Fuel Price Effects on Readiness

Abstract

Executive SummaryThe Department of Defense (DoD) endured a series of sharp fuel price changes between 2005 and 2011, which resulted in a net $27 billion unbudgeted fuel requirement. Because most fuel used by the Department is used for operational purposes, the Office of the Secretary of Defense (OSD) is concerned that an unbudgeted fuel requirement may negatively impact operations and that this in turn may negatively impact readiness. In general, readiness refers to a Service's ability to produce units qualified and able to perform tasks and missions in time for emergent contingencies.While fuel purchases represent only about 2.5 percent of the Department's budget, there is large variation among the Services. In Fiscal Year (FY) 2012, the year following the period we studied, fuel accounted for almost 16 percent of Air Force Operations and Maintenance (O&M) expenditures but only 4 percent of the Army's O&M and 1 percent of the Marine Corps' O&M. Also, since 2004, the rate of increase in the fraction of the O&M budget that is attributable to energy costs has accelerated, implying that as energy prices have increased, exposure to price risk has increased relative to other expenditures.This research effort explored both qualitatively and quantitatively whether fuel price changes leading to an unfunded fuel requirement have affected readiness in the past, and whether they could again in the future. The qualitative component involved a series of interviews with the Services and review of doctrine and budgetary documents. This allowed the research team to develop a more nuanced view of how fuel price changes are handled.The processes by which fuel is programmed for, budgeted for, acquired, and distributed shape the ways in which readiness can be affected by changes in price. The following list describes the basic Department-wide process:• The Office of Management & Budget (OMB) projects the market price of crude oil.• The Office of the Secretary of Defense (OSD) uses the OMB projection to project the price of refined petroleum products, and publishes official fuel rates.• The Department sets requirements for refined petroleum products to support warfighter needs.iii• DoD components program for fuel by multiplying their requirement by the OSD rate. 1• All fuel programming is wrapped up into a budget submitted to the president. The final programmed price is referred to as the President's Price.• The DoD budget contains only enough funds to pay for programmed requirements at the budgeted price.• Defense Logistics Agency (DLA) procures fuel on the world market to resell to the Services.• The Defense Working Capital Fund (DWCF) finances fuel and uses available cash balances to attempt to stabilize customer prices relative to budgeted prices.(DLA charges all DoD customers anywhere in the world the same price per gallon.)• When unable to stabilize the price at the budget price using cash balances, DLA adjusts the price charged to the Services.• A DLA price increase results in an unbudgeted fuel requirement for the Services.T...