All of these would-be solutions, unfortunately, have a major problem: They're not economic unless energy prices are at very high levels.

Take Canada's tar sands. Using today's technology, there's theoretically as much potential oil there as under all of Saudi Arabia. The problem is using the technology is extremely expensive.

In fact, based on what we've seen so far, increasing the scale of operations doesn't help with costs.

The leading developer of Canada's oil sands is the Syncrude venture, which is essentially a partnership between giant energy companies including CONOCOPHILLIPS (NYSE: COP). Realizing that developing oil sands would be expensive and risky, ConocoPhillips and others decided to pool their interests into one giant project, limiting overall financial risk to each member.

Thus far, the partners' ambitious development program has been basically successful. Plans to ramp up output in stages are still more or less on target, despite some unforeseen delays, and Syncrude looks set to continue the expansion.

Syncrude's progress is best reflected in the performance of its tracking stock, CANADIAN OIL SANDS INCOME FUND (TSX: COS.UN, OTC:COSWF). Organized as a Canadian trust, the Fund's only asset is an ownership of a little over one-third of Syncrude. First quarter distributable cash flow per share rose 50 percent, enabling management to boost the actual dividend by 50 percent. Coupled with a 5-for-1 stock split, those results have spurred Canadian Oil Sands' shares to new heights.

Syncrude/Canadian Oil Sands' costs, however, surged to more than $35 per barrel of oil produced. That's more than twice levels of two years ago, and continues a trend in place virtually since Syncrude was formed.

With oil prices more than twice even those levels, the rising cost of Syncrude's output obviously hasn't raised too many concerns. And as long as oil prices continue to rise--or at least avoid a major breakdown--investors will largely ignore the issue. The fact that costs and output are increasing exponentially at the same time does, however, present remarkably different economics from conventional energy projects.

When an ordinary oil or gas well or coal seam is developed, much of the cost is incurred up front. Roads must be built, equipment must be set up, workers must be hired, facilities and supply chains must be put in place and the most profitable methods of exploitation must be sorted out. While this is being set up, the ratio of ordinary operating costs to the amount of oil equivalent produced will be very high. As output is ramped up, however, the ratio tends to fall dramatically, boosting profit.

The fact that oil sands production appears to work in precisely the opposite way--Syncrude's cost per barrel of oil equivalent produced has risen along with its output--indicates remarkably different economics. Producers must rely on ever-higher oil prices in order to increase or even hold market share.

There are many reasons for the rising costs. One is that electricity is so essential for processing what's mined into useable fuels.

Greater demand for power has pushed up its price in the region, as well as demand for natural gas to run the plants, which in turn has increased prices of both gas and power. Another is the enormous amount of waste generated by producing oil from tar sands that must be disposed of (which, by the way, is far greater than waste generated from producing conventional oil and gas).

Regardless of cause, however, it's clear that this is not a fuel source that would survive a return of $30 or even $40 per barrel oil. The more we rely on it, the less likely we'll see a return to those levels, since such a drop would automatically curtail production and hence drive prices back up. But it also means tar sands producers' profits are far more at risk to energy price swings than conventional producers, and their share prices will be as well.

Another misconception about tar sands is that all anyone has to do to make a mint is buy some land holding prospective reserves. That's certainly true for conventional oil, gas or coal reserves--i.e., a small company can almost always sell its interest to a developer if it lacks the resources itself. The key element for developing oil sands, however, isn't the reserve itself; it's the immense sums of money needed to mine and process the stuff into something resembling a useable fuel.

The only companies with the financial power to accomplish that are the handful of super oils that dominate global energy production. In addition to Syncrude, TOTAL (NYSE: TOT) has emerged as a major developer. One thing that's appealing to the French giant is it has its pick of properties with little competition for bidding. That's because any time you have such a limited pool of potential buyers/developers, it's going to be a buyers' market.

That means almost all of the oil sands penny stocks now hyping their wares to investors are going to come up very short of actually producing anything. Their promoters and company insiders will obviously make money, as unwary investors buy and push up their stocks, enabling them to sell shares either given them or purchased for pennies. So will a handful of early bird investors, who have the sense to sell when their moose pasture appreciates.

The majority of investors in oil sands penny mining shares will suffer the same fate as those who indiscriminately chased penny gold shares back in the 1980s. They'll be seduced by the promotional hype and the big gains they fear others are making. They'll be too greedy to cash in on whatever gains may appear, and in the end they'll wind up with worthless stock. That was the pattern in the '80s, even before Black Tuesday, October 20, 1987, the day after the stock market crash of October 19. And once that event hit, there wasn't even a market for many of their holdings.

The only prudent way to bet on oil sands growth is to look to infrastructure companies, the owners of the pipeline and processing facilities that bring the heavy oil extracted from inhospitable northern Alberta to market. These companies' income basically comes from fees for the use of their facilities. That income stream will expand as long as oil sands' output does, and as long as production continues it will be relatively unaffected by swings in oil prices, or by the continued climb in producers' operating costs.

As the exclusive transporter of the output from Syncrude, Canadian income trust PEMBINA PIPELINE INCOME FUND (TSX: PIF.UN, OTC: PMBIF) has an added layer of production. Its fees are earned whether there's any throughput at its pipelines at all, as Syncrude is obligated to pay for the capacity. And as Syncrude expands, so will its system and locked-in stream of fees. Pembina also has a series of projects underway with other would-be oil sands producers that will similarly enrich cash flows in coming years.

Another provider of oil sands infrastructure is KINDER MORGAN (NYSE: KMI), which last year purchased controlling interest in Canadian energy infrastructure player Terasen. It also has extensive plans to expand its capability in the region. Both companies also have numerous other projects to see them through if the oil sands should fizzle. In the meantime, they're reaping an enormous stream of rising cash flow, for doing little more than just being there.

LESS PLAUSIBLE

The main difference between tar sands, ethanol and oil shale--which is found in abundance in the western US--is tar sands' output stands on its own economically. It needs no federal subsidies to be saleable, and there are companies actually making money now by developing it.

Like the oil sands, there's plenty of potential oil reserves right here in the US from exploiting shale. And there are examples of successful production globally, notably South Africa's SASOL (NYSE:SSL). That company was its home country's only major fuel source during the apartheid era, when it couldn't import oil. Today, it makes a profitable living processing a variety of solids to liquids, notably coal to oil, and is a key developer of technology as well.

The fact that no real US shale producer has yet emerged, however, speaks volumes. Moreover, the most promising synfuel technology is coal. Unlike shale, coal doesn't require a complicated process to mine and process and current technology allows it to be easily converted into fuel to power autos. Finally, it's cheap and abundant, and development infrastructure is well entrenched, again unlike shale.

As for ethanol, the hype machine has been in full gear lately, not least from the federal government itself. But investors should not confuse the real reason for the fuel's current success with real economics: Were it not for a cadre of farm state senators and representatives wielding enormous clout in Washington, ethanol would be nothing more than an afterthought.

The ongoing battle in Congress over ending a tariff on imported ethanol says it all. Basically, last year's energy bill mandates using ethanol to replace MTBE as a fuel additive to reduce pollution. MTBE was found harmful to the environment.

This mandate will obviously require a huge increase in ethanol demand, which will no doubt push up its price and by extension the price of gasoline overall. In response, President Bush has proposed easing or eliminating the tariff on ethanol imports, which are principally derived from sugar cane produced in Brazil and the Caribbean.

Brazil has been particularly successful developing ethanol, thanks to a prolonged era of subsidies, technological advance and the fact that sugar has multiple growing seasons. As a result, Brazilian ethanol is cost competitive with petroleum for running automobiles.

Speaker of the House of Representatives Dennis Hastert (R-IL), however, recently stated he didn't "see an economic plus right now" in lifting the tariff. And it's not hard to see who's pulling his strings. Both the National Corn Growers Association and the American Farm Bureau Federation have called on Congress to keep the tariff in place.

Perhaps more important, powerful ARCHER DANIELS MIDLAND (NYSE: ADM), in a letter to House and Senate leadership, wrote, "Removing the tariff will have no impact on what American drivers are paying at the pump." In an election year, those are positively fighting words and imply dire consequences for politicians in need of funds.

The fact that US ethanol producers are willing to go to the mat to protect this tariff--despite the promised explosion of demand--is a clear sign that corn-based ethanol can't stand on its own economics.

Rather, it will do well only as long as the US government stands behind it. That may indeed be for a long time. But ethanol's growth is fundamentally a political and regulatory bet, not an economic or energy one.

THE REAL ALTERNATIVE

The real opportunity in energy over the next several years, however, is natural gas. We're still feeling the fallout from the titanic crash in gas prices during the first quarter of 2006. But while prices are still languishing in the $6 to $7 per million Btu, they appear to have stabilized here in the second quarter, during what is traditionally a "shoulder season" for demand.

Over the next several months, the level of natural gas prices will depend heavily on demand for generating electricity. That, in turn, will be in large part a function of the weather, which is unpredictable. A cooler than normal summer, for example, could further increase inventories and pump up prices.

On the other hand, we've already seen a warm start to the spring season, punctuated by the demand spikes in Texas last month, which occurred during a series of seasonal maintenance shutdowns and triggered blackouts. If that trend continues, the historically warm winter could be followed by a very hot summer--and there's always the risk of violent storms damaging output as they did last year.

As for longer-term demand trends, the drop in gas prices and continued high level of oil prices has already triggered switching back to natural gas in industry. And gas remains dominant in electric power production as well, with significant new plants powered by other fuels still some years off, even if they're ultimately built.

As a result, it's looking more and more like natural gas prices have bottomed, and that the risk is for higher not lower prices in the months ahead. We're not out of the woods yet with all the producers.

Some Canadian trusts producing gas, for example, were stretched to cover dividends in the first quarter and will be even more so when high-priced hedges come off in the coming months.

I fully expect we'll see more dividend cuts in this group, which will send their share prices south in a big hurry. Those who can hold their own, however, could well bust out to big gains later this year, particularly if gas prices bounce back as I expect.

Most attractive are gas producers that are still realizing sales prices below current market value, due to extensive hedging to lock in prices for future output. One of these is DOMINION RESOURCES (NYSE: D), which is also in the process of dramatically ramping up output. The company also runs gas and electric utilities as well as a pipeline and storage network, which generate steady cash flows, and unregulated power plants in key markets.

One final point; alternative energy bets like ethanol and oil from tar sands/shale depend on high prices for conventional energy--oil and gas--to be economic. Gas, despite the huge price gyrations in recent years, remains the benchmark.

One of the most painful lessons of investing is this: The more bets you take, the easier it is to get beat. If you buy a gas producer stock, for example, the only thing that will beat you is a big drop in gas prices. In contrast, if you buy an ethanol or oil sands play, you can get beat by an unforeseen problem with the technology as well a dip in energy prices.

There's nothing wrong with betting on the growth of any of these alternatives. But recognize your success will depend on a lot more than whether or not oil and gas prices go up or down. When it comes to playing a rise in energy prices only, there's no better way to go than established producers of plain old gas, oil and coal.

THE ROUNDUP

The benchmark 10-year Treasury note yield is pushing 5.19 percent as the week draws to a close. That's reasonable, considering the Federal Reserve's push in the fed funds rate to 5 percent this week, and refusal to clarify what its future policy actions will be.

The Fed's wait-and-see attitude may be reasonable on its face. But it does signal that the central bank is going to react to what happens in the economy, rather try to get out in front of it. That's a marked contrast to the Greenspan Era, when the former Fed chairman went to great pains to keep the market guessing about its next move, and always seemed to convey a sense that he knew just where he wanted the economy to go and how to get it there.

It's an historical fact that long-lived Fed chairmen have been replaced by short-timers, just as periods of economic calm and stability have been followed by times of turbulence. The question of which proceeds the other is largely a chicken-and-egg problem. But if the pattern holds Chairman Bernanke's reign may be brief and things will get somewhat violent going forward.

My contention remains that spiking interest rates will, sooner or later, sow the seeds of lower rates, in part by depressing growth in concert with rising energy prices. But in the meantime, they could go a bit higher this time around.

What's most worrisome is we've yet to see the kind of real selloff in income investments that we typically so during rate spikes. In summer 2003, spring 2004 and spring 2005, for example, the mere threat that the 10-year yield could hit 5 percent plus was enough to set off panic-selling in everything from closed-end bond funds to real estate investment trusts and utilities.

It seems unlikely we'll get by without one before this cycle ends either. As a result, I continue to recommend a conservative strategy of holding down the duration of fixed-income holdings, by buying improving credits and controlling maturities. I also advise sticking only with the strongest income stocks, keeping cash and generally being cautious with new buys.

The good news is earnings season continues to unfold positively for Utility Forecaster and Personal Finance Income Portfolio selections.

As long as that's the case, they'll make sense for conservative income investors to hold for income, long-term wealth building and safety.