Many of our gray-haired defense experts remember the heat the Pentagon took for a litany of bad purchases it allegedly made in the 1980s, and now the department seems to have sprinted down that path. Gone are the $500 toilet seats and $1,000 coffee pots. Now, under the Defense Department’s alternative fuels program, it’s spent as much as $425 a gallon on biofuel to replace fossil fuels that cost less than $4 a gallon.
The timing couldn’t be worse. The Pentagon is facing unprecedented budget cuts while our nation faces a growing number of complex threats. This is no time to use precious budget resources on technologies rightly the province of the commercial market.
The excuse is that having readily available fuel and not being dependent on foreign sources is a national security issue. According to a February Government Accountability Office report, “DoD has determined that renewable energy sources could help achieve its mission by, among other benefits, expanding and securing necessary energy supplies to reduce dependence on foreign oil.”
While true, that does not compel the conclusion that we need to devote precious defense dollars to develop “green” alternative fuels vastly more expensive than the fuels they may some day replace. This is particularly questionable when the U.S. is sitting on years of fossil fuels which, if exploited, would make being held hostage to foreign sources a historical oddity.
So, why is DoD willing to spend $2 billion on alternative fuels? Today, a gallon of diesel on the commercial market costs, on average, $3.85. The Defense Logistics Agency (DLA) bought 450,000 gallons of an “advanced” variety of alternative fuels refined from different biomass sources, including “non-food waste” conversion and (of course) algae for a reported $12 million. That makes the per-gallon price $26.67, slightly short of seven times what’s available at your friendly fossil fuel service station.
In 2009, the DoD spent $8.5 million with Solazyme for just 20,000 gallons of algae-based biofuel — $425 per gallon. If you’re Harrison Dillon, CEO of Solazyme, what’s not to like? Later that year, according to a Rand Corp. 2011 study, “Alternative Fuels for Military Applications,” the DLA bought 40,000 gallons of fuel refined from the camelina plant for $2.7 million, or more than $67.50 per gallon.
The U.S. Navy is on an alternative fuels “Great Green Fleet” journey. According to data in the Rand 2011 study from the Fiscal Year 2008 Petroleum Use by the DoD report, the Navy used 46,000 barrels per day of petroleum-based fuel in its vessels. That’s approximately 1.9 million gallons per day. At the more modest cost of $26.67 per gallon referenced above, the fuel bill would be $51.5 million per day, or $18.8 billion per year.
The Navy will not be able to instantly replace 100 percent of its fuel demands with alternatives. A reasonable goal might be to achieve 20 percent of total procurement. The hope would be to reduce the cost of alternatives to parity with fossil fuels in the near future. Let’s say it was possible to do that by 2022.
To reach that goal — using a straight line reduction — the Navy would have to reduce the cost premium for using alternative fuel by $2.35 a gallon, or 10 percent of the difference between $26.67 and $3.20, each year. The approximate cost of a gallon of fossil fuel diesel in 2008 was $3.20, according to the Defense Energy Support Center.
Thus in the first year, the Navy would buy 386,400 gallons (20 percent of its 1.9 million gallon total) as alternatives for a purchase price of $10.3 million per day, totaling $3.8 billion annually. The remaining 80 percent of the needed diesel would be 1.5 million gallons per day of fossil fuel costing (at $3.20 per gallon) $4.9 million per day or $1.8 billion annually.
The combined cost would be $5.6 billion, or approximately $3.3 billion more than a purchase of fossil fuel only.
In the second year, the alternative fuel costs would be reduced by $2.35 to $24.32 per gallon. The cost of the alternative fuel would be $3 billion, with a combined bill of $5.2 billion.
However, after taking 10 years to reach parity with fossil fuels, the Navy would have spent more than $18.2 billion extra on achieving “green” fuels for only 20 percent of the fuel for fleet operations.
According to the U.S. Navy Fact File, that is the equivalent value of just over four Gerald Ford-class aircraft carriers 10.4 Virginia-class submarines or 38 littoral combat ships (2010 Unit Cost Cap).
Another argument often made is that investment in alternative fuels will create a sufficient artificial market to drop prices close to fossil fuels. But world consumption of crude oil is 87 billion barrels per day (in 2010) and the Defense Department uses roughly 340,000 barrels, or about 0.4 percent of world consumption. The Pentagon is unlikely to make a dent in the world crude oil market price.
As the Rand 2011 study concluded, alternative fuels have no military benefit. Investment in them will not increase our defense capabilities, yet it will rob the defense budget of money needed for assets and systems that do enhance our defense.
The optimists in the alternative fuels cheering section, however, look at $26.67 a gallon and boast that costs have been dropping and will continue to do so until they are competitive with petroleum. This begs the question: Why is DoD the proper research and development agency for exploring the use of alternative fuels when every defense dime is becoming more precious? Especially when the primary beneficiary of lower alternative fuel prices would be the commercial market.
The business case described above puts the economics of alternative fuels in question when compared with other funding priorities. The return on investment for DoD must be lower fuel prices, not some misplaced sense of pride of engaging in the “green” initiative of the moment.
Finding a variety of ways to ensure energy independence is an extremely worthy goal. However, with economic pressure squeezing crucial national security capabilities, it is not in the nation’s best interest to use DoD resources for developing alternative fuels.
The private sector and the commercial market is the best place for that effort. With the deficit the government is running, there isn’t much of a financial case to be made by using the defense budget to put the nation further in the red by going green.
J. David Patterson, executive director of the National Defense Business Institute at the University of Tennessee and former principal deputy undersecretary of defense, comptroller, in the George W. Bush administration.