Bulk Fuel Pricing:

DOD Needs to Take Additional Actions to Establish a More Reliable Methodology

GAO-16-78R: Published: Nov 19, 2015. Publicly Released: Nov 19, 2015.

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Johana R. Ayers
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AyersJ@gao.gov

 

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What GAO Found

The Department of Defense (DOD) adjusted its methodology for developing the standard fuel price for fiscal year 2016 in order to develop a more precise estimate, but the new methodology does not reflect actual market conditions or fully account for risks to the reliability of its fuel cost estimate. In July 2014, GAO found that DOD had not updated its approach to establish the standard price for fuel to reflect existing market conditions since 2007 and recommended that DOD re-evaluate its approach and document its assumptions. DOD generally agreed and in December 2014 implemented a new methodology to establish the fiscal year 2016 standard fuel price. This new methodology used the Office of Management and Budget’s (OMB) Gas and Oil price index instead of its prior approach based on a projection of the price of crude oil and factors such as refining costs. DOD stated the new methodology would provide a price estimate closer to actual fuel prices, among other benefits.

Comparison of the Components of DOD’s Fiscal Year 2015 and Fiscal Year 2016 Standard Price

Notes: Percentages may not add to 100 percent due to rounding. According to DOD officials, in fiscal year 2015 and prior years the refinement markup was determined based on a percentage of the forecasted crude oil price. This markup has historically ranged from 30 percent to 50 percent of the price of crude oil. Nonproduct costs include facilities sustainment, restoration, and modernization; transportation; and storage costs.

However, DOD did not use valid and reliable data when evaluating options for adjusting its fuel pricing methodology, as suggested by GAO’s Cost Estimating and Assessment Guide, because it used the Gas and Oil price index as a dollar value rather than applying it in its analyses as a percentage to measure the change in prices from one year to the next. DOD officials explained that they erroneously applied the price index in the methodology used to determine the standard price included in the President’s budget for fiscal year 2016 that was submitted to Congress in February 2015. We found that applying the Gas and Oil price index as a measure of a change in fuel prices from one year to the next produced results that differed from what DOD found. For example, DOD applied the Gas and Oil price index for fiscal year 2016 as a dollar price of $122.56 per barrel of fuel. In contrast, we calculated a fuel price estimate between $58.10 and $83.58, depending on how the Gas and Oil price index is applied to actual fuel prices.

Furthermore, DOD’s analysis of the use of the price index did not review and understand the limitations and risks to the reliability of its fuel estimate, which result from determining a projected fuel price that applies the price index against actual fuel prices for fiscal years that would be almost 2 years old at the time of its budget request. GAO’s Cost Estimating and Assessment Guide states that data should be fully reviewed before being used in a cost estimate to understand the limitations and risks. According to DOD officials, the department is reviewing its methodology for developing the fiscal year 2017 standard fuel price and is considering options, including using the Gas and Oil price index.

Why GAO Did This Study

Each fiscal year, the Office of the Under Secretary of Defense (Comptroller), in coordination with the Defense Logistics Agency, sets a standard price that DOD will charge for fuel, which the military services and other customers use in developing their annual budget requests. In setting the standard price, DOD endeavors to approximate the actual price it will pay for fuel during the year of budget execution. However, due to the timing of DOD’s budget process, the department establishes the standard price almost a year in advance of when it begins to purchase the fuel at the current market rate. Historically, DOD has used economic assumptions data provided by OMB to establish the standard price. The department is considering approaches for setting the fiscal year 2017 standard price.

A provision in the Senate committee report accompanying its version of the Fiscal Year 2016 National Defense Authorization Act directed GAO to review DOD’s approach for estimating its fuel consumption. This report discusses the extent to which DOD adjusted its methodology for determining the standard price used in developing the fiscal year 2016 budget request. We reviewed DOD’s analysis of various methodologies.

What GAO Recommends

To improve DOD’s methodology for developing its standard fuel price for fiscal year 2017 and future fiscal years, we reiterate our recommendations from our 2014 report that DOD reevaluate its approach for estimating the standard price and document its assumptions, including providing detailed rationale for how it estimates each of these components.

We further recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense (Comptroller) to take the following two actions as it reviews the methodology for developing the standard price for fiscal year 2017 and future fiscal years:

  • Use valid and reliable data on market conditions, and
  • Review and understand the risks and limitations of using data, such as actual fuel price data from 2 years prior, in the methodologies it assesses.

DOD partially concurred with our first recommendation, and concurred with our second.

For more information, contact Johana Ayers at 202-512-5741 or ayersj@gao.gov

Recommendations for Executive Action

  1. Status: Open

    Comments: DOD partially concurred with the recommendation, but did not identify what actions it may or may not be taking to address it. As of July 2016, DOD had not taken steps to implement the recommendation. According to the DOD Comptroller official who is responsible for managing the bulk fuel program, the department does not have a similar formal process for determining rates for other commodities and working capital funds. Therefore, the official stated that DOD does not want to make the bulk fuel standard price determination unique and apart from these other commodities. Because of concerns with the quality and transparency of information available to Congressional decision makers and department fuel customers concerning the methodology selected each year and its application to relevant data used in estimating fuel rate prices for the next fiscal year, the Senate Armed Services Committee directed DOD to submit detailed guidance to the congressional defense committees no later than February 1, 2017 that, among other aspects, requires documentation of the rationale for using one methodology over another for estimating the next fiscal year?s fuel rate price, to include the limitations and assumptions of underlying data and establishing a timeline for developing annual estimated fuel rate prices for the next fiscal year. As of September 2017, DOD has not submitted a report in response to Congressional direction.

    Recommendation: To improve DOD's methodology for developing its standard fuel price for fiscal year 2017 and future fiscal years, GAO reiterated recommendations from its 2014 report that DOD reevaluate its approach for estimating the standard price and document its assumptions, including providing a detailed rationale for how it estimates each component of the price.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD concurred and has taken steps to implement this recommendation. According to DOD documentation, DOD evaluated three methodologies for developing the fiscal year 2017 standard fuel price, and ultimately selected a methodology that used data provided in the Administration's economic assumptions (i.e., the Gas and Oil Price Index) and data on the most recent 1-year average of actual refined product costs. According to a DOD Comptroller official who oversees the bulk fuel program, several factors underpinned the department's decision to select the fiscal year 2017 standard price methodology. First, leadership within the department felt strongly that fuel pricing should be developed in a consistent manner for each budget cycle that is based on information included in the Administration's economic assumptions. Second, the methodology DOD selected provided an estimate that seemed reasonable compared with the actual fiscal year 2015 average price for refined petroleum products. Finally, the official noted the methodology is based on actual fuel prices that were adjusted to account for projected market changes. By evaluating a range of options and using data from the Administration's economic assumptions and actual refined fuel prices, DOD used valid and reliable data and it assessed relative risks and limitations of the pricing options it considered as we recommended in November 2015. As a result, DOD reduced the risk that its standard price for fiscal year 2017 would not reflect actual market conditions.

    Recommendation: In keeping with GAO's 2014 recommendations, the Secretary of Defense should direct the Office of the Under Secretary of Defense (Comptroller) to: (1) use valid and reliable data on market conditions, and (2) review and understand the risks and limitations of using data, such as actual fuel price data from 2 years prior, in the methodologies it assesses, as it reviews the methodology for developing the standard fuel price for fiscal year 2017 and future fiscal years.

    Agency Affected: Department of Defense

 

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