Can the U.S. Military Afford to Run on Biofuels?

by Rich Smith (The Motley Fool) ... The beef tallow being used today, however, costs just $2.05 per gallon, making it cheaper than the $2.76 per gallon that the Defense Logistics Agency pays for F-76. A 90-10 diesel-tallow blend, therefore, should cost approximately $2.69 per gallon, saving the Navy $0.07 on every gallon of fuel it burns.

Yes, you read that right. Five years after naval use of biofuels became a thing, it's already reached price parity with oil.

Now here's why that's important: Saving $0.07 a gallon on fuel in a small naval squadron over the course of a few months is a good start. But the U.S. Navy as a whole goes through about 1.3 billion gallons of fuel annually. Were the same fuel used by the Great Green Fleet used across the whole fleet, the savings would add up to $91 million annually.

And that's not all. Eventually, the Navy wants to get about half of its energy from renewable resources such as biofuel, solar power, and nuclear energy. (Today it gets about 17% from these sources combined, with biofuel's contribution still negligible.) As demand for biofuel ramps up, though, Secretary of the Navy Ray Mabus says that economies of scale will permit biofuel prices to fall even further.

Consider, too, the volatility of the oil market, where prices have ranged from as low as $31 to as high as $122 a barrel over the past five years. Yes, oil -- and F-76 naval fuel -- is historically cheap today, with oil costing just $45 a barrel. But it could just as easily cost three times as much a few years from now.

Come the day F-76 is selling for $6 a gallon, $2 biofuel is going to look like an even better bargain.

For suppliers of biofuel to the Navy -- companies like Tyson, and TerraVia, if it ultimately decides to remain in the biofuels business -- that would be a day to look forward to. On the other hand, suppliers of traditional petrol may not be as enthusiastic about the prospect. In particular, both ExxonMobil (NYSE:XOM) and Valero Energy (NYSE:VLO) are key suppliers of fuel to the U.S. Navy. Both companies sell hundreds of millions of dollars worth of diesel to the Navy annually.

Simply put, neither of these companies butters its bread with biofuels. The more the Navy shifts its fuel consumption to biofuels, the less happy these companies will be.

Luckily for them, the entire productive capacity of America's biofuels industry today (about 210 million gallons annually) won't come close to meeting the Navy's desire to substitute half its fuel consumption with biofuels. In the near term at least, the best the Navy can hope to obtain is perhaps a 90-10 blend.