Defense Budget: Review of DOD's Report on Budgeting for Fuel Cost Fluctuations

Correspondence issued by the Government Accountability Office with an abstract that begins "The Office of Management and Budget (OMB) establishes for the Department of Defense (DOD) the price DOD will use for pricing crude oil when constructing its budget for upcoming fiscal years. DOD in turn uses OMB's price in establishing the standard price to be used for a barrel of fuel for budgeting purposes by DOD fuel customers such as the military services. Because of the volatility of world petroleum prices, the standard price for a barrel of fuel included in the President's annual budget request for DOD may be lower or higher than the actual price established by the world market at any point in time after DOD's budget request is submitted to the Congress. During the fiscal year, DOD pays for fuel at the actual market rate, which typically varies from the budgeted rate. As a result, if the actual price of crude oil increases above the price DOD charges its customers, more dollars are needed to pay for fuel than originally budgeted. If the actual price is lower than what DOD charges its customers, DOD has more dollars than needed. Additionally, if DOD responds to increases in the world market crude oil prices by increasing the price it charges its customers above what they initially budgeted, the customers will have additional funding needs to pay their fuel bills. Concerned as to whether DOD's method for setting fuel prices has produced realistic budget estimates, last year the Congress required DOD to consider alternative methods. Specifically, the John Warner National Defense Authorization Act for Fiscal Year 2007 requires the Secretary of Defense to submit a report on the fuel rate and cost projection used in the annual DOD budget presentation. The act required that DOD identify alternative approaches, including approaches used by other federal departments and agencies and the feasibility of using private economic forecasting organizations, for selecting fuel rates that would produce more realistic estimates of the amounts required for DOD to accommodate fuel rate fluctuations. DOD is also required to discuss the advantages and disadvantages of each approach and to identify the department's preferred approach among the alternatives and provide a rationale for preferring that approach. Finally, the act further requires that GAO review DOD's report, including the basis for the Secretary's conclusions for the preferred approach. DOD submitted its report to the Congress on February 27, 2007. In response to the act, we determined (1) the extent to which DOD identified and evaluated alternative crude oil forecasts that could be used in setting its fuel rates--such as forecasts used by other federal departments and agencies and private economic forecasting organizations, and (2) DOD's basis for selecting its preferred fuel rate setting approach.