Once the Next "Big Thing" in Energy, Are Ethanol's Days Now Numbered?

By Markets Fool.com

The world's energy needs are going to require a lot of sources to power the future. Ethanol has been widely used as a fuel additive in the United States, and currently makes up 10% (or in some cases more) of almost all of the gasoline sold nationwide. Considering that more than 130 billion gallons of gasoline are sold annually in the U.S., that's a lot of ethanol.

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However, there are definite questions as to ethanol's viability both in the short and long term. With that in mind, we asked two of our energy experts, Travis Hoium and Jason Hall, for their thoughts on ethanol. Here's what they had to say.

Travis Hoium: Ethanol was really the first "renewable" energy source that made big inroads in energy in the U.S., well before wind or solar energy became the industries they are today. But ethanol's fundamental flaws have become more challenging than many ethanol fans want to admit and make this a poor industry for long-term investors.

The first challenge is that ethanol isn't abundantly available or even truly renewable, there are trade-offs in producing ethanol. For example, if we increase production of ethanol that means we're using land that could have been used to produce food to produce energy. The food or fuel debate may have been politicized, but it's true that increasing ethanol production increases food costs, which is why farmers love ethanol so much.

Ethanol is also in a tough strategic position in the energy industry. If ethanol production goes up, demand for oil goes down, which will lead to lower oil prices, making ethanol less competitive. Worse yet, when ethanol production goes up the cost of its feedstock goes up, reducing its competitiveness in the market. This is why ethanol has relied on government mandates and subsidies to remain in business. But these subsidies should be short term until the industry can get to a competitive state economically. Clearly, that hasn't happened or we would all be driving ethanol vehicles because it would cost less than oil.

I'm not one for making environmental issues a key part of any investment thesis but in the case of ethanol it is a key flaw in the industry. You have to consume energy just to create ethanol and in the U.S. most of that energy is going to come from burning natural gas or coal. This makes the resulting ethanol far less clean than the industry will advertise. Then consider that you're burning energy to create energy, sometimes at a very inefficient rate. That's an incredibly inefficient process and not even one that's clean like wind or solar.

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At the end of the day, I don't see ethanol being more than a bit player in energy and one that requires government subsidies to exist. I'll keep my money in energy sources like wind and solar that are more efficient, cutting costs more quickly, and are competitive with fossil fuels even without subsidies. That's where the future of energy really lies.

Jason Hall: I agree with most of Travis' analysis, but I think ethanol (unfortunately) is far from dead. To Travis' point, it's not really a "green" fuel, even though it is renewable, as it requires a tremendous amount of energy input to get much in energy output. Furthermore, it's also not cost-competitive without government subsidies. Frankly, I'd probably not even consider investing in any ethanol producer like Archer Daniels Midland or refiner Valero Energy , the two largest publicly traded U.S. ethanol producers, at least based on ethanol production as the reason for my investment.

With that said, ethanol makes up about 10% of all gasoline (sometimes more) sold in the U.S. every year. According to the U.S. Energy Information Administration, that added up to 13 billion gallons of ethanol in 2013 -- up from 1.6 billion gallons in 2000. Considering that ethanol is used to reduce tailpipe emissions in the U.S., and gasoline remains the dominant automotive fuel -- and is likely to for the next 20 years -- that means ethanol isn't going away anytime soon.

With that said, I'm following Travis' advice and not investing a single penny based on ethanol's survival -- just because it's not going away doesn't make it worthy of your investment dollars. Don't get me wrong here: I'm not saying Valero and ADM aren't investment-worthy. I am definitely saying I wouldn't invest in them -- or any other company -- based on ethanol as a renewable fuel.

If you reallywantto invest in ethanol, tryBoston Beer.

The article Once the Next "Big Thing" in Energy, Are Ethanol's Days Now Numbered? originally appeared on Fool.com.

Jason Hall has no position in any stocks mentioned. Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Boston Beer. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.