What will be the fuel of the future?

published 4 October 2007

What will be the fuel of the future? There are plenty of new forms of renewable energy all vying to take the place of oil. And they could make pretty profitable investments.

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Going green is becoming big business. And big business knows it.

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Tesco recently launched a £100m fund to finance investment into sustainable technologies, while HSBC has promised to become carbon neutral'.

Organic milk and fair trade bananas fill our supermarket shelves, while taxes on plastic bags may not be far away.

Green investments: alternative energy

But in investment terms, the biggest green sector of all has to be alternative energy, which has been shoved into the limelight by the soaring cost of oil and instability in the Middle East.

And now even the UK's biggest oil company is getting in on the act...

BP is committing $500m to research on biofuels.

It's a drop in the ocean for BP, but it comes on top of the $8bn it has already put aside for its new low-carbon alternative energy arm, says The Telegraph.

Speaking at the launch of BP's annual Statistical Review of World Energy, Lord Browne said: "We believe the demand for biofuels will rise significantly through the next decade. Consumers want energy which is clean and local."

And judging by the response to the listing of VeraSun, America's second-biggest ethanol producer, he's right. The company saw its shares which floated at $23 each - soar as high as $30 on its first day of trading, valuing the company at more than $1.7bn.

The third and fourth largest producers Hawkeye Holdings and Aventine Renewable Energy - are due to float later this year.

Renewable energy: is corn ethanol a viable alternative?

So is corn ethanol a genuine alternative to oil, or is it just another hyped-up bubble industry?

Cyrus Sanati on Breakingviews.com is sceptical about the ethanol industry. He says that "the economics and chemistry" of ethanol production haven't changed since Henry Ford shelved the first ethanol-run engine in 1908 because it was too expensive to run.

VeraSun plans to sell its corn ethanol as a fuel called E85 which is 15% petrol and 85% corn ethanol. "But E85 is difficult and expensive to transport and has almost no price savings over petrol."

He's not the only one who is concerned. Russell Hasan of Alternative Energy News reckons that "a near-term boom and bust in corn ethanol is possible". Potential risks to the industry include a fall in the price of oil, a spike in the price of corn, the withdrawal of US government subsidies or increased competition from foreign producers such as Brazil.

Certainly, the reaction to VeraSun's flotation suggests there's a lot of optimism priced into the shares already.

But it's important to remember that as Lord Browne points out - this is not purely about cost. The fact is that people will pay a premium to go green. UK consumers in particular are quite happy to pay more for organic and fair trade' food, or eco-friendly' cleaning materials. Why wouldn't they do the same for a fuel which they perceive to be cleaner?

You can read more about ethanol on our website here: Can ethanol save us from oil addiction?

Of course, alternative energy isn't the only solution to oil at $70 a barrel. At that price level, looking into other, more obscure sources of oil becomes economical. Royal Dutch Shell has been researching ways to make oil from oil shale in Colorado for around 10 years now, while Canada's tar sands have been generating a great deal of excitement among investors for some time (if you'd like to read more about the tar sands which are thought to rival Saudi Arabia in terms of potential oil reserves - then click here: How to invest in Canada's black gold mine.

But while green fuels and alternative oil sources are still in their infancy, the dirty old man of the energy industry is making something of a comeback.

At the aforementioned conference, Lord Browne highlighted the fact that coal is the world's fastest-growing fuel. This is mainly due to consumption by China. The emerging giant accounted for nearly half of the growth in global energy consumption during 2005.

But the good news is that coal is also cleaning up its act. China's severe environmental problems mean it has made a zero-emissions coal-fired power plant one of its main energy priorities.

It's also plentiful. While many experts are worrying about supplies of crude oil peaking, there is enough coal in the US to last for another 250 years, says MoneyWeek regular Dan Denning. You can read more of Dan's thoughts on coal below.

We also recently published an interesting piece from Martin Spring of the On Target newsletter on how existing technology can be used to actually convert coal into oil. Click here to read it: Could coal replace oil?

Turning to the stock markets...

The FTSE 100 rallied strongly, gaining 112 points to close at 5,619 as investors regained some of their appetite for mining stocks. Xstrata was the main riser among the miners, up 8% to £19.66 as Canada's competition authorities cleared its bid for Falconbridge. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 jumped 109 points to 4,729, while the German Dax rose 116 to close at 5,422.

Across the Atlantic, US stocks built on Wednesday's rally, as markets welcomed Federal Reserve chief Ben Bernanke's comment that high energy prices seemed to have had little impact on inflation so far. The Dow Jones Industrial Average surged 198 points to 11,015, while the S&P 500 rose 26 to 1,256. The tech-heavy Nasdaq gained 58 to 2,144, its biggest single-day gain since March 13, 2003.

Overnight in Asia, the strong performance on Wall Street continued to buoy markets. The Nikkei 225 soared 405 points to 14,879, the biggest rise since February. The index has gained 0.9% this week, the first weekly gains in six weeks.

This morning, oil was higher in New York, trading at around $70.05 a barrel. Brent crude was also higher, trading at around $67.

Meanwhile, spot gold was trading at around $584 an ounce, helped by a weakening dollar and generally brighter sentiment. Silver was also higher, trading at $10.30 an ounce.

And in the UK, energy supplier Centrica has announced it will spend £400m on building a new gas-fired power station that will begin operating in 2008.

And our two recommended articles for today...

How can you make the most of tax breaks on Aim?

- London's Alternative Investment Market is attracting huge numbers of foreign firms. This means there are even more opportunities for investors to exploit the tax breaks available on the junior market. But there are pitfalls too, warned Tom Bulford in a recent issue of MoneyWeek. Find out how you can make the most of the tax incentives without losing your shirt in the process, by clicking here: How can you make the most of tax breaks on Aim?

Why you should invest in coal

- One benefit to high oil prices is that it forces innovation that will result in new forms of fuel, says Dan Denning in Profit Watch. But one of the prime contenders to take the place of oil harks back to the Industrial Revolution - coal. To find out why the dirty old man of the energy industry is making a comeback, click here: Why you should invest in coal

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.