On 26 January 2012, while visiting Buckley Air Force Base near Denver, Colorado, President Barack Obama lauded the Department of Defense for its leading role in energy conservation. The President’s words show the administration is driving DOD investment in energy efficiency and alternative fuels from the top down, with senior DOD civilian and military leadership proceeding full speed ahead to accomplish the President’s energy vision. With Air Force Secretary Michael B. Donley, Navy Secretary Ray Mabus, and Assistant Secretary of Defense for Operational Energy Sharon Burke by his side, the President noted:
The military is doing its part, as usual. Now, it’s important for the military to do its part so we can set a good example and help create an additional market for clean energy . . . [This] means that the world’s largest consumer of energy—the Department of Defense—is making one of the largest commitments to clean energy in history. That will grow this market, it will strengthen our energy security . . . Our number-one priority is always the security of this nation. But what our military understands is that if we’re smart on energy, that saves DOD budgets that allow them to do a whole bunch of other things.1
The Green Fleet and the Navy’s Energy Goals
With $1.8 billion invested in energy efficiency, alternative fuels, and a comprehensive energy public-affairs campaign, the Navy seems to be leading the way in military-energy transformation. In 2009, then Chief of Naval Operations Admiral Gary Roughhead made it clear that he believed that energy would be a “strategic imperative” by the year 2020. As such, he declared two fleet-focused energy goals: To cut tactical fuel consumption by 15 percent from a 2008 baseline and to utilize 50 percent alternative-sourced fuel in tactical vehicles. This followed the Secretary of the Navy Ray Mabus’ five energy goals:
- Power 50 percent of the Navy’s total energy usage from alternative sources by 2020
- Power 50 percent of energy used ashore from renewable resources by 2020
- Demonstrate a “Green” strike group in local operations and deploy a “Green Fleet” fueled by nuclear and fossil fuel alternatives by 2016
- Transition their 50,000-strong commercial vehicle fleet to 50 percent hybrid or electric vehicles by 2015
- Make energy a key performance factor in acquisition of new systems.2
By examining the CNO’s goal of reducing tactical fuel consumption by 15 percent from the 2008 baseline, the implications of using alternative fuels, and the cost of sailing the “Great Green Fleet,” one will quickly see—by extension—that the DOD’s energy investments as a whole warrant more scrutiny. The purpose of this exercise is not to disprove the peak oil theories upon which the DOD’s decisions seem to be based, or to imply that all the efficiency investments made were ill-advised, but to highlight that the goals were conceived without proper analytic rigor. Without this rigor, many analysts see investing all available resources in energy-related initiatives as imprudent. There are many theories and opinions on fossil-fuel futures, yet leadership has not shown any interest in providing a proper analytic foundation for their investment decisions. Such hasty investment puts warfighting capability at risk while still falling short of its goals.
Recent strategic attention has shifted to the Pacific theater, meaning the U.S. military’s next war will likely be Navy-focused. In light of fiscal constraint, lack of applicable technology and concrete analysis, and uncertain and dynamic energy futures, the Navy should either abandon or restate the consumption reduction and any alternative energy-related goals (sister-service goals should also be scrutinized). The United States cannot risk losing the next war as a result of efforts to curry political favor in “greenness.”
If the U.S. government’s goal is to go green through DOD investment and policy changes, it should look elsewhere. By far, Navy utilization of oil pales in comparison to U.S. domestic consumption. To put this in perspective, the U.S. government comprises 2 percent of domestic oil consumption: 93 percent of that is by the DOD and 25 percent of that is by the Navy. The Navy’s oil consumption is only .465 percent of total U.S. consumption.3 Clearly, the DOD is not the consumption and cost driver for global oil.
The Global Oil Market
Although global oil markets are very complicated, three primary factors drive fuel costs: global supply, global demand, and reserves maintained by countries, which act as shock absorbers during cost spikes. Obviously, the Navy’s stated goals indicate the service sees fuel costs as a limiting factor to deploying ships in the next decade. In other words, investing heavily in energy efficiency and alternative fuels demonstrates that leadership believes the basic ability to provide fuel to ships and aircraft could be the deciding factor in battle by 2020.4 Many experts hold the opinion that this is improbable.
To believe in the goodness of the CNO’s and SECNAV’s goals, one must buy wholeheartedly into the theory of peak oil production. This theory insists that present-day production capacity is nearly maximized and that production will decrease over the coming decades, forcing exponential growth in cost due to demand increases in emerging economies like China and India.5 While many fossil-fuel models draw curves showing quickly rising costs due to scarcity of fossil fuel, others do not. Development of known oil fields, undiscovered fields, unconventional oil (new harvesting methods), and natural gas liquid in combination could potentially increase world oil production. Some models predict that the peak may occur as late as 2050, with a gradual decline thereafter.6 The reality of future oil production will likely lie somewhere between these theories. All models predict scarcity within the next 200 years, meaning that sooner or later the world as a whole needs to wean itself off of fossil fuels.
It seems that Navy leadership has not considered this alternate future and instead advances the peak-production hypothesis as they endeavor to invest all available funds in energy efficiency initiatives and alternative fuels since return on investment would be quickly realized with skyrocketing fossil-fuel prices.7 The DOD must consider when it will become a strategic imperative and when it should invest in energy efficiency and alternatives in balance with warfighting requirements.
The Case for Alternative Fuels
Currently, biofuels are very expensive, yet the SECNAV’s willingness to buy them is undeterred. “At $26.67, biofuels can’t compete with traditional, $3-a-gallon jet fuels the military currently buys. Mabus says he is nonetheless confident that Pentagon demand will create a secure enough market to drive down the price enough that it can compete with fossil fuel.”8 Surprisingly, Secretary Mabus sees force structure as a lever: “The only way we can afford to get the number of ships, the number of aircraft that we need is to change the way we get fuel.”9 Considering their share of consumption, neither the DOD nor the Navy alone will create a viable demand for fuel or alternative fuels.
U.S. domestic use (public), commercial maritime shipping, and the air transportation industry dwarf the Navy’s consumption. These sectors will drive cost parity for fossil-fuel alternatives. When for-profit industries see promise in cost parity (driven through oil scarcity and alternative production capacity/distribution in the future), they will invest and utilize alternative fuels.
According to the British Petroleum Outlook 2030, the 2012 U.S. biofuel supply is one million barrels. In 2030, biofuel supply is projected at 2.5 million barrels.10 Comparing the $26.67 per gallon price point highlighted in Secretary Mabus’ congressional testimony to the cost of fuel from the U.S. Energy Information Administration’s International Energy Outlook 2014, real cost parity between alternative fuels and fossil fuels is questionable by the mid-2020s.11 With this uncertain energy business case and the likelihood that the Navy will be called on to maintain presence and conduct major combat operations around the world in the near term, sacrificing ship hulls as the SECNAV suggests might be premature.
The 2010 RAND study Alternative Fuels for Military Applications directly questions why alternative fuels are being pursued. The study found “no direct benefit to the Department of Defense or the services from using alternative fuels rather than petroleum-derived fuels.”12 Second, it stated “if a domestic alternative fuel industry does develop, alternative fuels will be sold at the then-prevailing fuel prices, which over the foreseeable future will be determined by crude oil prices in the world oil market.”13 Why would a producer of alternative fuel sell at a price less than the market-comparable fossil fuel, when doing so would result in a loss for its stockholders? Third, the study pointed out that DOD research and development, testing, and certification are being conducted to foster commercial feasibility in an “if we build it, they will come” mentality.
Use of the Navy budget to subsidize commercial affordability to falsely influence cost parity is viewed by the Senate Armed Services Committee as misappropriation of Navy funds. In a February 2012 hearing, Representative Randy Forbes (R-Va.), a member of the House Armed Services Subcommittee on Seapower and Projection Forces, criticized Mabus’ plans, asking, “Shouldn’t we refocus our priorities and make those things our priorities instead of advancing a biofuels market?” He continued, “You’re not the Secretary of the Energy. You’re the Secretary of the Navy.”14 Later, in a March 2012 hearing, Senator John McCain noted that the Navy had spent over $400 per gallon for roughly 20,000 gallons of algae-based biofuel for testing. He then questioned the Navy’s recent track record in its alternative-fuels program, saying, “maybe [this] will be another Solyndra situation.”15
The RAND study also stated “current Department of Defense contracting authority is inadequate to allow DOD to cost-effectively promote early industrial production of alternative fuels.”16 There may be a conflict of lines of effort as well. One of the final recommendations from the study was to “clarify the roles of DOD and the Department of Energy in alternative fuel technology research,” since it seems that the DOD’s budget has been used to fill gaps in the DOE’s research program.17
While the platforms for the 2012 Green Fleet demonstration and the 2016 deployment have been already been certified to burn 50/50 blended alternatives, the demonstration and the deployment are problematic. Due to ship schedules, the demonstration will not include a unitary carrier strike group, expeditionary strike group, or the like; instead it will comprise various ships and aircraft flying and sailing non-simultaneously from both U.S. coasts. The deployment in 2016 will take an initial load of more than 300 million gallons of fuel. After this 50/50 blended fuel is burned, ships and aircraft will utilize fossil fuel (this might be seen as evidence that the Navy is prematurely utilizing alternatives). Biofuel cost projections place the 2016 price above $20 per gallon. Given that the price of alternative fuel is half this estimate (which is highly unlikely), the Green Fleet deployment will occur at twice the fossil-fuel cost. There is clearly negative return on investment for alternative fuels in the near term.
Navy Tactical Energy-Efficiency Investments
Navy energy investment became a priority in 2009 with the development of the Chief of Naval Operations (OPNAV) N4’s Task Force Energy and the Naval Energy Coordination Office (NECO). NECO was ordered to collect, validate, and forward support technologies and initiatives in line with the SECNAV’s and CNO’s goals. These initiatives matured in 2010 with the development of Program Objective Memorandum-12 (POM-12), where considerable investment was promoted and more conservative investment views were stifled. POM-12 energy investments were collected in a single database, with estimates of barrels saved by year provided by initiative sponsors. These estimates were not independently vetted outside NECO but were used to justify the $1.8 billion POM-12 energy-related investment.
In October 2009, the Chief of Naval Operations Assessments Division contracted the Center for Naval Analyses (CNA) to vet the initiatives. To accomplish this, CNA established the baseline 2008 fuel consumption. They then used ship and aviation platform inventories and fuel burn rates from the Naval Energy Utilization Reporting System to estimate potential growth in consumption, since it would work in direct opposition to goal attainment. The modeled growth provided 20 percent increase in consumption.18
POM-12 efficiency initiatives were divided by CNA into specific (items related to known technology or procedures) and non-specific (those that were not related to anything tangible). One non-specific initiative labeled “Energy Conservation Broad Agency Announcement” attributed per annum savings from prospective technology gained from a public affairs campaign to solicit new initiatives from industry. This could be seen as questionable, since estimating a number of barrels saved would be irrational without a specific efficiency gain factor to apply to the new technology. The aviation goal leveraged 1.7 million of the 2.7 million barrel requirement with the non-specific initiative “Legacy Energy Conservation Research and Development.” This initiative attributed savings to the implementation of unnamed technologies on legacy platforms. The CNA study questioned the legitimacy of these assumptions: “[E]ven if they were accurate, the savings from the POM-12 initiatives are highly dependent on non-specific sources of savings—over 60 percent in FY 2020 and over 70 percent in FY 2030. Betting on these to reach the CNO’s goal seems problematic.”19
The study also found that planned force structure with fuel-intensive platforms like the joint high-speed vessel, littoral combat ship, CG-47 class cruisers, DDG-51 class destroyers, F-35 Joint Strike Fighter, F/A-18 E/F/G, P-8, and others make the consumption cut unattainable without reducing our worldwide forward presence. “Given the Navy’s planned ship force structure through FY 2020, fuel use 15 percent below the FY 2008 level equates to a reduction of 34 percent below the extrapolated FY 2020 use.” To meet the goal, the Navy would have to reduce ships’ deployed and non-deployed (training) steaming days. For aviation, “fuel use in FY 2020 is about 13 million barrels compared to the 10.1 million barrels in FY 2008, so fuel use 15 percent below the FY 2008 level equates to a reduction of about 22 percent below the extrapolated FY 2020 use.”20 This equates to a 10 percent reduction in flying hours. The CNA study also more directly questioned the validity of the data used to make Navy investment decisions.
Using a metric of the cumulative barrels saved per million dollars expended shows some enticing bargains—perhaps too good to be true. We do not calculate any return on investment for any of the initiatives (we don’t think the data is good enough to reliably do this), but the metric of cumulative barrels saved versus dollars spent tends to highlight some of the POM-12 initiatives. However, before funding any of these seemingly attractive initiatives, both the cost and the savings need to be carefully evaluated.21
Invariably, there will be some good that comes from devoting $1.8 billion dollars at an energy problem that might develop in 20–30 years—similar to the tangible technological gains from sending a man to the moon in the 1960s. Clearly though, the CNO’s and SECNAV’s goals are not feasible.
A More Cautious Course
What are the Navy’s “strategic imperatives”? Should the Navy invest to fill today’s ship-sized holes in the ship maintenance budget, or invest in operational energy reduction? Each energy initiative is assigned a technological readiness level (TRL) that provides a measure of maturity in the defense acquisition process. TRL might be viewed as a measure of risk in achieving advertised savings of a particular initiative. By calculating return on investment per year, number of years to achieve it, and then sorting by technological readiness level, one could develop an investment model that meters risk and return in much the same way one balances risk in retirement accounts.
For example, some believe that it is highly likely that in the near term the United States will deter or engage North Korea, Iran, or China. Those believers are more concerned about that threat than they are about oil spiking to $200 per barrel. With this view, scaling back investment in low TRL, low return on investment, or long payback period initiatives and accepting the consequences to leaderships’ goals makes sense.
The original Navy POM-12 list consists of 65 initiatives. A methodology to select those that minimize risk of attaining return would demonstrate that energy efficiency initiatives provide real savings in a crawl, walk, run approach. This is similar to investing in bonds versus higher- risk tech stocks. By removing initiatives with a TRL of greater than 6, which indicates it is in the final stages of operational testing or already implemented, the number of initiatives reduces to 42. If return must be achieved by 2016, the number drops to 25. Finally, if initiatives with less than $30 million return on investment by 2020 are removed, 11 very low-risk initiatives remain. Using this method reduces the requirement from $1.8 billion to $573 million while saving 1.9 million barrels of fuel in 2020. This would fail to meet the CNO’s or SECNAV’s goals, but it would free resources to remediate large and dire implementation issues with the littoral combat ship and Joint Strike Fighter. Other services are seeing similar pressure on budgets and programs, including the Air Force’s F-22 and the Army’s comprehensive personnel drawdown.
This cautious approach toward DOD energy investment is warranted given uncertain fossil-fuel futures, immature technology, and global demand for U.S. forces. It is clear that there are serious concerns with the Navy’s analytic methodology used to defend investment in energy initiatives. Considering the Navy case study as evidence, and that other services are following suit under political pressure, the DOD’s energy investment as a whole should be more closely scrutinized. Past DOD acquisition decisions drive growth in future fuel consumption across all services, for which there is not enough technology or procedural change available to meet the desired end state.
The outlook for alternative fuels is not encouraging. No one knows what reality will come for fossil fuels in the next two decades, and efficacy in DOD investment would be enhanced by consideration of futures other than those predicted by the peak oil hypothesis. Our nation’s blood, treasure, and next victory may depend on investing in the right things at the right time, and this requires a sound analytical foundation, which is currently lacking.
1. President Barack Obama, Remarks by the President on American Energy, Aurora, Colorado, Buckley Air Force Base, Aurora, Colorado, 26 January 2012, www.whitehouse.gov/the-press-office/2012/01/26/remarks-president-american-energy-aurora-colorado.
2. Secretary Ray Mabus, “Energy Awareness Message,” October 2009, www.navy.mil/navydata/people/secnav/Mabus/Message/Energy%20Message%20ALNAV.pdf
3. Chief of Naval Operations N45 “Navy Energy Program,” Chief of Naval Operations N45 (12 May 2011), by Tracy Moriarity, http://e2s2.ndia.org/schedule/Documents/Abstracts/Moriarty.pdf, slide 3.
4. U.S. Energy Information Administration, International Energy Outlook 2014, 9 September 2014, www.eia.gov/forecasts/ieo.
5. Kenneth Deffeyes, Beyond Oil: The View from Hubbert’s Peak (New York: Hill and Wang, 2005).
6. Freddy Hutter, “Tier 2 and Invalidated Outlooks,” Trendlines Peak Oil Scenarios (2011), http://trendlines.ca/free/peakoil/Scenarios/scenarios.htm#tier2.
7. Deffeyes, Beyond Oil.
8. Sophia Yan, “Some biofuels too expensive for anyone but the U.S. Navy,” Bloomberg Business Week, 21 March 2012, www.businessweek.com/news/2012-03-21/some-biofuels-too-expensive-for-anybody-except-u-dot-s-dot-navy.
9. Brock Vergakis, “Mabus defends biofuels during energy hearing,” Navy Times, 12 March 2012, www.navytimes.com/news/2012/03/ap-mabus-defends-biofuels-during-energy-hearing-031212/.
10. British Petroleum, “Energy Outlook 2030,” www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-Outlook/BP_Energy_Outlook_Booklet_2011.pdf, slide 40.
11. U.S. Energy Information Administration, International Energy Outlook 2014.
12. James T. Bartis and Lawrence Van Bibbler, Alternative Fuels for Military Applications, (Washington, DC: RAND Corporation, 2010), 83.
14. Carlo Munoz, “McCain sees another Solyndra in biofuels spending,” The Hill, 15 March 2012, http://thehill.com/blogs/defcon-hill/army/216261-mccain-warns-navy-biofuels-plan-could-become-another-solyndra.
16. Bartis and Van Bibbler, Alternative Fuels, 85.
18. Micheal McCrea et al., Prospects for Reduced Fossil Fuel Consumption Afloat, (Washington, DC: Center for Naval Analyses, 2010).