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Tickers in this Article: ADM, DSTI, PLUG, BLDP, XOM, CVX, RDS.A
I disdain coyness, so I'll state this up front -- I am no fan of alternative energy.

In my opinion, much of it is propagated on subsidies, wishful thinking, and lousy business models.

That said, many people today believe energy independence is important, and alternative energy is the means to obtain it.

In the United States, it seems everyone who is anyone has latched onto ethanol as an immediate alternative to fossil fuels.

U.S. ethanol production is a profitable business, to be sure, and growth is near exponential.

According to the Renewable Fuels Association, ethanol production has doubled in the past three years, reaching nearly 5 billion gallons in 2006. With 113 ethanol plants currently operating and 78 more under construction, the country's ethanol output is expected to double again in less than two years.

But domestic ethanol only works because of a 51-cent-a-gallon federal subsidy and a 54-cent-a-gallon tariff on imported ethanol.

And the reason for the double-pronged subsidy-tariff attack?

Corn -- the main ingredient in U.S. ethanol -- is hopelessly inefficient as a feed stock because it first must be turned into a sugar before it can be turned into fuel. The combination of subsidy and tariff makes much cheaper Brazilian and Caribbean sugar-based ethanol prohibitive.

And therein lies the problem for investors. Government makes ethanol profitable, but government can be whimsical. Should laws change (and they often do), the 200 or so ethanol plants could be rendered superfluous.

On that front, few companies stand to lose more than Archer Daniels Midland (NYSE: ADM), the world's largest corn processor. The company's shares are up over 200% in the past four years, partly because its coffers have been stuffed with ethanol subsidies.

Another popular alternative, solar power, has also received a considerable run over the past three years. Like the corn-squeezin' companies, many solar-power companies run on government spending.

Consider DayStar Technologies (Nasdaq: DSTI), a developer of photovoltaic products that convert sunlight into electricity. The company's primary revenues were generated from contracts with the New York State government. Those contracts in 2006 totaled $184,000 on which the company managed to lose $20 million, yet at one point last year DayStar's market cap exceeded $180 million.

Fuel cells are another chatted up, heavily subsidized industry. Fuel cells differ from batteries in that they consume reactants, which must be replenished, while batteries store electrical energy chemically in a closed system. Additionally, while the electrodes within a battery react and change as a battery is charged or discharged, a fuel cell's electrodes are catalytic and relatively stable.

Problem is, fuel cells are terribly expensive and terribly inefficient. The overall efficiency (electricity to hydrogen and back to electricity) of fuel cells is between 30% and 50%, depending on conditions, while a much cheaper lead-acid battery might return about 90%.

More investors are foregoing the fuel-cell hype. Plug Power (Nasdaq: PLUG), a fuel-cell leader, has seen its shares tumble after reporting $1 million in fourth-quarter revenues -- a 62% decline versus last year.

Meanwhile, another leader, Ballard Power (BLDP), announced growing sales and a declining cash-burn rate, but that hasn't stopped its shares from losing two-thirds of their value in the past year.

Free-market capitalism dictates that the most efficient energy will be consumed first. For all the environmental and economic troubles it causes, oil turns out to be remarkably efficient. The energy required to pump crude out of the ground, refine it and transport it from oil well to gas tank is about 6% of the energy in the gasoline itself. The alternatives don't even come close.

For that reason, hundreds of billions of dollars flow into oil production annually, and that's going to continue well into the relevant future. According to the International Energy Outlook 2006 Reference Case, world oil demand is expected to grow to 98 million barrels per day in 2015 and 118 million barrels per day in 2030.

I like the companies that produce oil most efficiently and on a grand scale. In other words, the most politically incorrect companies -- Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS.A).

All three are integrated majors and are proven long-term performers with growing revenues, earnings, and dividends. Combined, the market cap of this trinity is $750 billion.

More importantly, Exxon Mobil, Chevron and Royal Dutch make solid money without the smoke and mirrors of government manipulation, which makes them by far a safer investment compared to their alternative-energy counterparts.

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