Pentagon oil spending may snarl efforts to trim $490B

 Feb. 8 (Bloomberg) -- The U.S. military's appetite for oil may snarl efforts to pare defense spending by about $490 billion in the next decade.

 The Pentagon, the world's single largest consumer of energy excluding countries, spent $17.3 billion on petroleum in fiscal 2011, a 26 percent increase from $13.7 billion the previous year, according to Department of Defense data provided to Bloomberg Government.

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 Iran and these four other countries are the world’s biggest oil producers, according to 2010 data from the U.S. Energy Information Administration.

 World oil prices will average an estimated $145 a barrel in 2035 in 2010 dollars, up from between roughly $85 and $110, according to Energy Department statistics. Such an increase might force the military to dedicate more of its budget to fuel while still trying to cut total spending, said Russell Rumbaugh, a defense budget analyst.

  “The oil prices will further exacerbate the defense spending cap,'' said Rumbaugh, a co-director of the Stimson Center's program on budgeting for foreign affairs and defense in Washington. “They'll be in competition with other defense priorities, including procurement and paying soldiers.'”

 Rising oil prices accounted for the bulk of the Defense Department's increased petroleum costs last year. The spending was the highest since at least fiscal 2005, the last year for which comparable data is available, according to the Pentagon. The costs represent about 2.5 percent of the department's budget in fiscal 2011, which ended Sept. 30.

BP Plc, Europe's second-largest oil company, was the top supplier of fuel to the Pentagon last year. The London company had defense contracts valued at $1.35 billion. The No. 2 supplier was Valero Energy Corp. of San Antonio, with $905 million.

More With Less

     The physical amount of petroleum purchased by the military rose 0.4 percent to about 117.0 million barrels from about 116.5 million barrels the previous year. That equates to an average price of about $148 a barrel in fiscal 2011 and about $118 a barrel in fiscal 2010.

     “This is obviously at a time when the military is already making budget cuts,'' Phil Flynn, an analyst at PFGBest in Chicago, said in an interview. “You're asking the military to do more with less, and higher fuel costs are going to make that more difficult.'”

 In a budget proposal presented last month, Defense Secretary Leon Panetta said the department would try to cut $487 billion, or 8.5 percent, from the $5.62 trillion in spending that had been planned for 2012 to 2021.

     Flynn said it was encouraging that the amount of petroleum purchased by the Defense Department didn't rise materially last year.

Average Prices

“The growth was not significant,'' he said. ``Remember they were fighting two wars. They were fighting in Iraq and Afghanistan and, of course, we have troops all over the world. As we see a reduction in these troop levels, one would hope the demand would drop naturally.'”

     The military's petroleum consumption is tied to its operations, Lieutenant Colonel Melinda Morgan, a Pentagon spokeswoman, said in an e-mail.

 “The department's efforts to improve our energy use are focused on increased military capabilities and effectiveness, not solely decreasing consumption through arbitrary targets at an enterprise level,” she said.