DOD eyes savings in sinking oil prices

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The recent drop in oil prices could save the Defense Department hundreds of millions — or even billions — of dollars, which might help it navigate an austere budget environment. 

The full extent of the potential boon is not known, and prices at the pump have yet to hit bottom, but the Department of Defense (DOD), one of the biggest consumers of petroleum products in the U.S., could reap unexpected savings from planning budgets when gasoline was far more expensive.

{mosads}The Defense Logistics Agency (DLA), part of the Pentagon, buys the department’s fuel and then sells it to different branches of the military. The agency planned for oil to cost $134 per barrel for the next five years, but since June prices have dropped precipitously, now hovering around $50 a barrel.

“Most of the contracts we’re operating off of right now were set at older prices, and so it’s just too soon to tell now with the new drop and contracts that are now based on these new prices, what kind of savings may be achieved in the coming months,” Pentagon press secretary Rear Adm. John Kirby told reporters on Tuesday.

He predicted the department would have a “better sense by the middle of the year.”

In fiscal 2014, the DLA sold 90.5 million barrels of petroleum products to DOD totaling approximately $14.5 billion, according to an agency spokeswoman.

While the total savings are not yet known, lawmakers are already thinking about how to spend the possible windfall, particularly in a year when the Pentagon is bracing for the return of automatic spending cuts known as sequestration.

“There’s so many shortfalls because of sequestration, there’s plenty of places to spend it,” incoming Senate Armed Services Committee Chairman John McCain (R-Ariz.) said Wednesday.

He suggested the extra money might be spent on readiness or training, though moving the money from fuel costs could require congressional authorization.

Sen. Jack Reed (R.I.), the panel’s top Democrat, noted that the DOD’s operations and training budgets have become “stressed” in recent years.

“One of the benefits of the lower gasoline prices, for as long as they last, is they can be buying fuel so they can be allowing pilots to fly more hours” and let more infantry and armor training operations take place, he said.

Training, deployment and other DOD operations, however, probably aren’t going to benefit from the oil price gap anytime soon. 

In order for the department to see immediate savings, the DLA would have to lower the rate at which it sells back the oil, something the agency is “highly unlikely” to do several months into the fiscal year, according to Todd Harrison, senior fellow at the Center for Strategic and Budgetary Assessments.

The DLA “budgets in advance for fuel in order to absorb the ups and downs of the day-to-day oil market” so that the department is “not hit with a sudden shock,” he said.

He and other experts suggested the DOD wouldn’t realize savings until fiscal 2016 and 2017.

DOD spokeswoman Michelle McCaskill said the secretary of Defense sets the standard price for fuel but that “to date” the agency has received no notification to adjust the cost.

In October and November alone, the DLA sold roughly 15.4 million barrels of petroleum products to the DOD for around $2.5 billion.

Sen. Lindsey Graham (R-S.C.), also a member of the Armed Services panel, was split between spending and saving.

“I think they should come up here and reprogram it,” he said before suggesting, “if we were smart we’d probably put it in an account because oil prices are probably going to go up one day again.”

Tags Jack Reed John McCain Lindsey Graham

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