Fuel Price Effects on Readiness

The objective of this task is to determine the extent to which fuel price volatility has driven The Department of Defense (DoD)’s unfunded requirements and to what extent that, in turn, has affected military readiness. The results of our research indicate that price volatility caused unbudgeted fuel requirements totaling approximately $27 billion from Fiscal Year (FY) 2005 through FY 2011, the last year we examined. However, we found no significant evidence during this period that in-year unbudgeted fuel price changes caused reductions in readiness. We did find weak evidence that the Services may have scaled back a few future operations in response to long-term price increases, but because readiness is a high priority, money was always located to meet programmed requirements in the current year. Finally, we investigated the question: given perfect hindsight, what funding scheme would have minimized the unbudgeted requirements that were experienced? Using linear programming, we estimated that the best policy DoD could have pursued was to take the President’s Budget fuel price and increase it by 30 percent every year from 2005 to 2011. Such a policy would have resulted in a net unbudgeted requirement of only $2 billion dollars measured in FY 2013 dollars, down from the $27 billion dollar shortfall that we actually observed.