Jim Jubak

Jubak's Journal1/8/2008 12:01 AM ET

Profit from a stupid energy policy

A new federal law mandates a variety of changes -- but not for years. Here are five stocks that are likely to benefit from the politics of delay.

By Jim Jubak

House Speaker Nancy Pelosi called the energy bill Congress passed and President Bush signed in December "groundbreaking." Now that oil has hit $100 a barrel, other descriptions -- laughably inadequate, cruel hoax, stupidity incarnate -- come to my mind.

I do, however, have one good thing to say about this law, which combines the worst of Washington special-interest politics with the desire of the average politician to avoid rocking the boat while seeming to do something for "the people." It is a superb guide to making money in the energy sector over the next five years:

Buy oil-service stocks, coal producers and transporters, movers of water and, surprisingly, producers of electrical cable, owners of pipelines and solar stocks.

Today, I'm going to explain the provisions of the bill and give you five picks for the first two segments, oil-service companies and coal producers and transporters. I'll save my plays on water, electrical cable and pipelines for my next column and give solar stocks a column of their own to round out the series.

New energy requirements

The Energy Independence and Security Act, to use its bloated title in Washington-speak, does the following:

  • It requires cars and light trucks sold in the United States to deliver a fleetwide average of 35 miles per gallon from the current 27.5 miles per gallon by 2020.

  • It sets new energy-efficiency standards that would phase out incandescent light bulbs in favor of compact fluorescents and other energy-efficient bulbs by 2014.

  • It mandates an increase in the production of biofuels, such as corn-based ethanol, to 36 billion gallons by 2020.

  • It throws a small barrel of subsidies, mostly for research, at energy technologies -- $90 million a year for advanced battery research, for example.

  • It requires the Department of Energy to study a grand range of topics from the durability of engines using biodiesel to the barriers to greater use of biogas.

In other words, aside from the rather timid increase in miles per gallon by 2020 -- European clean-diesel cars can easily get 40 miles to the gallon already -- this is a recipe for doing nothing meaningful in the next five years.

Everyone, even an ethanol fanatic, knows we aren't going to get to 36 billion gallons of corn-based ethanol by 2020. Competition for corn supplies for fuel and food has already pushed up corn prices to the point where making ethanol is barely profitable. And that's with production running at 6.4 billion gallons of corn-based ethanol and consuming just 20% of the corn harvest in 2007. Most estimates show corn-based-ethanol production peaking at somewhere near 15 billion gallons a year.

Fuel technologies in the works

And where's the rest of that 36 billion gallons of biofuels to come from? From technology that would turn switch grass or wood chips or other sources of cellulose into ethanol or some other fuel.

The problem is that this technology isn't quite ready for prime time. Range Fuels, with funding from venture capitalists and $76 million from the Department of Energy, has begun work in Georgia on what it calls the country's first commercial-scale cellulose-to-ethanol plant, using wood chips and forest residue to produce ethanol. Other government grants awarded Jan. 3 -- a total of $385 million -- went to Iogen Biorefinery Partners, Abengoa Bioenergy Biomass of Kansas, Alico, BlueFire Ethanol and Poet (formerly Broin).

Video on MSN Money

Jim Juak
Oil scare tactics
Fear is one of the primary elements driving oil prices higher, explains MSN Money's Jim Jubak. So the recent move by Russian energy giant Gazprom to snare some of Nigeria's huge natural-gas reserves has oil-market watchers scared -- and is keeping oil near $100 a barrel.
It's hard to find a public company on the cutting edge of the future of biofuels to invest in. There are a few small publicly traded companies working on developing better enzymes for turning cellulose into fuel. They're small and volatile, so check them out carefully. One you might consider if you're hankering after an investment in this sector is Verenium (VRNM, news, msgs). This small biotech has research agreements with DuPont (DD, news, msgs), Bunge (BG, news, msgs) and Cargill. Caveat emptor: The stock trades for less than $10, and the company is projected to lose money again this year.

Continued: Years from reality

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