Energy industry observers say Sen. Barack Obama is waffling in his support of coal-based energy alternatives.

Obama's camp denies any switch has occurred, but the notion could have major implications for investors in alternative-energy plays like

Syntroleum

(SYNM)

and

Rentech

(RTK)

-- as well as for Obama's appeal as a presidential candidate.

Obama, a Democrat from coal-rich Illinois, co-sponsored the Coal-to-Liquid Fuel Promotion Act of 2007 with Sen. Jim Bunning (R., Ky.) in January. The measure offers federal loan guarantees to companies building plants to turn coal into jet and diesel fuels, along with tax credits and a Defense Department study of the process. The sponsors billed the act as underwriting a clean domestic source of energy for the next generation.

But many greens charge that the coal-to-liquid process isn't clean enough. Since January, Obama has largely ceded leadership of the issue to Sens. Bunning and James Inhofe (R., Okla). Another prominent backer, Sen. Craig Thomas (R., Wyo.), died this month.

On Thursday, Obama sponsored a Low Carbon Fuel Initiative that was consistent with his goal of reducing carbon emissions -- but notably omitted coal as a possible solution to America's dependence on foreign oil.

"My approach would reduce carbon emissions overall in the transportation fuel pool, but it wouldn't dictate what feedstocks could satisfy the low carbon fuel standard or how many gallons of a particular fuel would have to be produced. Instead, fuels could be mixed and matched to achieve the carbon reduction targets," Obama said on the Senate floor.

"In essence, the market would dictate what pool of fuels would be sold in the U.S. in order to satisfy the requirements. The fuels could be corn-based ethanol, cellulosic ethanol, biodiesel made from soybeans, electricity used by plug-in hybrid vehicles, or perhaps some kind of fuel that hasn't even been developed yet. The only requirement is that the overall mix of fuels sold in the U.S. would have to meet the carbon reduction targets set forth in my proposal."

In distancing himself from the coal-to-liquid push, Obama may quiet some environmentalist critics. But he may also risk compromising his image as a candidate who rises above politics as usual -- at least on this issue.

"I don't think the omission

of coal was an accident," says Luke Popovich, a spokesman for the National Mining Association, the industry's largest lobbying group. "He's feeling the pressure; this is not unexpected that the greens would insist on this litmus test from Democrats. They view this issue of coal with the same unreasoning, religious fervor some evangelicals look at abortion."

Ahead of Thursday's carbon amendment, the senator's office issued a "clarification" of his position on coal-based fuels on Tuesday -- just hours after my story detailing

Obama's coal conundrum -- saying: "Sen. Obama will not support the development of any coal-to-liquid fuels unless they emit at least 20% less life-cycle carbon than conventional fuels."

Obama's Senate spokesman Ben LaBolt says the statement was a "specific response" to a

CongressDaily

story that he says "incorrectly" reported Obama and Bunning were planning "joint amendments to subsidize CTL without environmental standards."

LaBolt reiterated that Obama supports development of CTL as a partial solution to America's energy independence, but would oppose any amendment lacking environmental safeguards. He also disagrees with the characterization that Obama has shifted his stance and/or is kowtowing to the green wing of the Democratic party.

But such comments fall largely on deaf ears on both sides of the coal divide.

"Barack Backtracks On Liquid Coal Fuel," says a headline on The Daily Green.com, a unit of Hearst Magazines that aims to be a "one-stop Web destination" for pro-environment consumers. The Web site's news editor says the headline was merely an "introduction" to a

Los Angeles Times

story that declares "Obama yields to a greener side."

Elsewhere, Friends of the Earth, a San Francisco-based federation of environmental groups, issued a statement to "welcome Sen. Obama's clarification ... other senators who care about the future of our planet would be well advised to follow Sen. Obama's lead."

Other Democratic senators apparently have followed Obama's lead (or vice versa) this week, voting against an amendment sponsored by Inhofe that would have funded the development of alternative fuels, including coal-to-liquids, and required the EPA to assess the viability of coal-based diesel and jet fuel.

"The record is now clear," Inhofe said in a statement after Obama and other Democrats voted against the so-called Gas Price Act. "Many of my colleagues in the U.S. Senate have claimed to be proponents of coal-to-liquids technology. Today those senators were forced to put themselves on record -- and they voted against it. Their constituents and the American people are entitled to know how they vote, rather than what they might 'declare' in press conferences."

Clearly, there's an element of partisan politics at work here. But the National Mining Association is concerned green groups are pressuring Democrats to impose an "unrealistic standard" on CTL fuels.

The industry group says the greens are demanding a 20% lifecycle reduction in greenhouse gas emissions, and an 85% capture of greenhouse gas emissions. Those guidelines "would all but end any chance America has of using CTL fuels to reverse our growing reliance on foreign energy," according to a letter from the lobbying organization to Sen. Jeff Bingaman (D., N.M.), chairman of the Energy & Natural Resource committee.

"What the National Resources Defense Council and other greens are doing is raising the bar to point where coal-state Democrats cannot" support CTL, says Popovich.

He says a "20/70" standard is doable and more realistic. "They're trying to say, 'We recognize there's a value in this coal, but here's the standard we think you need to insist upon,' which is calculated to make it impossible for the industry to qualify for these loans. That's partly what we're seeing here."

The NRDC's climate-control specialist declined to comment.

Tulsa-based Syntroleum, which has been working with the Air Force to test alternative fuels at Tinker Air Force Base in Oklahoma, would almost certainly have benefited from Inhofe's legislation.

The broader issue for investors is that if congressional support for CTL wanes, it could have negative implications for CTL technology providers like Syntroleum, Los Angeles' Rentech and South Africa's

Sasol

(SSL) - Get Report

, as well as coal producers such as

Arch Coal

(ACI) - Get Report

,

Peabody Energy

(BTU) - Get Report

,

Consol Energy

(CNX) - Get Report

and

Massey Energy

( MEE).

In Obama's home state, Rentech is partnering with Peabody to build a CTL project in East Dubuque, Ill. The first phase of that project is estimated to cost over $800 million, or roughly twice Rentech's market cap, notes Pavel Molchanov, an alternative-energy analyst at Raymond James.

"Rentech is facing some financing challenges in trying to be the first mover in developing this industry from scratch in the U.S.," he says, adding that federal loan guarantees "would go a long way in securing some bank financing for this; clearly it would improve companies' access to capital."

Federal loan guarantees for CTL plants were a key component of the Coal-to-Liquid Fuel Promotion Act Obama co-sponsored with Bunning in January.

"I had hoped

Obama would be giving this issue a lot of air time -- it has really not happened," says Molchanov, who has a market perform rating on Rentech. "It definitely seems like the whole

CTL concept is lacking a true champion of national prominence."

Aaron L. Task is editor at large of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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