Oil is all over the place. It’ll get crushed one day and then bounce right back into the $40s the next. And while the volatility in the oil market probably won’t change anytime soon, thanks to an uncertain economy, there is something distinctly different about the way we’re reacting to the comeback of cheap gas.

No, the green movement won’t just go away. Consumers continue to demand more earth-friendly products. A sense of urgency over climate change and OPEC’s stranglehold over our oil supply continues. We continue to seek alternatives. But alternative energy’s next wave needs to prove it can sustain once the hype dies down.

Take ethanol. At first glance, 2006 looked like a great year to be in the ethanol business. Shares of Pacific Ethanol were on fire, shattering the $20 mark by the end of March. By May, shares broke $40. Bill Gates’ millions helped jump-start the stock, and new government mandates all but ensured the success of the corn-to-fuel business.

As time would soon tell, the spring of 2006 proved to be a great time to sell your ethanol holdings. Pacific Ethanol’s light is not shining quite as brightly as it once was. The stock is more than 98% off its 2006 high, and Gates is steadily unwinding his stake in the company.

Pacific has been plagued with problems recently. The company’s most recent annual report is chock-full of problems, including violations of some debt covenants and other shenanigans involving the company’s line of credit (You can read a good synopsis here.)

But the bigger problem is that you can’t sell ethanol for more than it costs to make it. One would think that would kill this business off entirely. But thanks to inexplicable government support and backward-thinking energy legislation, ethanol production will most likely continue despite the tough lessons we’ve learned.

So the big question remains — can someone successfully develop an alternative energy source that will actually make money?

Do the Math: 20,000 > 28

When you look at the numbers, one particular alternative energy source makes a whole lot of sense: algae. One acre of corn gives you 28 gallons of oil in a year. An acre of algae can yield anywhere between 20,000-100,000 gallons of oil per year. No wonder the updated 2007 Energy Independence and Security Act supports extracting fuels from algae.

While the algae fuel field is not completely crowded, multiple players are developing, harvesting and extracting systems that could one day be industry-standard designs. In as little as three years, we could see a powerful new energy industry.

Chevron and Shell have started exploring the possibilities of algae. There are also a few small companies that are working on the technology. Below are three penny stocks in the algae fuel business. All of these stocks have a market cap under $2 million, a share price under 10 cents, and can be found on the Pink Sheets and Over-the-Counter Bulletin Board:

• GreenShift Corporation (OTC: GERS)
• Nanoforce Inc. (PINK: NNFC)
• PetroSun Inc. (PINK: PSUD)

With the coming transition to alternative fuels, early investors in algae oil stand to claim some huge gains if this technology takes off…

Best,
Greg Guenthner

January 20, 2009

Greg Guenthner

Greg Guenthner heads up Agora Financial’s small-cap division and is the founder of one of the only independent OTC research advisories in the industry. A graduate of George Mason University, Guenthner joined Agora in 2005 after several years as a journalist. He is managing editor of Penny Stock Fortunes and Bulletin Board Elite.

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