Defense, Deficits, and Biofuels

By Edelman and Flinchbaugh

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ME.  The Senate Armed Services Committee recently approved spending restrictions for alternative energy or environmental programs, unless the Defense Secretary determines the program will reduce casualties, is necessary to protect human health and environment, and is cost-effective.  The Senate Committee measure mirrored a similar House bill preventing the Defense Department from purchasing biofuels at a higher cost than petroleum except for narrow testing purposes. The Senate Committee provisions also said the Pentagon cannot build biofuel refineries unless such projects are authorized by law.    

BF.  This issue is at the intersection of three of the more politically divisive issues this budget season -- defense cuts, deficits, and energy. Advocates for the restrictions say biofuel purchases divert dollars away from more vital programs at a time when the Defense budget faces $487 billion in cuts over the next decade.  The Navy announced a $12 million contract last December to buy 450,000 gallons of advanced biofuels for jets, at a price significantly higher per gallon than for petroleum fuels. The Navy planned to spend $510 million over the next three years to create advanced aviation fuels.  

ME.  The amount spent on biofuels is a drop in the bucket compared to the total military fuel budget. Our military is the largest single user of transportation fuels and the U.S. uses 22 % of the global oil supply. However, the U.S. only has 3% of global oil reserves with an expected life of about 10 years. OPEC members have 80% of global oil reserves many with over a hundred years of life. So, is it smart for the military to rely on one fuel source when alternatives and flexible technology are available?  The irony is that biofuels continue to make gains in cost-competitiveness.  According to one source, Defense per-gallon costs for advanced biofuels contracts have dropped more than 90% in two years.  Ag Secretary Vilsack and Navy Secretary Mabus have been instrumental in developing a military biofuels program, in part, because of inherent dangers posed by the military's sole reliance on petroleum-based fuels.  “It's about maintaining America's military and economic leadership across the globe in the 21st century,” Mabus told Senators in March.  He noted every time the price of oil goes up by a dollar per barrel, it costs the Navy $31 million. “When anyone says we can't afford to invest in developing alternative sources of energy, I say we can't afford not to,” Mabus said.  

BF.  Congress is micro-managing the Defense budget.  People forget World War II was won not only by the sacrifices of our soldiers, but by industrial capacity and superior fuel access.  World War II ended after Allies cut off oil access and destroyed synfuel facilities. Hitler's war machine ran out of fuel.  Today, the combination of oil's near exclusive use in transportation and OPEC's cartel-like control over world oil reserves are major threats in global stability and economic growth. Can we afford to have 95 percent of the world relying for its economic well-being on decisions made by a few countries in the Middle-East?  The military's role is to provide defense, national security, and win wars. As oil becomes scarce and higher priced in the future, relying on one fuel source is a strategic weakness exploitable by nations that for the most part don't like us.
 
ME.  Flex-fuel technology has been around since Henry Ford's Model T.  Many areas around the world produce crops and biomass, but don't produce much oil.  If advanced biofuel technologies can become competitive with oil, then the military has flexible options in terms of strategic fuel sourcing networks around the globe.  If the U.S. economy and military develop flexibility to use alternative transportation fuels, then oil becomes less important and less U.S. military involvement will be required to stabilize oil supply routes or oil-rich nations that are destabilized by terrorists financed in part by oil revenues.  Biomass-rich nations of the world gain opportunities for economic growth due to their enhanced ability to produce food and energy not only for their own use, but also for the rest of the world.  Military flexibility could help shape a more peaceful world.

BF. We learned in the last century that as people became more productive and incomes increased, so did their demand for food and energy.  They shifted from food crops to eating more pork and beef.  As incomes rise, some of the factors that create international tensions and probability of war can often be reduced.  But for this to occur in a global trading system with open markets, sovereign political systems must respect property rights and rule of law.  Perhaps over time, the advanced biofuel technologies will provide an opportunity to achieve greater distribution of market supply and demand allocations in a peaceful manner for the 9 billion people who will be living on Earth in 2050.  History will show it is short sighted to forgo such an investment with promise for providing critical opportunities for our global economy to grow in the name of deficit reduction. 

ME.  A loophole in the proposed policy allows for biofuel testing and biofuel price competitiveness.  Scaling up and building an initial biofuel refinery for deploying new technology can cost up to five-times more than the cost of adding capacity with mature technologies.  However after initial plants are built with a new technology, costs are likely to decline as the design plans are reused and improvements are made in plant performance.  First generation biofuel plants are more energy and water efficient today than the initial ones constructed because of incremental investments in improvements.  The same will be true for next generation of advanced biofuels.  Some new technologies also promise the opportunity for improving price competitiveness and flexibility for existing biofuel refineries and infrastructure.  However, they must be given an opportunity to be developed and commercialized.  The new fuels face contract specs and warranties designed for existing petroleum fuels.  Flexibility and reality-based testing are needed along with initial market customers with deep pockets who can absorb the risks.   

BF.  It is never wise to count your chickens before they hatch.  While the availability of alternatives promotes competitiveness longer term, infant industries with new technology often operate at higher costs until they are established. Government incentives are important.  Yes the budget deficits faced by our government are real.  But I agree with a comment by former Senator Simpson, Co-Chair of the Deficit Reduction Commission, if anyone thinks that eliminating biofuels in the Defense budget will solve the deficit, then "they have rocks for brains.” 

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* Edelman is a professor of economics at Iowa State University and Flinchbaugh is an emeritus professor of agricultural economics at Kansas State University.

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