Every single day the U.S. Department of Defense uses 300,000 barrels of oil. It alone accounts for about 2% of America's total daily energy consumption, which makes it the single largest fuel consumer in the country. America's military actually consumes as much energy as the entire population of Nigeria, and there are 140 million people living in Nigeria. Suffice it to say, the military uses a lot of oil, which is why it's looking at alternative fuel sources to wean itself off of oil. One of those alternative sources is biofuels, and this year actually marks the first time the U.S. Navy is including biofuels in its annual procurement for bulk fuels.
Why the U.S. Navy wants biofuels
As part of the military's mission to use less energy, the U.S. Navy is seeking to get 50% of its energy from alternative sources by 2020. It has a long way to go as it currently generates about 17% of its electricity from nuclear and renewable sources. In order to bridge the gap, the U.S. Navy is looking to biofuels as a direct replacement for petroleum-based gasoline and distillates. These are also known as drop-in biofuels.
The reason the Navy is particularly interested in drop-in biofuels is because these require no modification or operational changes to the Navy's current fuel distribution infrastructure, aircraft or ships. These are different from biodiesel that blends with diesel or jet fuel because biodiesel has certain properties that actually limit its usage. For example, it has the potential to clog fuel systems or cause poor performance in cooler temperatures. Further, there are water separation problems that prevent biodiesel from being used as a marine fuel. This limits the Navy to drop-in biofuels, which aren't currently readily available and are fairly cost prohibitive.
Counting the cost ... and paying for it
In the past the Navy has tested advanced biofuels that cost upward of $26 per gallon. That price, of course, didn't sit well with many taxpayers, which is why the National Defense Authorization Act was passed, which limited the Department of Defense from paying higher prices for alternative fuels than it pays for petroleum-based fuels.
In order to combat the high price of commercial drop-in biofuels, the Navy and the U.S. Department of Agriculture, or USDA, worked together to create the Farm-to-Fleet program. Under the program, producers seeking to offer drop-in biofuels can apply to the USDA Commodity Credit Corporation for grants that will offset the cost of the feedstocks needed to produce these drop-in biofuels. Further, some drop-in biofuels can qualify for Renewable Identification Numbers, which can be sold to further offset the cost. The hope is that between these two offsets producers will be able to supply a drop-in jet fuel, which is the most costly fuel the navy uses, for the same price as traditional jet fuel.
There still is a pretty big disconnect between the price and availability of drop-in biofuels when compared to petroleum-based products. However, the hope is that by working directly with the USDA the cost of biofuels will slowly come down so that by 2020 they will be both readily available and cost comparative. That is why this year's procurement measures are a step in the right direction. But it's still a small step, and the Navy has a large gulf to cross as it works to more than double its access to alternative energy sources over the next few years.
Matt DiLallo has the following options: long January 2016 $10 calls on Ford. The Motley Fool recommends Ford and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.