-Cross-Posted from Andrew Holland’s Energy, Security, Policy blog –

Scale of the Global Oil Market

The RAND corporation recently released a report “Promoting International Energy Security” for the U.S. Air Force that, for the most part, contained the conventional wisdom about oil prices and energy security: in a global marketplace, there is little that one buyer can do to affect prices. The report then went on to state the importance of the US military in maintaining international trade routes and supporting energy infrastructure security around the world. On the whole, it was an anodyne report from a government contractor to its client that generally would have quietly been filed away.

However, the report did have one section that dove directly into a simmering area of contention: the Department of Defense’s investment in a domestic biofuels industry. Both the House and Senate Armed Services Committees have rejected the Department of Defense’s plans to purchase biofuels and to directly invest in domestic biofuels producers. The Senate will likely consider an amendment on the floor to attempt to reinstate the program in July. The specialist media quickly reported the controversial provisions, saying “Renewables no fix for U.S. military fuel woes” (Reuters) and “Alt fuels won’t solve military energy problems” (Greenwire).

The RAND report overlooks the strategic importance of developing alternatives to petroleum fuels. It is a strategic mistake for the military over the long term to rely on a single source for 80% of our military’s energy needs. To simply accept that oil is going to remain as the sole source of liquid fuel that the US military relies on for its transportation, operations, and training is to say that we should accept the long-term strategic risks of price volatility and dependence upon uncertain foreign countries (even if we do not import oil directly from Iran or the Middle East, the price we pay for oil is largely set by market conditions in that region). In addition, we know that the amount of oil in the world is finite — a peak could come over the next decades. We should not simply accept this national security risk when there are developing technologies that could alleviate this threat to national security.

The author of the report, James Bartis, has been skeptical of the military’s biofuels missions before, writing in a 2011 report that there is “No Direct Military Benefit from Use of Alternative Fuels by Armed Forces.” In the most recent report, he echoes these findings.

Issue of Costs for Renewable Fuels

The top-line finding of the RAND report, as reported in Reuters’ article, is that renewable fuels are likely to remain “far more expensive” than petroleum products absent a technological breakthrough. However, unreported in these articles is a finding from the report that: “significant national benefits would accrue from establishing a large (i.e., millions of barrels per day), commercially competitive alternative-fuels industry in the United States.”

The RAND report is wrong that renewable fuels are going to remain “far more expensive” than petroleum; the needed technological breakthroughs are happening today. Robert Rapier wrote, in his “Current and Projected Costs for Biofuels from Algae and Pyrolysis” column, the Department of Energy’s Biomass Program anticipates that the cost of production of biofuels could drop significantly — perhaps as low as $2.32 by 2017. This means that biofuels could quickly develop as an alternative to oil. At ASP’s  “Biofuels for National Security” event on March 1, Commander Goudreau of the Navy echoed that statement, saying that biofuels could be cost competitive with petroleum-based fuel by the end of the decade. He cautioned, however, that without guaranteed purchasers of biofuels, the market will not develop as fast.

Conclusion – This can be done

Fortunately, the military has a history of creating large scale industries that are important for national security, and benefit the country as a whole. When the Navy was reconstituting itself in the late 19^th Century as a modern fleet based on steel-hulled warships, it was faced with the problem that foreign-made steel (particularly German and English) was cheaper. However, instead of buying it from abroad, it worked with companies like Bethlehem Steel and US Steel to create a domestic steel manufacturing capability. The result was both cheaper steel, and an industry with a scale to build the Golden Gate Bridge, the Interstate Highway System, and the industry that won two World Wars.

The Defense Production Act (DPA) of 1950 codified the ability of the DoD to invest in industries deemed important for national security. It helped to establish domestic aluminum and titanium industries through the Cold War. More recently, the DoD used the DPA to invest in silicon carbide, semiconductors, microwave power tubes and superconducting wire; helping to create the conditions in Silicon Valley that would lead to the technology boom of the last several decades. Investing in a domestic biofuels industry follows this same model: it allows the DoD to create a leading industry of the 21^st Century.

The Department of Defense is attempting to secure a similar future for the biofuels industry. This is an industry that provides clear benefits for the United States as a whole, and significant benefits for the military.

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