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1 1 (May 6, 2019)

handle is hein.crs/govzpb0001 and id is 1 raw text is: I Congressional Research Service Info rming the legaslative debate since 1914 May 6, 2019 Oil Price Volatility and the Department of Defense Oil Price Volatility The price of crude oil historically rises or falls with the world economy. However, supply generally does not smoothly follow demand and numerous factors can impact crude oil prices (e.g., supply, demand, available supply, value of the dollar, geopolitical risks). Thus, oil prices can be volatile. Volatility in crude oil prices can disrupt or enable oil industry investments and production-factors that can have a ripple effect on the global economy. The market also responds to geopolitical events. For example, sanctions on crude oil may constrain supply, which can affect prices and access. In general, the price of crude oil affects the price of petroleum products (e.g., gasoline, jet fuel) for U.S. consumers, including the Department of Defense (DOD). This In Focus discusses the impacts the price of crude oil has on fuel procurement for DOD. It also illustrates some recent geopolitical events that may have an impact on price and how DOD budgets to accommodate oil price volatility. Oil Price Effects on Defense Spending DOD uses more energy than any other federal agency. In FY2017, DOD spent about $11.9 billion on energy, roughly 76% of the entire federal government's energy expenditures. DOD depends heavily on petroleum products (e.g., jet fuel, diesel, fuel oil) to perform mission operations (see Figure 1). Historically, operational energy (energy required for training, moving, and sustaining military forces and weapons platforms for military operations and training) constitutes roughly 70% of DOD energy use. Figure I. DOD Energy Consumption by Fuel Type Percent of Total, FY20 17, Measured by British Thermal Units Fuel oi Ohf2% .\Gdsoh ~e Other - 2% Renewabips 1% Natural G 9% Electridct 14% Diese Iet Fuel 14% 6 Source: U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy. Note: According to DOE, graphic excludes nuclear energy. For more information, see DOD's 2016 Operational Energy Strategy. DOD needs to match its appropriations with real-world market oil prices. According to DOD's FY2019 Budget Certification Report, 2008, 2009, and 2012 were the most challenging years for the department's procurement of petroleum products, as the projected prices did not accurately anticipate the volatile market conditions in those years. Since FY2009, according to DOD, the standard price has been maintained throughout the year twice-FY2013 and FY2014. In the fourth quarter of 2014, the price of crude oil decreased roughly 40% and has remained low compared to the FY2013 and FY2014 prices. Subsequently, petroleum product expenses declined for DOD in FY2015 and FY2016 resulting in a surplus in each of these fiscal years. DOD reprogrammed a portion of these funds, as authorized by 10 U.S.C. §2208, and Congress rescinded a portion. In FY2016, DOD reprogrammed approximately $2 billion to other accounts and Congress rescinded about $1 billion. According to DOD's FY2017 Operational Energy Annual Report, from FY2013 to FY2017, total operational energy demand remained relatively stable, around 87 million barrels per year, while the price of crude oil fluctuated. The price of oil declined in 2014 resulting in fuel expenditures dropping from $14.8 billion in FY2013 to $8.2 billion in FY2017, a decrease of around 45%. Recent Geopolitical Developments Energy production decisions, political destabilization, and war are some of the world events that can affect the price of oil, and, as a result, the costs of operations for DOD. Some analysts have expressed concerns that the oil market could potentially enter a period of price volatility due to recent geopolitical developments. Such developments include sanctions on Iran and recent actions taken by the Organization of the Petroleum Exporting Countries (OPEC). Iran In mid-2012, the United States and the European Union enforced sanctions on Iran. These sanctions resulted in Iran cutting its crude production by around 1 million barrels per day (Mb/d) through 2015, according to the U.S. Energy Information Administration. In 2016, after sanctions were lifted as part of the Joint Comprehensive Plan of Action (JCPOA), Iran increased crude production to pre-sanctions levels of nearly 4 Mb/d. In May 2018, the Trump Administration announced its intention to withdraw from the JCPOA. In August 2018, the ttps:icrs reports.cong ress go,

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