Okay, so here’s a business guy in a course positioned at the intersection of engineering and law trying to blog for the first time ever, and to top it off it appears I’m the first one to post, so I have no frame of reference from my classmates. Go easy on me….
While in Iraq last year, I was awestruck at the sheer scale of the supply trains that exist to provide logistical support to the American warfighter. The purchasing, delivery, and usage of mobility fuels especially struck me as both a huge operational liability and a massive financial cost. Non-stop breathing of exhaust fumes from F-16s, MRAPs, and a myriad of other tactical vehicles showed me very clearly the environmental cost we were paying as well. I decided to do a little research into just how critical oil becomes in order to support our current foreign policy in places like Iraq, Afghanistan, Horn of Africa, etc. I hope to shed some light on how significant a role petroleum plays in our foreign policy and to encourage thoughts on what else would be required of us, resource-wise, should we find ourselves moving towards military conflict with Iran or North Korea on top of our current commitments. Unanticipated domestic response missions such as Hurricane Katrina in 2005 and foreign aid missions like the Haitian earthquake of 2010 only add to the burden on both oil supplies and the Defense budget alike.
For Fiscal Year 2010 (FY10), which runs 1 Oct 09 – 30 Sep 10, the Department of Defense requested $664B from Congress. Included in this number was $130B solely to support the wars in Iraq and Afghanistan. 2.5-3.0% of the entire budget is allocated for fuels (product only), so big picture we’re looking at $3.25-$3.9B just for fuels that support our Southwest Asian operations, and $16.6-$19.9B overall. That’s an awful lot of money at an absolute level, but bad news part one: it gets worse. The Air Force has the lion’s share of this fuel demand (53%), and they spend an additional 144% of their fuel cost on delivery. The Army only represents 7% of that fuel demand, but spends another $3.2B just on fuel delivery personnel costs. $3.2B for gas jockeys! Quick back-of-the-napkin calculations show that we could easily be spending over $48 billion dollars, all in, just to satisfy DoD fuel needs for FY10.
Bad news part two: This budget, with respect to oil, was budgeted based upon a forecast for crude at $60.98/bbl. Today’s (25 Jan) NYMEX close for WTI at Cushing was $74.96/bbl, a 23% increase over the forecast less than halfway through their fiscal year. Morgan Stanley published their own forecast for crude prices recently, and they believe it will hit $95/bbl by calendar year end, so the DoD may have even more price shocks coming to them when the final gas bill is tallied up. More accurately, though, the DoD doesn’t buy crude oil; it buys refined fuel products such as MoGas, Diesel, AvGas, JP5, JP8, and bunker fuel. Using gasoline as a proxy for all refined products they buy (for simplicity) and Bloomberg data, as of today they could be paying as much as (spot) $1.99/gal or $83.58/bbl. So maybe that $48B is even higher than has been forecasted. Supplemental budget allocation, anyone?
Clearly energy use is a significant- game changing, in fact- issue for the American military. Only 22% of their energy demand support basing and infrastructure, the rest is operational. We must ask ourselves as a nation if we are willing to continue to spend this kind of money, consume massive quantities of a finite resource, and inflict an unknown amount of damage on our planet to sustain our current foreign policy courses of action. If we collectively agree that it is justified for national security, then so be it. If not, however, perhaps some calculated adjustments need to be made.
Sources: DoD, DLA, CIA