Pity the poor woman I saw driving around in a Ford Excursion yesterday. Its 10-cylinder engine inhales a gallon of gas every eight miles. Of course, with a 42-gallon fuel tank, she can still drive more than 300 miles – it’s just going to cost her a small fortune every time.

Filling up today at $4-plus a gallon set her back a wallet-emptying $150. Ouch. It’s amazing there are some of these big gas-sucking SUVs still on the road. Their owners have to be wincing every time they pull up to the pump.

It’s likely they’ll be wincing all summer, too. Meanwhile, concerned consumers and smart investors are looking for alternatives to gas-guzzling engines…

Change is Coming in Engine Design

[ad#Google Adsense]The idea of the internal combustion engine has been around for, would you believe, 805 years?

It’s true. Back in 1206, a man named Al-Jazari of Mesopotamia described a “double-acting, reciprocating piston pump, with a crank rod mechanism.” The Chinese followed with working examples in the thirteenth century, and Leonardo Da Vinci developed his own compression-less design in 1509.

Al-Jazari’s design is essentially the predecessor of most modern internal combustion engines. Over the years, engine designs have been refined, improved, made more powerful, and most importantly, more efficient. There’s just one remaining problem: Most of them still run on costly gasoline or diesel fuel. But that’s about to change.

Congress Finger-Points About Dependence on Foreign Oil… Again

Gasoline has been more than $100 a barrel now for weeks, and we all know what that means: the president and members of Congress pointing fingers about our reliance on foreign oil… again.

You may remember that Washington politicos did the same thing two years ago when oil hit $147 a barrel. So did the seven presidents and seated congresses before this crew.

What was the result? When gas prices eventually over-corrected in the opposite direction, the president and Congress went back to their normal routines of wasting taxpayers’ money. Some analysts foresee similar price corrections and business as usual in Washington. But I’d venture to say that we’re going to see a different outcome this time.

Since 2008, two notable events have occurred and stand to change the way we’ll use energy in the future.

T. Boone Pickens’ Personal Campaign Pays Off

The first event was that T. Boone Pickens got his dander up about our use of foreign oil, and personally went on a campaign to convince Members of Congress that we needed to switch our vehicles over to run on our 100-year supply of natural gas.

It took two years, but HR 1380 was introduced on April 4 by four congressmen, and it now enjoys growing bipartisan support. As of April 15, the NAT GAS Act – or the “Pickens Bill” as it’s now commonly referred to – has 172 co-sponsors. It seems everyone wants to be seen as being part of a good idea… finally.

The bill, if passed, would create about $1 billion in tax incentives per year for five years. Those incentives would encourage truck manufacturers to begin building heavy-duty trucks that would run on natural gas instead of diesel.

In addition, it would provide tax incentives to owners of truck stops who install natural gas filling stations, thereby creating the nationwide infrastructure necessary for this to work. And that could produce solid returns for investors who are thinking long term.

The Electric Vehicle Supply Gap

The second thing that happened in 2008 when gasoline prices jumped over $4 a gallon concerned automobile manufacturers.

The recession hammered sales, and they began to see the writing on the gasoline price wall. So, one by one, nearly every manufacturer in the world announced a line of electric vehicles (EVs) that included:

  • Hybrid Electric Vehicles (HEVs)
  • Plug-in Hybrid Electric Vehicles (PHEVs)
  • Battery Electric Vehicles (BEVs)

Still, consumers didn’t necessarily flock in droves for the cars, as the price of oil fell temporarily and the economic downturn rattled consumer confidence.

Numerous critics of EVs point to recent low sales numbers as evidence that electric cars are going to flop. Poppycock. Clearly, that’s not the case. Such sentiment suggests how little they understand the complexities of the automotive marketing and manufacturing process.

The time it takes for a vehicle to reach market, from initial design to the day it rolls out in a showroom, can take as long as five years. Given that EV models were drawn from scratch, this timeline is fairly accurate, and manufacturers are still in the process of getting their production facilities in line to mass produce these vehicles.

If the number of people I personally saw lined up to drive the Nissan LEAF last month in Washington, D.C. was any indication, the demand is there, and it’s very, very real.

Demand for EVs Outpaces Supply

And that’s not just a casual observation: Ernst & Young predicted last year that companies like Nissan would sell out projected 2010 and 2011 production runs. So far, they appear to be right. And Chelsea Sexton, the electric car guru best known for the film Who Killed the Electric Car?, predicts that demand for EVs could outpace supply later this year, with 50,000 cars on the market and more than 200,000 willing and waiting buyers.

Right now, it’s the supply that’s lacking. Most manufacturers aren’t starting big production volumes until the end of this year or 2012, but that’s always been their plan.

Just like when gasoline-powered vehicles were introduced for the first time, EVs aren’t being made in high volumes yet. You have to walk before you run, and that’s exactly what the electric vehicle industry is doing. The production costs and retail price tag of brands like the Chevy Volt will come down over time, and make these vehicles far more attractive to consumers.

Manufacturers’ initial production runs are headed towards dealers and early adopters in a few key states that have taken the lead with installing the necessary charging point infrastructure. And with Google (Nasdaq: GOOG) working with the Department of Energy to build a smarter charging platform, confidence is building.

The other big difference is that we’re not just talking about building a different model with another gasoline engine. BEVs and PHEVs have large battery packs and a completely different set of manufacturing issues that have to be solved.

Automotive engineers are now mostly electrical engineers. They have to be, since the internal combustion engine is no longer part of the equation.

Transportation is Changing… For the Better

With the advent of large natural gas vehicles (NGVs) and various forms of EVs coming on fast, gasoline and diesel consumption will begin to level off and could even peak in five to 10 years, before permanently retreating.

There’s a whole new paradigm shift in transportation underway. Investors who research and invest in the companies involved in NGVs and EVs should do very well.

Good investing,

— David Fessler

[ad#jack p.s.]

Source:  Investment U