Can ethanol save us from oil addiction?

George Bush hopes that ethanol is the 'silver bullet' to end America's oil addiction. But even if this is too optimistic, alternative energy is an investment story that just won't go away...

In his State of the Union address, George W Bush said that he wished that America could end its oil addiction; his plan is to cut US consumption of Middle-Eastern oil by 75% by 2025.

He went on to say, that "by applying the talent and technology of America, this country can dramatically improve our environment, move beyond a petroleum-based economy and make our dependence on Middle-Eastern oil a thing of the past".

As the Wall Street Journal reported, he is touting cellulosic ethanol as the 21st Century silver bullet to wean the US off its long, perilous addiction to the Middle-Eastern fuel.

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The importance of his remarks are not so much whether or not the US can achieve such an extraordinary objective, but the simple fact that mainstream and alternative energy have become very big investment stories. A client of ours said only this week that he keeps reading about alternative energy and has come to realise what a very big story it is.

Quite recently, Chevron placed an advertisement in the New York Times, which said the following: "The world consumes two barrels of oil for every barrel discovered. The fact is the world has been finding less oil than it has been using for over 20 years.

'Not only has demand been soaring, but the oil we have been finding is coming from places that are tough to reach. At the same time the newly discovered oil is of the type that requires a greater investment to refine. And because demand for this precious resource will grow, according to some, by 40% by 2025, fuelling the world's growing economic prosperity will take a lot more energy from every possible source".

Biofuels research benefits farmers, said the Financial Times, and sugar prices are soaring because of its use to make ethanol, says the Wall Street Journal.

From an investment point of view, the energy story will not go away and demand for energy from all sources will grow alarmingly. As Chevron indicated, oil alone is not going to deliver the amount of energy that the world is going to need in the future. It is hard to imagine the future without energy prices being very high.

By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.

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