JBL: Profiting From Energy Independence

When President Bush claimed we were addicted to oil, alternative energy stocks surged, ethanol in particular. The only two pure plays on this traditionally corn-based fuel, Pacific Ethanol (PEIX) and Xethanol (XTHN), are each up threefold since the beginning of the year.

Even with those returns behind them, I believe these stocks still have plenty of upside. Ethanol is the new dot.com, except unlike all those Internet stocks that crashed and burned at the beginning of the decade, ethanol-focused companies will have earnings that live up to the hype.

Before I explain why this is so, I'd like to note that ADM (ADM) is up almost 50% since the beginning of the year, and Deere (DE) is up 20% because farmers have more money. That's in part thanks to increased demand for corn for ethanol. If you're a regular reader of mine, you will know that I was  way ahead of the government and the market on these alternative energy issues.

The U.S. is just beginning to see the ethanol boom. President Bush has required that 7.5 billion gallons of ethanol be used annually by 2012, up from the approximately 6.3 billion gallons expected to be used this year.

Meanwhile, four states have mandated 10% ethanol in all their gasoline, and many more have plans to follow. That means ethanol use could easily exceed President Bush's target. Why? Because the 7.5 billion gallons mandated by 2012 amounts to just 5% of the 140 billion gallons of gas Americans use each year.

It's true that the 51 cent-a-gallon tax incentive for ethanol is likely to be phased out, meaning that taxpayer money will no longer be going to farmers in the form of subsidies. But as long as crude oil remains above $50 a barrel, and corn costs less than $3 a bushel, simple economics will be in ethanol's favor, making it cheaper than gasoline.