You could not walk into a biofuel store today to purchase a gallon of advanced fuel, because such stores don’t yet exist. But if they did, customers would pay a hefty premium as things stand now. This is because the current demand for these fuels is anemic, so any company would be forced to charge a high rate per gallon: small-scale production incurs higher costs. This is called an economy of scale, indicating the greater savings realized by mass production. The infrastructure for fossil fuels is extensive. Accordingly, the cost remains very low by comparison with advanced biofuels. This ratio precludes meaningful purchasing of biofuels by private customers. For a start-up biofuel company to succeed as anything more than a well-funded biology hobby, a trigger of some sort—such as the U.S. Navy’s commitment—must catalyze further investment in the product.
The trigger will cause a chain reaction in which more biofuels become available on the market while their price gradually decreases. As the use of these fuels in different areas becomes more attractive, more third-party buyers will appear. Then companies can expand production yet again—by this time, other intrepid, biologically adept individuals will have started their own businesses, thus spurring competition in the market and flooding the streets with increasingly less-expensive biofuels until a rough equilibrium is established (full disclosure: one of the coauthors is the CEO of Energy Pioneer, a company dedicated to innovative power-saving solutions).
Sustainability and decreased volatility set biofuels apart from their fossil-fuel competition. American demand can be supplied almost exclusively here in the United States and would be subject to a more free market than one dictated by the Organization of the Petroleum-Exporting Countries and by non-renewable global oil reserves.
For his part, Secretary of the Navy Ray Mabus is wagering that the Navy’s needs can overcome economies of scale in advanced biofuels. His commitment to “supply 50 percent of DON energy demand with alternative sources . . . by 2020” and fuel for the “Great Green Fleet” are part of the trigger necessary to develop these less-volatile products.1 Accounting for rising petroleum costs by the end of the decade, this trigger may finally bridge the gap between sustainability and cost-effectiveness.
This is a bold strategy, but it is far from unprecedented or irresponsible. Mitigating economies of scale is something the Department of Defense has consistently done well. The Defense Production Act (DPA) of 1950 affords the President “a set of unique economic authorities to incentivize the creation, expansion or preservation of domestic manufacturing capabilities for technologies, components and materials needed to meet national defense requirements.” In 2005, the definition of “national defense requirements” was extended “to include not only military production and construction but also energy production or construction.”2
The DPA has been used to overcome such economies of scale as “silicon carbide, indium phosphide, and gallium arsenide wafers for electronics, microwave power tubes, radiation hardened microelectronics, superconducting wire and metal matrix composites.”3 More famously, the act helped provide funding for the Navy’s controversial nuclear-propulsion efforts, among countless other projects.
Secretary Mabus has conceded that biofuels are hardly a panacea. The efficacy of various types of the product is a debate that will mark the future of naval energy policy. Yet for a nation that intends to be both economically and militarily viable for the foreseeable future, these fuels are a critical piece of the energy puzzle.
Critics of current biofuel prices forget that the Navy—and the Department of Defense as a whole—has been mitigating economies of scale for more than 50 years with enormously positive results. Constructive debate on how best to power our ships and airplanes is essential, but refusing to act on viable new sources because their up-front costs are greater than the status quo ignores precedent. The U.S. Navy helped lead the world from sail to coal to oil to nuclear power. Now it is once again at the helm of an energy shift. We are in a unique position to dictate our energy destiny this century, taking the lead in a changing world as it grapples with increased energy demands. Resourcefulness—not inaction—is key.
2. “Defense Production Act,” Defense Production Act Committee, www.acq.osd.mil/mibp/dpac.html.
3. Rich Mirsky, “Trekking Through That Valley of Death: The Defense Production Act,” Innovation 3, no. 3 (June–July 2005).
Mr. Kleeb, as chief executive officer of the company Energy Pioneer, works with utilities, contractors, and banks to bring cost-effective and sustainable energy sources to households. He lived for 19 years on a military base overseas.