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It’s been predicted before, and now it’s being predicted again. The International Energy Agency is noting that oil production is down, despite, as you’ve doubtlessly noticed, increased oil prices. Typically when prices rise it precipitates a concurrent rise in production. Oil sources heretofore not economically feasible to extract and/or refine become more attractive, and thus move from the ground to consumer’s vehicles and furnaces.

The IEA reported this morning that in spite of the rising prices, the pace of oil production has not kept up with the quantity demanded in the marketplace. They are predicting that this trend will only accelerate in the coming years. Are they crying wolf? Who can tell, but this comes on the heels of a report issued last month that indicates per capita gasoline use in the 3 northwestern states of Washington, Oregon and Idaho down by an average 10% since 1999. The report theorizes the increased gasoline prices are responsible for much of the decline. You think? Since this came at a time when more NW residents opted to drive SUVs and high performance cars than ever before, it’s probably not because their vehicles are more fuel efficient. Yet.

The IEA report also indicates that the standard culprits; economic growth in the 3^rd world, especially India, China and the Middle East, a growing population and, a failure to increase refinery capacity in the U.S combined with a stagnation in oil production, is the main cause of the shortfall. The report does not see the trends that created the shortfall easing any time soon. Oil production numbers will have to be increased through more expensive means, such as deep water, artic and oil sand extraction.

While this may mean pain for you, and the economy as a whole, it has a silver lining, as do most dark clouds. Just as the problems in the sub-prime mortgage market have generated opportunities for the foreclosure and distressed property investor, this economic situation will create investment opportunities in the alternative energy sector.

Weather you’re in individual equities, traditional sector funds or ETFs, those that are heavily invested in alternative energy stand to do well in the foreseeable future. As an example, Phoenix, AZ based First Solar is on a tear, posting revenue numbers that beat Wall Street’s expectations last quarter by 220%. They have experienced as much as a 392% year over year quarterly sales growth recently, despite just signing new deals that have yet to cone to fruition.  See a story in the investors business daily here.

The Wall Street Journal reported yesterday that U.S. wind power producers are hamstrung by a lack of windmills. U.S. windmill makers just can’t keep up with the demand, leading to a search for wind turbine producers elsewhere. Last year 2,454 megawatts of wind turbine generated energy capacity was installed in the U.S. It’s the same in other countries throughout the world, record numbers of turbine installations have outstripped supply.

One wind turbine producer that’s bet heavily on the trend to continue is the Spanish firm of Iberdrola SA. The Madrid based utility concern has snapped up alternative energy production companies recently, but also owns Gamesa SA, the world’s second largest wind turbine producer, acquired last year for just over $4B. Denmark’s Vestas Wind Systems A/S is the largest wind turbine producer, with 13,000 world wide employees. Last year they installed over 15,000 megawatts of wind generated capacity and had a 28.2% share of the market. Modern wind turbines require around 8,000 component parts, so producers of such parts are not to be overlooked when searching for investment opportunities.

McCord Air Force Base in Washington State is set to begin expanded trials on a new, synthetic jet fuel that’s 50-50 mix of JP-8 and a coal shale derivative. The fuel was produced by Tulsa based Syntroleum and costs, are you sitting down? $10 a gallon! If the Air Force, which uses over 6 million gallons of jet fuel a day, would switch to the fuel, it could provide the economic impetus needed to jumpstart mass production.

As it stands now the high cost is largely due to the lack of large scale production facilities. A plant to produce the fuel in large number will cost an estimated $1 billion (with the inevitable cost overruns, figure $1.4B). It’s kind of the chicken / egg corundum. There’s insufficient quantity of the synthetic fuel demanded due to the high cost, but investors are hesitant to invest in the production plant because there’s not much demand for the fuel. This says nothing of opportunities in the biodiesel arena, a fuel also now being used in small quantities by the Air Force. The fuel is also slowly finding favor with consumers, and the trend is sure to accelerate.

Although there is opportunity in the alternative energy sector that’s recognized by investors, it seems few of us have actually put our money where our mouths are. A recent report by the Calvert Group determined that although 85% of investors feel they can make money in alternative energy, only 20% have actually entered the sector. This in itself is indicative of a future profit opportunity. As more investors enter the sector, demand for shares in alternative energy firms will rise and with it, prices.