(Editor’s note: When entrepreneur Rich Hilt told VentureBeat that his Menlo Park, Calif. company, LiveFuels, is developing algae as an alternative fuel, we asked him to explain. Here’s his piece.)

President Bush has asked us all to consider the liquid fuels market as an important priority. His recent State of the Union Address challenges all Americans to reduce our absolute consumption of gasoline by 20 percent over the next 10 years • 15 percent from substituting other fuels (notably ethanol) and 5 percent by higher miles per gallon vehicles.

His vision is to rely on ethanol from corn and other cellulosic sources such as wood chips. But it may be equally important to all of us, if the next “Tiger in our tanks” are tiny “Creatures from the Black Lagoon.” Yes, algae. (In fact, much of the oil we use today comes from dead algae that is thousands of years old.)

Our transportation system is the largest user of liquid fuels, consuming about 140 billion gals of gasoline and 45 billion gals of diesel fuel every year. The rest, 135 Billion gals of liquid fuels, is used to heat homes and fuel industrial processes. The United States currently produces about 5,000 million gals of ethanol from kernels of corn and 300 million gals of diesel from oil crops (such as soybeans and canola) half of which is exported to Europe.

There is no doubt that President Bush’s proposal, to increase to 35 billion gals of ethanol and biodiesel within about 10 years can be done. The current acreage devoted to corn or soybeans for fuel would need to grow from 13 million acres to perhaps 40 or 60 million acres. This would represent about one third of all crop acreage.

The real question is: should ethanol be the focus or will other sources be ignored in doing so. Right now, ethanol produced from only the kernels of corn yield about 370 gals/acre/yr. Diesel produced from soybeans produces 50 gals/acre/yr. Biodiesel from Palm Oil beats both with yields of 600 gals/acre/yr.

The promise of using the entire corn plant • which is referred to as “stover” and involves a more complex process in turning the cellulosic materials into ethanol • could produce 1,000 gals/acre/yr. Brazil is currently using sugar cane for its ethanol and produces about 650 gals/acre/yr. They are working on a “Super” cane that could produce 3,200 gals/acre/yr. So there is a range today of 50 to 600 gal/acre/yr for ethanol and diesel from biomass and the promise of 1,000 to 3,200 gal/acre/yr in the next 5 to 10 years for some of the other newer varieties of crops.

Putting this in perspective, during the 80s and early 90s, the National Renewable Energy Laboratory (NREL) found algae that produced the equivalent of 1,000 • 5,000 gals/acre/yr of biodiesel in their lab (see NREL info here; downloads Pdf). The field of biology has changed greatly since NREL worked on the problem. If over the next 5 to 10 years NRELs results can be reproduced outside of the lab, and extended to the 10,000 • 15,000 gal/acre/yr that some biologists think can be achieved, it presents a formidable challenge to the other biofuels.

People in the energy business are looking for an oil that can be used to provide a feedstock to existing oil refineries. It might come from corn, oil crops, or algae. Don Paul, Chevron’s Chief Technology Officer, has referred to this as “super” crude, and should be viewed as an important goal of the biofuels industry. The advantage that biologists have in working on algae is that they can literally look for the right algae with oils that have carbon molecules with chains of 5 or 6 carbon atoms rather than the 12 • 15 carbons in most of the exiting biofuels. This would take advantage of the entire infrastructure already in place.

The challenge for companies in the algae-to-biofuels business is to make the industry real. There are existing companies such as Solazyme and LiveFuels who are currently focusing on the biology. Companies such as Green Fuels and Aurora Biofuels are involved in finding ways to grow the algae. There is an existing group of companies currently in the nutraceuticals industry harvesting and supplying algae for food supplements and cosmetics (such as Cyanotech). There is even a company in New Zealand (AquaFlow) that has a small shed next to the tertiary holding ponds at a sewage treatment plant that is producing just enough biodiesel to provide 5 percent of the fuel for a small SUV.

So the challenges are there. Can the “Test Tube Washers” (biologists) find the right algae that can produce the most and best oil. Will the “Plumbers” (growers) figure out how the get the most from open ponds, closed ponds, or perhaps more sophisticated “bioreactors.” Is there a way to leverage the experience from the “Squeezers” (nutraceuticals) to be able to separate the oil from the algae. Does “Big Oil” (refiners) have the commitment to provide its future CEOs with some alternatives to finding oil by punching expensive holes in the ground.

Investments in the area of algae-to-biofuels will have to have some champions, just like the solar, wind, fuel cell, and ethanol industries have experienced. None of them were, or are at this time, instant successes. It will take a blending of existing energy companies, government research labs and dollars, and VCs/Entrepreneurs to make oil from algae and other alternative fuels happen.

The politics will still be there. Corn growers have a strong lobby. The soybean lobby isn’t as big but is just as determined to keep its position in the energy debate. Even the “conservationists” can manage to bring people to DC to argue their case. There isn’t any lobby for “Small Critters” yet, but it will undoubtedly happen.

Over the next 10 to 20 years, it will take ethanol or butanol from biomass, diesel from oil crops, and algae oil to help the world, and not just the US, provide for liquid fuels for its transportation and heating requirements. By 2030 the world will need to have an additional 500 to 600 Billion gals more oil. It might require almost doubling of the existing acres under cultivation. The cost to build biofuels plants could amount to $600 to $800 Billion. All of this is difficult but achievable, and together with the developing of technologies that use less fuels should help the world’s energy situtation. I am personally looking forward to spending the next decade in the exciting field of CleanTech.