For several years, BMW has been building custom prototypes of luxury cars that can switch between hydrogen and gasoline in an internal-combustion engine. Now, the automaker is touting a version that has gone through rigorous product-development steps, so that it could theoretically be mass-manufactured–although BMW will make only 100 of them and give them away to a privileged group of as-yet-unnamed celebrities and politicians.

Many observers feel hydrogen as a transportation energy source is a far-out proposition. With this move, BMW has at least made a strong case that it will be more practical to burn hydrogen in a traditional internal combustion engine than to pass it through fuel cells to produce electricity to drive electric motors.

The question now is whether BMW’s project really pushes hydrogen cars any closer to adoption, or just represents a refinement of the necessary engineering details.

“They have come down on the side of “OK, if we are going to use hydrogen, using it in an internal combustion engine specially designed for that purpose is the better technology path,” rather than trying to bring brand-new technology to market, says John Heywood, director of the Sloan Automotive Laboratory at MIT. “I think it’s a technical judgment they are making, and maybe it’s got a mid-term, as opposed to a long-term, timescale. They are a high-performance-engine, fun-to-drive-car company. That is their culture, so this fits in with that culture.”

The hydrogen/gasoline prototype is based on BMW’s 7 series sedans, many of which retail for more than $100,000. (No price has been set on the new hybrid, since the car will not be sold.) The vehicle has a super-insulated tank that stores liquid hydrogen at minus-480 degrees F, and a special fuel-injection system that can switch between gasoline and hydrogen. The engine can pack a 260-horsepower wallop while burning hydrogen–something that an electric car powered by a hydrogen fuel cell cannot now do in such a large car, BMW says.

Thomas Korn, senior project engineer for BMW’s hydrogen program in Oxnard, CA, says the new car boasts not only high performance, but also low emissions. Hydrogen combustion leads to the formation of nitrogen oxides, but BMW’s new car has sophisticated control systems that optimize the concentrations of hydrogen being burned and the engine timing, to minimize or eliminate the formation of nitrogen oxides.

Should a demand ever emerge for such cars, BMW could theoretically mass-produce them, Korn says. Unlike an earlier batch of 12 hydrogen-powered prototypes made by BMW, the new car has gone through brutal longevity tests, and uses parts that can be mass-manufactured by suppliers, rather than one-off, custom-crafted components.

“It went through production process, so we have the technology to industrialize it,” says Korn. “On the other hand, the situation out there is not such that we can sell the car, because the potential customer hardly will find a place to fill up the car.”

Even in relatively green-thinking Germany–whose government subsidizes the BMW development effort–there are only a handful of hydrogen filling stations. “Our idea is to give it away to selected users and push the hydrogen economy, and actually get another step done.”

So BMW is both excited about hydrogen and aware that it’s not headed for showrooms anytime soon. That’s because any serious effort to use hydrogen in automobiles raises fundamental questions about how best to make it, deliver it, and store it cheaply aboard a car.

In fact, hydrogen is really only a storage medium for energy, not a fuel source itself. To make it, you need either to first extract it from a fossil fuel–which defeats the purpose of cleaner transportation energy–or to pull it out of water by splitting water molecules with electricity. If the electricity comes from a fossil fuel, again the point is defeated. Thus, making it a sustainable energy source requires using electricity from renewable sources like wind or solar–at a time of great demand for the small supply of such electricity. Such sources would have to be massively expanded for hydrogen to make a significant dent.

Still, none of these drawbacks to hydrogen have stopped BMW from evangelizing about it. “Hydrogen is the fuel of the future. We need a new fuel sooner or later, and the one which is endless, let’s say, is hydrogen. That’s the motivation for BMW in this field,” Korn says. And what’s clear is that the company is the leader in advancing hydrogen-combustion engines, although other companies are also working on them, as well as fuel cells.

MIT’s Heywood notes, however, that even if hydrogen’s problems can be solved, hydrogen is, at best, 50 years away from making a meaningful contribution to our energy needs. “A feeling is growing, that, really, hydrogen isn’t a particularly convenient way of doing all of this. It doesn’t automatically go to the top of the list, but it is a potential way to deal with transportation’s contributions to greenhouse-gas emissions,” he says. “But you’ve got to be really careful about how you produce the hydrogen, and then you have a lot of distribution and storage issues that have got to be worked out, so it is still a very open question.”

Which leaves one question: Who will get these cars? “People who have an impact on public opinion. People who come from the political arena, from industry, entertainment,” says Korn. What about California’s Governor Schwarzenegger? “No comment,” he says.

“I think they should give it to one or two really prestigious engineers,” says Heywood, “to in a sense change the flavor of the media-related effort, and underline that this is a technology exploration.” But he adds that he’s not interested.