As part of his macro-plan for the nation, President Bush introduced us during his State of the Union address to a forgotten native of the American prairie -- switchgrass. Trying to stick with my New Year's resolution to pay attention, I decided to find out whether switchgrass could form a significant part of our future fuel supply.

Ethanol as fuel
Ethanol from corn has been a part of the American energy equation for many years. It currently makes up about 3% of our automotive fuel supply and exists in two forms on the market: E10 and E85. E10 is a 10% ethanol/90% gasoline blend that runs in standard gasoline engines. Many farm states mandate the use of E10 and have been using it for decades. E85, meanwhile, is an 85% ethanol/15% gasoline blend that can be used only in vehicles specially designed to handle it. And several million vehicles on U.S. highways already can.

General Motors (NYSE:GM) is the largest producer of E85 vehicles and leads the pack with more than 1.5 million of them on the road. The only challenge for owners of those vehicles lies in finding fuel stations. About 550 stations carry E85, and projections show that nearly 2,500 may supply it by the end of the year. But that will still leave it far from readily available, considering there are nearly 169,000 stations (link opens a PDF file) across the country.

Two types of ethanol
Ethanol from corn is produced in a process not unlike that for making whiskey. For starters, only the kernels are used. They are exposed to enzymes, which convert the starch into sugars. The sugars are fermented with yeast, and the resulting ethanol is distilled to increase its strength.

Ethanol from switchgrass or similar biomass is known as cellulosic ethanol, so called because it's produced from the cellulose in plant stalks. This process of ethanol production has some obvious advantages over the traditional corn method. For one, the entire switchgrass plant can be used to produce fuel, thus eliminating the sorting and sifting required when using only the kernels from an ear of corn. Switchgrass is also perennial, and that helps save on the cost and energy associated with annual planting. And the resources aren't limited to just switchgrass: Corn stalks, wood chips, and other cellulosic biomass that is currently regarded as waste product can be converted to ethanol, too.

A balance of priorities
So, what's not to like? Well, first off, E85 vehicles get 20%-30% worse fuel economy (link opens a PDF file) than gasoline-powered vehicles do. For example, the Chevy Avalanche gets 16 mpg when using gasoline but only 12 mpg when using E85. Therefore, E85 will need to sell at a significant discount to gasoline.

The second downside is that biomass fuel production takes up a huge swath of farmland. Researchers at Auburn University estimate that an acre of switchgrass can produce up to 1,000 gallons of ethanol. That means replacing all of the gasoline consumption in the U.S. with the use of E85 would require at least 150 million acres of switchgrass production -- an area almost as large as the entire state of Texas, and that's based on the highest yield production scenario. In all likelihood, a much larger area would be required.

Finally, successful production of cellulosic ethanol has not yet been achieved on a commercial scale. While the president has set the goal of bringing this technology to market in the next six years, there are no guarantees that it will occur. To put the proposed time frame in perspective, consider that the government has been researching ethanol from switchgrass since 1985. This is not a revolutionary new technology, and we can only wait and see whether ethanol from switchgrass hits the big time at all, much less within six years.

On the upside, producing ethanol domestically creates jobs in the good ol' USA, and it reduces the complicated political entanglements associated with oil. Ethanol also burns cleaner than gasoline, a fact that would aid in the reduction of carbon monoxide and carbon dioxide (CO2) emissions. What's more, growing switchgrass or other biomass plants actually absorbs CO2, thus offsetting much of the CO2 released when the ethanol is burned. Furthermore, I'm willing to bet that no farm-state politician will ever vote against ethanol in any form.

The investment angle
So, who stands to benefit from increased ethanol production? An obvious choice is Archer Daniels Midland (NYSE:ADM), already a major player in corn ethanol. Another one is Deere (NYSE:DE) -- after all, farming an area the size of Texas would undoubtedly require a fair amount of new machinery!

For me, however, I think I'll just stick with the oil patch. I hate to be cynical about alternative fuels, but at current prices, E85 is competitive with gasoline only when substantial government subsidies get involved.

More environmentally friendly Foolishness:

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Fool contributor Robert Aronen does not own shares of any company mentioned in this article. He has never made whiskey, but he has a friend in Sweden who makes vodka in his kitchen to avoid the high liquor taxes. The Motley Fool has a disclosure policy.