By The Peak Energy Strategist Research Team

On February 23, 2012, President Obama was down in Florida at the University of Miami on a larger re-election campaign tour. Touching on one of this generation’s many hot topics, he addressed the painfully high gasoline prices and mentioned alternative sources of energy as a way around them:

“We’re making new investments in the development of gasoline and diesel and jet fuel that’s actually made from a plant-like substance, algae… You’ve got a lot of algae out there, right? If we can figure out how to make energy out of that, we’ll be doing all right. Believe it or not, we could replace up to 17% of the oil we import for transportation with this fuel we can grow right here in America.”

That sounds like an amazing plan: a dream come true, really. A world where nobody brings up the finite state of oil or has to worry about the increasing difficulty – whether technical or political – of bringing black gold to the market… one where the correspondingly high prices just don’t matter nearly as much: That’s the kind of world most of us would doubtlessly like to live in. And it would just be one big bonus if such a substance could stave off the ravages of smog, and the taxes and annoyances associated with global warming.

If algae could do all of that, that would be wonderful. And according to President Obama, the U.S. has researchers (private, public or both) looking into that possibility even now. But unfortunately, as with most things in life, it really isn’t as easy as all that.

The truth is that renewable products used for energy purposes isn’t a new idea at all, though working with algae in particular might very well be. Various forms of biofuel – from leaf-based to corn-based to dung-based – have been around (or at least been toyed with to some degree or another) for decades now. In fact, that particular alternative energy idea dates back at least to 1853, when E. Duffy and J. Patrick created the first engine that was designed to run off of the substance.

Up next, in Germany in 1893, Rudolph Diesel revealed the first biofuel car engine, followed very closely by England’s Herbert Akroyd Stuart and Charles Richard Binney, who had been working on the same kind of device. It was Diesel who said in 1912 that, “The use of vegetable oils for engine fuels may seem insignificant today, but such oils may become, in the course of time, as important as petroleum and the coal-tar products of the present time.”

That’s a powerful thought that so many other inventors throughout world history have clung to. Some of them have been proven correct and some have failed miserably. And others might still be shown geniuses ahead of their time.

Technically, that still could be true of Diesel. It’s only been a century or so since he came up with his technology, after all. And countless other ideas have taken plenty of time and fiddling before they finally caught on.

But so far, Diesel’s hope doesn’t seem to be coming true… and the future doesn’t look all that bright for it either.

Peak Energy Strategist Editor Dave Fessler Weighs in on Biofuels

The Oxford Club’s resident energy specialist, Dave Fessler, is all about the promotion of green energy. He has come out in favor of various forms of alternative fuels – including solar, wind and geothermal – multiple times throughout his various publications. His followers can find examples of such both on his signature service, Peak Energy Strategist and through other hodgepodge outlets such as Investment U (a free e-letter) and The Oxford Club, which incorporates a number of minds towards the greater goal of financial prosperity.

Yet even Dave sees the folly in biofuels, an opinion he detailed a few years back when the subject was popping up, as it does every so often. His article, published on Investment U, can be found in full in the site’s archives and is also included right below…

Biofuels: Don’t Let This Alternative Energy “Greendoggle” Fool You

by Dave Fessler, Energy and Infrastructure Expert
Friday, March 5, 2010: Issue #1210

As the old sixteenth-century saying goes, “You can’t make a silk purse from a sow’s ear.”

Translation: Sometimes, you can dress something up as much as you want, but it doesn’t change what it really is.

Or in the case of biofuel, what it isn’t.

And to coin a more recent adage, “putting lipstick on a pig” is exactly what biofuel advocates continue to do.

I’m interested in all forms of energy – fossil fuels, renewables, nuclear, etc. And like most Americans, it’s my wish to see us weaned off Middle Eastern oil in my lifetime. For example, in the following ways…

  • By moving towards renewable energy resources like wind, solar and geothermal.
  • Nuclear fuel is also a viable way to gain greater energy independence – despite the issue of how to store the spent fuel.
  • The United States is blessed with a 100-year supply of natural gas – the second-largest reserves in the world.

But biofuels aren’t viable. Here’s why…

The Biofuel Brainwash

A “Greendoggle.”

That’s how I’d describe the misrepresentation of the biofuel industry.

Even with its high greenhouse gas emissions, burning coal represents a better solution than biofuels. Especially when you consider biofuels’ detrimental factors.

Right off the bat, it doesn’t make much sense to take the world’s main food staples – corn, wheat and rice – and turn them into fuel.

But just five years ago, bio-ethanol, bio-diesel and bio-gasoline were billed as America’s solution to imported oil. And all it took to drive prices skyward was dwindling crude oil supplies, rising prices, increasing global demand – and a healthy dose of biofuel hype.

On the surface, biofuels seem like a great renewable energy idea. The argument is that carbon produced from biofuels is “better” than carbon from fossil fuels. Why? Because when the plants (i.e. fuel) are grown, it offsets the carbon production.

Congress bought the hype, passing a law, mandating 35 billion gallons of ethanol production a year by 2017. And to grease the wheels, lawmakers tossed a $0.51 per-gallon subsidy at ethanol producers. Bio-diesel producers received even more – $1 for every gallon produced.

Farmers jumped for joy at the prospect of making some serious dough. Crop rotation plans were dumped in favor of one thing: Corn. And lots of it.

Ethanol production plants popped up across the Midwest. Between 2000 and 2008, the number vaulted from 50 to 140. Sixty more were under construction.

Who knew that America’s solution to imported oil was in U.S. soil all along?

But back the corn truck up…

Biofuel Reality Check

In the quest for energy independence, politicians overlooked a few key details…

  • As farmers piled all their resources into growing corn for ethanol, just about every food made with corn rose in price.
  • Food producers then found themselves paying three to four times what they paid for corn just a few years before. And they did what any business does: passed the costs along to consumers.
  • Aid organizations cut food donations by 50% (more in some cases).

A Wall Street Journal editorial said: “Cornell’s David Pimental and Berkeley’s Ted Patzek found that it takes more than a gallon of fossil fuel to make one gallon of ethanol – 29% more. That’s because it takes enormous amounts of fossil fuel energy to grow corn (using fertilizer and irrigation), to transport the crops, and then turn that corn into ethanol.”

A University of Minnesota study in 2008 was even more sobering: “Converting forests, peat lands, savannas, or grasslands to produce food-based biofuels in Brazil, Southeast Asia, and the United States creates a huge biofuel carbon debt. When land-use changes are taken into account, 17 to 420 times more CO2 is released than the reductions gained when these biofuels displace fossil fuels.”

As demand for corn and other biofuel stocks soared, farmers just started planting corn, ignoring a century’s worth of data on the benefits of crop rotation.

And due to the glut of corn, soybeans, wheat and rice were all in short supply, causing their prices to rise, too.

For example, soybeans had to be grown elsewhere. That turned out to be Brazil. But large-scale deforestation in the Amazon Basin (to increase the available land for soybean production) just adds to the insanity of biofuels.

Speaking of insanity…

The Backwards Way to Boost Biofuel

In Sumatra and Borneo, nearly 10 million acres of forest have been burned to create fields for palm oil plantations for biofuel. In Malaysia and Indonesia, they’re about to erase 25 million acres of prime forest.

There are two things wrong with this…

  1. Burning the forest produces 93 times the greenhouse gases that burning the fuel produced on them would.
  2. The trees are nearly twice as efficient absorbers of CO2 than the palm plants grown for fuel stock.

The expiration of the $1 per gallon federal biofuel tax credit in January means many biodiesel companies are no longer commercially viable – and might signal the end for this biofuel “Greendoggle” in the United States.

However, some members of Congress are trying to reinstate it. One can only hope that saner heads will prevail.

Good investing,

Dave Fessler

History Indicates That Dave Is Right on Biofuels So Far

For all of the many ideas that have grown out of biofuels century-long history, none of them have amounted to very much. In fact, from a larger financial standpoint, the entire notion is little more than one really big flop.

As Dave detailed above, it wasn’t that long ago that corn-based ethanol was all the rage in this country. Government and environmentalists alike assured the American people that the substance was going to not only wean the country off of foreign – and often unfriendly – oil dependency, but also save it a significant amount of money, both on the national and individual levels.

Addressing the issue and its subsequent failure, Forbes reminisced in a recent article: “Remember how ethanol was going to save us from dependence on foreign oil imports? After four decades, huge mandates to force it on gasoline consumers, tens of billions of dollars in subsidies, and huge impacts upon food prices, it only represented about five percent of automotive fuel (by volume) in 2008. Biodiesel accounted for less than one percent of the diesel market that year.”

Contributor Larry Bell, who specializes in climate, energy and environmental, among other areas, continues the article by explaining how the basic science of turning algae into viable energy is just about as simple as President Obama painted it to be way back in February. But putting that science into practice to actually fuel an entire nation – especially one as large as the U.S. – requires far too much money to cover “construction, maintenance and operations,” not to mention a steady supply of enormous amounts of water.

Maybe somebody someday will come up to a viable solution to those issues. But because there isn’t any such thing today, it’s completely impractical to speculate on the subject to the extent that too many people are.

To this day, biofuel has been little more than a costly mistake, a fact that Dave Fessler recognizes. So while other analysts and investors try to find ways to make money off of what could turn out to be the newest biofuel craze, he uses his services to point out much more viable ways of making money.

With a history like the one the alternative energy source has, it’s not worth touching with a ten-foot pole… no matter how good and profitable anybody makes it sound.