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Department of Defense Fuel Spending, Supply, Acquisition, and Policy Department of Defense Fuel Spending, Supply, Acquisition, and Policy Anthony Andrews Specialist in Energy and Energy Infrastructure Policy September 22, 2009 Congressional Research Service 7-5700 www.crs.gov R40459 CRS Report for Congress Prepared for Members and Committees of Congress Department of Defense Fuel Spending, Supply, Acquisition, and Policy Summary Department of Defense (DOD) fuel consumption varies from year to year in response to changes in mission and the tempo of operations. DOD may consume upwards of 1% of the petroleum products refined in the United States annually. Petroleum products purchased and consumed overseas may double DOD’s consumption. The majority of DOD’s bulk fuel purchases are for jet fuel, which has ranged as high as 101 million barrels annually in the past decade. The U.S. refining industry has been supplying 50% of the jet fuel demand. DOD has consumed as much as 145 million barrels in overall petroleum products annually. In FY2000, fuel costs represented 1.2% of the total DOD spending, but by FY2008 fuel costs had risen to 3.0%. Over the same time, total defense spending had more than doubled, but fuel costs increased nearly 500%. Prices paid for military specification JP-8 and JP-5 jet fuel have exceeded the price of commercial equivalent fuel. In a recent move to contain fuel costs, DOD has begun substituting commercial grade jet fuel for some of its purchases, and upgraded the fuel to military-specification. Currently, 141 refineries operate in the United States. DOD’s top four fuel suppliers operate a combined 31 refineries in the United States, which represents nearly 6 million barrels per day of crude oil distillation capacity. A typical U.S. refinery yields a limited supply of jet and diesel fuel depending on the type of crude oil processed. Gulf Coast (Texas and Louisiana) refineries yield up to 8% jet fuel. Generally, refineries are set up to run specific grades of crude oil, for example light sweet crude or heavy sour crude. Light sweet crude is particularly desirable as a feedstock for gasoline refining because its lighter-weight hydrocarbons make it easier to refine. Heavier crude oils require more complex processing than light crudes, and sour crudes require desulfurization. Changing crude oil supplies have consequently forced refineries to upgrade their processes (thus increase refinery complexity) to handle heavier sour crude oils. At the same time, the Environmental Protection Agency (EPA) has taken action to require lower sulfur content of diesel fuel, and has proposed a final rule that will require refineries to report their greenhouse gas emissions as a prelude to expected legislation that will limits emissions. The Defense Energy Support Center (DESC), which falls under the Defense Logistics Agency, has the mission of purchasing fuel for all of DOD’s services and agencies. In practice, DESC has typically awarded fuel contracts for lengths of one year, but there are other buying programs with longer contract periods. DESC uses fixed-price contracts with economic price adjustments. These adjustments provide for upward and downward revision of the stated contract price upon the occurrence of specified contingencies. DESC has determined that supplies and related services are eligible for the multi-year contracting provisions under the Federal Acquisition Regulation, and has adopted contracting instructions for entering into multiyear contracts. Bulk petroleum contracts and direct delivery fuel contracts are likely to remain one-year contracts, however. DESC bases contract delivery price on the lowest cost to the government; however, the hidden logistical cost born by operational commands moving the fuel to their area of operations may not be fully accounted. The acquisition process for new military capabilities now requires that DOD account for fuel logistics when evaluating lifecycle costs. Congressional Research Service Department of Defense Fuel Spending, Supply, Acquisition, and Policy Contents Background ................................................................................................................................1 Fuel Purchases ............................................................................................................................2 DOD Fuel Cost vs. Commercial Fuel Price ...........................................................................3 DESC Fuel Cost vs. DOD Outlays ........................................................................................5 Refining, Suppliers, and the Crude Oil Supply ............................................................................6 Crude Oil Supply ..................................................................................................................6 Refining................................................................................................................................7 Sulfur Regulations ................................................................................................................9 Greenhouse Gas Regulations...............................................................................................10 U.S. Refiners Supplying DOD Fuel.....................................................................................10 Refinery Jet Fuel Yield and Supply .....................................................................................13 Fuel Acquisition........................................................................................................................14 Acquisition Regulations ......................................................................................................15 Multiyear Contracting Authority .........................................................................................15 Acquisition of Alternative Fuels ..........................................................................................16 Fully Burdened Cost of Fuel ...............................................................................................17 Policy Considerations ...............................................................................................................17 For Further Reading..................................................................................................................20 Figures Figure 1. Average Cost of All DESC Purchased Petroleum Products............................................3 Figure 2. DOD Fuel Costs vs. Commercial and Crude Oil Price ..................................................4 Figure 3. Crude Oil Supply 2007.................................................................................................6 Figure 4. Petroleum Products Boiling Range ...............................................................................7 Figure 5. Yields of Typical Gulf Coast Refineries ........................................................................9 Tables Table 1. DESC Fuel Product Purchased by Category ...................................................................2 Table 2. DOD Fuels Costs vs. Crude Oil Costs ............................................................................4 Table 3. DESC Fuel Costs vs. DOD Budget Authority & Outlay..................................................5 Table 4. Crude Oil Assays ...........................................................................................................7 Table 5. Top U.S. Fuel Suppliers to DOD FY2003 - FY2008..................................................... 11 Table 6. U.S. Refineries Operated by Top Suppliers...................................................................12 Table 7. Military Use vs. Commercial Use Jet Fuel, and Total U.S. Refined Products ................13 Table 8. U.S. Refined Military Jet Fuel Percentage of U.S. Refined Jet Fuel and All U.S. Refined Products....................................................................................................................13 Table 9. U.S. Refined Military Jet Fuel Vs. DESC Jet Fuel Purchases........................................14 Congressional Research Service Department of Defense Fuel Spending, Supply, Acquisition, and Policy Appendixes Appendix. Terms.......................................................................................................................21 Contacts Author Contact Information ......................................................................................................23 Congressional Research Service Department of Defense Fuel Spending, Supply, Acquisition, and Policy Background Department of Defense (DOD) fuel consumption varies from year to year in response to changes in mission and the tempo of operations. DOD may consume upwards of 1% of the petroleum products annually refined in the United States. Foreign purchased petroleum products may double DOD’s consumption. The Defense Energy Support Center (DESC), under the command of the Defense Logistics Agency (DLA), has the mission of purchasing fuel for all of DOD’s services and agencies, both in the continental United States (CONUS) and outside (OCONUS). DESC’s origins date back to World War II, when the Army-Navy Petroleum Board fell under the Department of the Interior. Its mission transferred to the War Department in 1945 and its designation changed to the Joint Army-Navy Purchasing Agency. In 1962, the agency became a part of the former Defense Supply Agency, now known as the Defense Logistics Agency (DLA). Designated the Defense Fuel Supply Center (DFSC) in 1964, it served as a single
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