(FORTUNE Magazine) - Why are you so interested in ethanol?

Our company uses a lot of jet fuel. With oil at $60 a barrel, we've taken on a team of 40 or 50 to explore alternatives from an environmental and economic point of view. Fuel prices will continue to rise dramatically, I think.

So what are you trying to do?

With Virgin Fuels, we will be investing in ordinary ethanol plants, in cellulosic-ethanol plants, in other kinds of alternative energy--and there's a possibility of a Virgin hybrid car at some point. We want to be able to say that we're producing more friendly fuels than we're using normal fuels. Hopefully we will build a fuel company that is a major competitor to oil companies.

This came about when I decided there was a major capacity shortage. Ted Turner rang me up and said, "Come and meet my people. They will convince you there is a better route."

Had you heard about cellulosic ethanol?

I wasn't aware of it. I was enormously excited--we ended up believing we should invest because cellulosic is almost 100% environment-friendly, and there's enough waste products to replace almost 100% of the fuel we need. It just seems like the win-win fuel of the future. With cellulosic ethanol, farmers benefit by extra production, subsidies can finally be put to good use rather than bad use, and it can reduce some of our security problems. It could avoid another Middle East war one day.

Cellulosic-ethanol plants are not cheap, and it still has to be proved it can be done efficiently, but we're willing to put some money into it.

How much?

A rough estimate at Virgin Group is $300 million to $400 million over the next two to three years. The money is for cellulosic and ordinary ethanol plants. We're talking to people in Brazil, India, the Philippines, and America. Sugar plantations in the Caribbean are suffering, and we're looking in places like the Dominican Republic to see whether an ethanol plant can't be constructed there. As far as cellulosic ethanol is concerned, the first plant is likely to be in the U.S.--America has good grants for cellulosic plants. It'll take about two years to build a plant for conventional ethanol, and 3½ years for cellulosic.

Can you actually make money at this, or is it pie in the sky?

On the ordinary-ethanol front, people realize it's a good business and there are good 30% returns. Cellulosic is more risky, but we look at it as a responsibility. Companies in San Francisco are working very hard on the enzymes. Someone will get it right. If you can be in on the ground floor, there should be a good future for it. I suspect the first specific investment will be made over the next three to six months.

You're a businessman. Do you think government subsidies are appropriate?

Ordinary ethanol is competitive in its own right. Cellulosic ethanol will become competitive. Nuclear power got support; cellulosic needs to be kick-started by government.

Have you talked to oil executives?

The industry we're talking about setting up is a competitor to the oil industry.

Should oil companies invest in ethanol?

Every responsible oil company should invest a small amount of their profits in this area. If they don't, their cost basis is going to go up and up, and the environment is going to get damaged. If we get enough investments in this area, we can push oil prices down, or at least make sure they don't go up any further, and protect the environment as well.

There must be some skeptics about what you're doing.

There were skeptics in the record business, but we built the biggest independent record company. With the airline, we've seen 13 competitors go bankrupt, and we've survived. We've built a successful mobile-phone business. We're a slightly unusual company in that we go into industries we know nothing about and immerse ourselves. Fuel is a necessity and it should be a good industry.

So what about jets and jet fuel?

I'm not sure ethanol will ever do it. But if you could cover all automobiles, trains, trucks, and so on using cellulosic ethanol, that effectively leaves airplanes to burn petroleum-based fuel. And with ordinary planes accounting for only 6% of transportation fuel, issues like global warming will be fixed.