Corporate Welfare for Biofuels Goes Beyond RFS

As biofuels lobbyists and the Obama Administration are battling over the final numbers for the 2014 Renewable Fuel Standard, the Administration is attempting to prop up the biofuels industry through military purchasing. The Administration recently announced they would be granting $210 million in military contracts to spur the creation of commercial scale biofuels by constructing three biorefineries to produce “drop-in” biofuels.[1]

This is not the first time the federal government has used the massive purchasing power of the Department of Defense (DoD)—the largest single energy consumer in the United States—to subsidize biofuel producers. But this latest spending is just as inappropriate as the Navy’s spending over $26 a gallon for biofuel in the past. The role of the military is to defend the United States, not to subsidize pet energy projects favored by the Obama Administration. This is especially true given the current threats posed by ISIS, Russia, and other troubles around the world.

Status of drop-in biofuels

 According to Department of Energy (DOE), drop-in biofuels are similar to gasoline, diesel, or jet fuels, and are made from a variety of sources. This round of subsidized biofuels will be made from waste fats, municipal solid waste, and woody-biomass.[2] They are called “drop-in” fuels because they can use current infrastructure and meet current diesel, gasoline, and jet fuel quality specifications since they are chemically indistinguishable from petroleum-derived fuels. However DOE states, “Drop-in fuels are in a research and development phase with pilot- and demonstration-scale plants under construction.”[3] Therefore drop-in biofuels are not currently commercially feasible, and only being produced because of this military contract.

Rationale for the drop-in biofuels program

The Department of Defense (DoD) is implementing this project through the Defense Production Act (DPA) of 1950, which allows the President to, “…prioritize contracts for goods and services, and offer incentives within the domestic market to enhance the production and supply of critical materials and technologies when necessary for national defense.”[4]

One obvious problem with these new subsidies for biofuel producers is that these subsidies are not “necessary for national defense”—not even close. Here’s what U.S. Secretary of the Navy Ray Mabus said:

You only have to read the headlines to understand how energy can be used as a weapon. Today, oil is the ultimate global commodity, and when something happens anywhere, energy traders out a security premium on the price, and the DOD has had billion of dollars in expense from its budget that had to be redirected to fuels.

We’re in a maritime century. 90 percent of all trade goes over the ocean, 95 percent of data goes under the ocean. The navy and marines provide the ability keep sea-lanes open, to deter conflict without escalating tension, to give the President options. And power and energy is critical to global growth and the ability of the navy and Marine Corps to do that.[5]

This is all true, but it provides no justification for why subsidies for biofuels would change anything and it ignores the change that has already made the world more energy secure—hydraulic fracturing and the rise of U.S. oil and natural gas production.  Plus, the U.S. already maintains the largest Strategic Petroleum Reserve in the world in order meet fuel needs in light of a short-term disruption.[6] It is hard to argue that drop-in biofuels are critical or able to fight against short-term price disruptions.

Private energy investment already solved the problem

Agriculture Secretary Vilsack also commented on the rationale behind the program, “Any time our military can use more American grown fuels instead of relying on foreign sources it makes our armed forces more energy secure.”[7] This is true, but it means that the federal government should be producing more oil. From 2008 through 2013, U.S. biofuel production increased by 612 trillion BTUs.

That is a nice increase, but it pales in comparison to the increase in petroleum production. From 2008 through 2013, oil production increased by 5,161 trillion BTUs and natural gas plant liquids increased by 1,182 trillion BTUs. In total, these liquids increased ten times as much as biofuel production. The security benefits of this increase in obvious. According to Energy Information Administration (EIA) chief Adam Sieminski, oil would cost $150 a barrel if not for the increase in U.S. production.

How much more would the military have to spend today on fuel if not for increased U.S. production? How much more dangerous would the Middle East be without the increase in U.S. production? How much more money would ISIS be making from black market oil sales if not for the increase in U.S. production? The very security and cost savings that Secretary Mabus and Vilsack claim they want to achieve have already occurred—from U.S. oil production.

If the Obama administration were serious about wanting to save money on military oil costs, or make the U.S. more energy secure, they would allow more oil production on federal lands—but instead they are restricting production. According to a recent report from the Congressional Research Service, since 2009 oil production on federal lands is fallen by 6 percent even as oil production on private and state lands have increased by 61 percent. Obviously the Obama administration is not serious about saving the military money or making the U.S. more energy secure because they would first allow what works today to continue.

As we have previously shown, this massive increase in domestic oil and natural gas production has put the U.S. on track to be self–sufficient in oil-production.[8] In fact, since 2005 there has been a sharp decrease in the amount of petroleum imported to the U.S. and an increase in the amount of petroleum exported.[9]

Neither U.S. citizens, nor the military are dependent on oil from overseas to meet their energy needs. The U.S. increasingly imports more oil from Canada than any other country, and Canada now provides the U.S. with more than three times the amount of oil imported from Saudi Arabia.[10]  As a nation, we are more secure because of the revolution in North American oil and gas production, not because of military subsidies for biofuels.

USDA Price Support

In addition to the millions of dollars the military is spending on drop-in biofuels, a separate program through the USDA is available to further subsidize the fuels to make them “cost-competitive” for the military. In 2012 the Administration announced that they would make up to $161 million dollars in funds available for this program.[11] This program allows the USDA to pay for the extra cost the military would accrue by buying biofuels over conventional fuels as long as a USDA-oriented feedstock is used (agricultural in character and made in the USA)[12].

Conclusion

It is critical that the United States military is focused on national defense. This is why Congress gave them the authority to invest in experimental projects when necessary to fulfill that role through the Defense Production Act. However, the Defense Production Act is not a mechanism to subsidize preferred industries or promote alternatives that are not critical for national defense. If the Administration were serious about guarding against oil price increases or increase the secure supply of oil, they would increase the federal lands available for energy production. Today less than 3 percent of lands are leased by energy production. Given the increase in oil production and the obvious price and security benefits, the fact that oil production has fallen on federal lands shows that the Obama administration is not serious about reducing prices or increasing the secure supply of energy.  Thanks to private technological innovation the United States has increased oil production at the most rapid rate ever. Now it is time to translate the energy increases on private and state lands to federal lands.

IER Policy Associate John Glennon authored this post.