Sunday, March 22, 2009

DOD Standard Fuel Pricing

Needs to be Changed
Last year in July I wrote a piece on my blog titled DOD Should Change its Fuel Pricing.
I see that nothing has changed over the past year.

I repeat part of what I wrote then.

The Defense Energy Support Center (DESC)’s customers, i.e., DoD, are charged standard prices for oil products set in advance by the Office of the Undersecretary of Defense (Comptroller), and, in most cases, are in effect for the entire fiscal year. The aim was to insulate the customer from market fluctuations.

Let us have a look what DESC says about the Standard DOD Customer Fuel Price [emphasis added].

The standard price of fuel is a tool that was created by DoDs fiscal managers to insulate the Military Services from the normal ups and downs of the fuel marketplace. It provides the Military Services and OSD with budget stability despite the commodity market swings, with gains or losses being absorbed by a revolving fund known as the Defense Working Capital Fund (DWCF). In years that the market price of fuel is higher than the standard price, the DWCF loses money. In years that the market price is lower than the standard price, it makes money. This gain or loss can be made up by adjusting future standard prices or by providing our DoD customers with a refund. This decision is typically made by the Office of the Secretary of Defense, Comptroller.

The standard price of fuel is not a marketplace price. You cannot compare the standard price of fuel with the price of fuel at the service station down the block. It is not intended that the standard price of fuel be comparable with similar fuels in the commercial marketplace. The prices that you should examine for comparison with the "station down the block" are those which DESC actually paid for those fuels. They are invariably less than the price which is being offered in the commercial marketplace because of the centralized buying power of the federal government.


Department of Defense and all DoD services complain about high oil prices but nobody questions the pricing policy of DESC! There have been several episodes back to the late 1990s when standard fuel prices were way above the commercial market price. (see the chart below)
Since September 2008 oil prices (and also commercial price of jet fuel) have been going down. But DoD standard fuel price for JP-8 has consistently remained over 60 percent of commercial jet price. In fact, in November 2008, DESC price was twice as much as that of commercial price. Only in February 2009, the discrepancy was reduced to nearly 30%.
DoD services have paid millions of dollars extra to DESC due to improperly set standard prices.

My conclusion is the same: It is time for DESC to reevaluate and reconsider its price setting mechanism. Before wining about the fuel costs and blaming on oil producers, the DoD should first look at the problems at home and fix them.


At 4:19 PM, Anonymous MoonofA said...

Some questions

Does the DESC price include distribution costs?

Is it one world-wide price?

If both answers are yes, which I assume reading the DESC explanation, than the fact that a lot of fuel goes to Iraq and Afghanistan would explain a significant higher price.

In principle - "hidden" war costs distributed over the whole military.

At 11:47 PM, Anonymous Anonymous said...

what is the transportation cost in Afghanistan?


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