The origin of the Department of the Navy's biofuel initiative and the volatility problem for defense energy

Abstract

This thesis presents three catalysts for the origins of the Department of the Navys biofuel initiative: (1) Section 526 of the Energy Independence and Security Act of 2007 effectively ended the Department of Defenses (DoDs) research program into synthetic fuels derived from fossil fuels; (2) the crude oil spot price reached a maximum daily price of $145.16 on July 14, 2008; and (3) the American Recovery and Reinvestment Act of 2009 appropriated over one billion dollars for biomass research and development. Although cost volatility has impacted the DoDs budget, the DoD already has used the Defense Working Capital Fund to make perceived oil prices less volatile to DoD users. Drop-in replaceable biofuels would not remove petroleum price volatility because biofuels act as close substitutes. The governments of other countries reduce cost volatility by managing fuel price risk using futures contracts; opinions differ on whether the DoD should pursue this option. To mitigate cost volatility, the Defense Business Board recommended exploring intragovernmental transfers between the DoD and Department of the Interior on two occasions. Long-term contracts could reduce volatility, but the DoD risks losing competitors in supply.