Many of the fuels in this industry remain in the late stages of research. Whether or not a defined leading technology can emerge is yet to be made clear.
  • Scalability Problems. Turning the concept into a realistic industrial operation has thus far proven to be a difficult case, from both the stance of a technical challenge and the cost required. While some companies have cleared this barrier, many have not.
  • Funding Issues. As the uncertainty of new technology and the history of first-generation ethanol failures linger in the minds of investors, the necessary capital needed to expand operations into reality is becoming increasingly more difficult to come by. Government support and initiatives by the military have played a critical part in the ongoing development process.

Yet for all these problems, the promise of each remains up in the air. Neither is truly ready for the mainstream public, although natural gas is significantly closer to such an adoption. Public companies such as Westport Innovations (NASDAQ:WPRT) and Fuel Systems Solutions (NASDAQ:FSYS) have played a vital role in developing the parts needed to create and convert automobiles into vehicles that can support natural gas. Also, a company like Clean Energy Fuels (NASDAQ:CLNE) is necessary for the nationwide expansion of accessible refueling stations that can get the movement rolling. Yet another necessary company in this field will inevitably be Chart Industries (NASDAQ:GTLS), whose technologies are essential for the compression of natural gas.

However, with regard to the greater promise of a long-term sustainable future, the hands-down winners are companies in the developing field of biofuels (although perhaps not quite in the way we had imagined). Not only do these companies have the upper hand of relying on a renewable resource, but they are increasingly gaining traction with their output advantages. Many biofuel companies have become ever more quick to adapt to the other benefits of their technology as they ramp up their production facilities. This has happened in the pursuit of markets that will also face critical shortfalls as oil becomes unsustainable.

A biofuel company like Solazyme (NASDAQ:SZYM) has developed a unique scalable technology to create not just fuels, but also oils used for nearly everything ranging from soaps to food, cosmetics, lubricants, chemicals, jet fuel, etc. With the flexibility to use the same equipment to take in a variety of inputs in order to create a variety of outputs, the company has served as a value creator for partner companies such as Unilever (NYSE:UN), Bunge (NYSE:BG), and Dow Chemicals (NYSE:DOW) -- just to name a few. The company is already well on track to ramp up its commercial production capacity to reach both meaningful and profitable levels by the end of 2013.

While natural gas and biofuels are sure to clash at some level, the conflict may not be nearly as distinct as investors often make it out to be. The future demand for oil alternatives is sure to be so large that each will likely carve out its own purposes in the medium to long term. A company like KiOR (NASDAQ:KIOR), which has claimed a fuel production cost of $1.80/gallon derived from wood chips, is likely to have its own market with its drop-in fuels. The same goes just as much for a natural gas exploration giant such as Devon Energy (NYSE:DVN), which is sure to have its own market to address with regard to supporting the industry or a future vehicle fleet dedicated to driving solely on the commodity. In the end, those who see a conflict between these two energy sources may very well be underestimating just how large the demand for oil replacements will eventually be.

Source: What Will Replace Oil? Natural Gas Vs. Biofuels