Every day the U.S. imports nearly 15 million barrels of crude oil and related petroleum products. That's equal to around 60% of the country's energy needs. Even a temporary interruption of that supply can lead to energy shortages and price spikes that have severe, lasting economic impacts.

What's worse is that many of those imports come courtesy of politically unstable regions of the world. As the chart below shows, close to 20% of America's crude oil imports come from the Middle East, where oil infrastructure is a constant target for terrorist groups. And another 15% comes from West Africa, including countries like Nigeria where rebel groups have played havoc with oil producing sites. In short: America's imported oil supply is far from secure.

And the nation pays dearly for that lack of security in the form of higher oil prices. In fact, more than 35% percent of the U.S. trade deficit is directly due to imported crude oil; Americans spend a close to $800 million on imported oil per day. And every time there's a terror attack or negative geopolitical development, oil prices spike. Few would argue that there's a significant political risk premium built into oil prices.

The Domestic Energy Source America Has Been Waiting For
But what if there were a way to reduce America's dependence on foreign oil imports? Imagine the economic advantages of a fuel that could be produced and sold in the U.S., eliminating (or at least reducing) the need to haul tankers full of petroleum halfway around the world from the Middle East to the U.S. Gulf Coast. Such a fuel could reduce energy prices for consumers, stimulate economic growth, and even reduce geopolitical tensions in the Middle East.

That's exactly the promise held out by ethanol and other so-called biofuels. The term biofuels refers to any energy source that's derived from agricultural products or organic matter. Far and away the most common biofuel in the U.S. is ethanol -- a type of alcohol distilled mainly from corn. The U.S. is one of the world's largest producers and exporters of corn; most of the nation's ethanol is produced directly from corn grown right in the heartland of the U.S. Midwest. Therefore, ethanol is totally free of political risk.

Right now, there are two main uses for ethanol. First and foremost, ethanol is a common blending agent. That means refineries mix ethanol with conventionally produced gasoline to produce a blended fuel.

Every car sold in the U.S. is capable of burning up to 10% ethanol; most are capable of burning fuels with mixtures of as high as 15%. In fact, ethanol is already blended with conventional gasoline -- you probably have already filled up with the corn-derived fuel without even knowing it. Even better, ethanol's use as a blending agent is growing quickly due to a series of environmental regulations.

In 1990, the Clean Air Act went into effect. This legislation limited the amount of carbon monoxide and unburned hydrocarbons (basically gasoline that didn't ignite properly) that could be released from passenger cars. Readers who live in or near certain metropolitan areas are likely familiar with air quality tests that must be performed on their cars every few years to test for the presence of such pollutants. Much of this is a result of clean air legislation.

One way to lower the carbon monoxide content of automotive exhaust is to oxygenate fuel -- basically add a chemical that increases the oxygen in fuel when it's burned. Back in the early 1990's, the oxidizer of choice became a chemical called methyl tertiary butyl ether -- commonly known as MTBE. MTBE effectively oxidizes fuel and is inexpensive to produce.

But in the years after 1990, MTBE was found to have some unfortunate side effects. Specifically, MTBE bonds easily and readily with water -- when it leaks from fuel tanks it often finds its way into the groundwater supply. And secondly, MTBE is thought to cause cancer -- at least 28 States have listed the additive as a carcinogen.

That's where ethanol comes in. As an effective oxidizer, it's the only widely available alternative to MTBE. Earlier this year, U.S. refiners switched from using MTBE to using ethanol as an oxygenating blendstock; the government is phasing out the use of MTBE.

Demand Far Outstrips Supply
But there's an issue with ethanol: insufficient supply. Refineries are not able to secure supplies of ethanol quickly enough to meet demand. 

To meet demand for ethanol, the nation's ethanol producers are building out their capacity to produce the fuel. Meanwhile, a host of new producers are entering the fray, frantically building new facilities just to keep pace with booming demand. This industry clearly has years of growth ahead of it.

But that's only one use for ethanol. While normal cars can burn fuels with as much as 10% to 15% ethanol, specially modified cars known as flex-fuel vehicles are capable of burning gasoline much richer in ethanol. In fact, a blend of fuel known as E85 -- 85% ethanol and 15% gasoline -- is already available at some gas stations. Better yet, E85 generally sells for about a 15% discount to the cost of regular gasoline -- a significant incentive for consumers to switch to the fuel.

Government Incentives
Another major push behind ethanol: government incentives and mandates. The government offers significant tax rebates for ethanol producers to encourage the building of new ethanol production plants. These incentives make it even more profitable to make ethanol. And the federal government also encourages farmers to grow corn to produce the fuel. 

Of course, ethanol can never fully replace crude oil or totally break America's dependence on foreign oil. The U.S. consumes about 320 billion gallons of crude oil every year -- even if Congress' mandate is achieved, ethanol would account for just 2.5% of annual demand. Nonetheless, ethanol will certainly play a role in decreasing America's dependence on oil. 

To get an idea of the potential, consider the case of Brazil. Brazil produces ethanol from sugar instead of corn; sugar-derived ethanol costs about half as much to produce as corn-derived fuel. More than half the cars sold in Brazil are capable of running on any mixture of ethanol and gasoline; these flex-fuel cars can even run on 100% pure ethanol fuel. Brazilian ethanol has proven extraordinarily popular -- ethanol actually accounts for more than half of all fuel burned in passenger cars in that nation.

Bottom line: ethanol demand is growing quickly and the government is actively pushing the fuel. The Energy Information Administration, a unit of the U.S. Department of Energy, projects massive growth for the fuel. That's despite the fact that the EIA models only tiny demand for E85 -- their estimates are based almost solely on ethanol's use as a fuel additive. The chart shows the EIA's projected growth for ethanol compared to growth in gasoline demand out to 2030. As the chart clearly shows, ethanol use is projected to grow more than 4 times as fast as conventional fuel.

How Can Investors Profit from this Growing Industry?
With the aforementioned points in mind, stocks leveraged to the booming demand for ethanol and other biofuels are set to see tremendous growth in the coming years. By buying in a short-term pullback and holding for the long-term, investors should see significant gains. 

Additional Industry Profiles . . .

Alcoholic Beverages Alternative Energy Bulk Shipping Casinos Coffee Retailers Consumer Staples Credit Cards Credit Ratings Debt Collection Deep Discounters Ethanol For-Profit Education Gold and Silver Grocery Retailers Healthcare Supplies & Services Natural Gas Online Travel Outdoor Advertising Railroads Satellite Radio Slot Machines Title Insurance Wineries

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