Biofuels: Earliest Investors Stand to Profit Most

Includes: FUE, VRNM
by: StreetAuthority

by Andy Obermueller

It's not your imagination... it is getting more expensive to fill up at the gas pump.

We had a reprieve for several months. Following the crash in oil, gas plunged well below $2 a gallon. Now it's knocking down the $3 mark. As a car driver, you might be sweating the increase. As an investor, you should be welcoming it with open arms.

The logic is simple, yet solid. As prices at the pump inch higher, the United States will again begin to look seriously at alternative fuels. For some, this will mean electric vehicles, but for most, the question will be: How can we get cheaper gasoline?

The answer is biofuel -- but not the biofuel that's been rehashed time and time again in the mainstream press. No, the real story comes from a little-discussed piece of legislation that dates back to the Bush era. And it has "game-changer" written all over it.

When Congress passed and President Bush signed the bill that codifies a federal biofuel production quota into law, it called for a range of biofuel, not only the corn-based ethanol we've all heard about before. Also included in the legislation was a call for sugar-based fuel that the government calls "advanced biofuel." This is code for cellulosic ethanol, which isn't made from traditional sugar sources like cane, but from a non-traditional source called cellulose, a type of sugar that's found in all plant life.

This sugar is hard to get to. For much of recorded history, only animals, notably cows, have been able to get energy from this type of sugar, which is locked tightly in the cell walls of plants. Now, using specially designed enzymes, producers can tease out the sugar, ferment it into ethanol and make biofuel from agricultural waste like wheat straw or corn stovers, from special grasses or even scrap wood and paper.

There's actually a company that collects wastepaper from Congress and turns it into fuel -- one of the few ways I know of to extract something useful from Washington!

The federal output table for biofuel calls for billions of gallons of corn-based ethanol, up to a maximum of 15 billion gallons in 2015 -- but that's a little more than a quarter more than we're currently using. The real growth in this fuel will be from cellulosic ethanol, of which the United States produces only a few hundred million gallons a year.

In the coming years, however, that output will raise exponentially, to a mandated 16 billion gallons by 2022. This represents the best hope to not only decrease our national dependence on imported oil but also to lower the cost of gasoline.

Here's the best news for aggressive investors: The companies in this space have been much maligned.

For years, cellulosic ethanol and the idea of growing our fuel have been dismissed as pie-in-the-sky dreams. But the science has caught up, lawmakers have embraced it, and now a lot of major oil companies are bowing to the inevitable future of biofuel.

There's no other industry that has as much growth potential in the next decade, and it's my prediction that cellulosic ethanol will gain currency as an investment trend beginning this year. I think you'll begin to see the media report on this topic when the price of oil returns to the $100 a barrel level. ["Why $100 Oil Could Make or Break Your Portfolio in 2010"]

Until then, though, companies like Verenium (Nasdaq: VRNM) and their fabulous potential are ripe for the picking -- at a fraction of their intrinsic value. My wisecrack about the effectiveness of Congress notwithstanding, Washington is on the case and is dispensing significant funds for research into how to advance cellulosic ethanol on the infrastructure side -- how to get it from the fields to your gas tank.

There's no doubt companies like Verenium are aggressive plays, but you can't simply invest solely in blue-chips and expect your portfolio to rake in profits. (Or sometimes any profits for that matter -- $10,000 invested in General Electric (NYSE: GE) five years ago would be worth about $6,500 today).

As other companies begin to invest in ethanol plant construction, the price of oil will help create a perfect storm. And the earliest investors stand the profit most.

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Disclosure: Neither Andy Obermueller nor StreetAuthority, LLC hold positions in any securities mentioned in this article.