Ethanol Is Not the Answer

One of the biggest problems with investing in "the next big thing" is the risk that the old thing isn't nearly ready to be supplanted. That certainly looks to be the case when the subject turns to ethanol.

Oil has undeniable problems as a fuel source. It's increasingly difficult to find; when it is found, it's not often in an ideal location; and it pollutes the atmosphere when combusted in the form of gasoline.

Ethanol has been trumpeted as a solution to the energy-security, renewability, and climate-change issues that oil presents. The first count is fairly unassailable -- whether the source is corn, sugarcane, rapeseed, or jatropha, many more countries have potentially robust agricultural energy supplies than have access to petroleum reserves. On the second count, these inputs are sort of renewable -- except for the minerals that are used to fertilize the crops. And as for climate change, corn-based ethanol falls flat over its full life cycle, but ethanol derived from sugarcane and especially cellulosic feedstocks improves the emissions picture substantially.

Ethanol is politically palatable in the U.S., and it has strong lobbying support from agricultural interests in Washington. This advocacy, above all else, has driven a major build-out of ethanol capacity that is overshooting demand and withering the price of the fuel. At the same time, high corn demand has lifted prices, which further pressures ethanol producers' margins.

You can interpret all of what I've said as a really long-winded way of saying "don't buy ethanol stocks." With VeraSun Energy (NYSE: VSE  ) and Aventine Renewable Energy (NYSE: AVR  ) hitting record lows, and even mighty Archer Daniels Midland (NYSE: ADM  ) struggling mightily, you probably don't need me to tell you there's something amiss here. Yet my intent is a bit different. I want to promote a better way to invest in the twilight years of oil's reign.

While ethanol producers are racing to the bottom, large oil producers are running to keep in place. That may not sound like a much better situation in which to invest, but this is where the oil service industry comes into play. These companies are very much geared toward keeping even the tired old behemoths chugging along. In my view, energy-service companies are the ideal way to play oil's golden years.

Some of the largest and best-known oil-service companies, such as Schlumberger (NYSE: SLB  ) , Weatherford International (NYSE: WFT  ) , and Cameron International (NYSE: CAM  ) , are doing extraordinarily well. All three touched annual highs on Monday, as did Core Laboratories (NYSE: CLB  ) , a mid-cap stock that I highlighted last month.

Skip the future-gazing -- this group represents today's best thing.

Related Foolishness:

  • Brazilian sugarcane ethanol player Cosan recently had a quiet American debut.
  • Pacific Ethanol's margins were looking a bit slim last quarter.
  • If you insist on ethanol, Archer Daniels Midland appears to have the best staying power.

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7/22/2014 4:00 PM
ADM $48.20 Up +0.12 +0.25%
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AVR $0.09 Down +0.00 +0.00%
Aventine Renewable… CAPS Rating: *
CAM $69.08 Up +0.18 +0.26%
Cameron Internatio… CAPS Rating: ****
CLB $166.34 Up +0.60 +0.36%
Core Laboratories CAPS Rating: ****
SLB $113.41 Up +0.37 +0.33%
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