BULK FUEL PRICING

DOD Needs to 

Reevaluate Its 

Approach to Better 

Manage the Effect of 

Market Fluctuations

Report to Congressional Committees

July 2014

GAO-14-595

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-595, a report to 

congressional committees

July 2014

BULK FUEL PRICING

DOD Needs to Reevaluate Its Approach to Better 

Manage the Effect of Market Fluctuations

Why GAO Did This Study

DOD purchases bulk fuel and sells it to 

customers, including the military 

services. Each fiscal year, DOD sets a 

standard price for budgeting purposes, 

endeavoring to closely approximate the 

price it will pay when it buys the fuel 

almost a year later. If this price is 

different than the standard price, DOD 

may need to take actions to manage its 

working capital funds—funds used to 

purchase fuel and other commodities 

that are reimbursed through sales. 

Senate Report 113-44, accompanying 

a bill for the National Defense 

Authorization Act for FY 2014,

mandated GAO to review DOD’s 

approach for establishing its bulk fuel 

pricing. This report discusses, among 

other things, (1) how estimated bulk 

fuel costs have compared to actual 

costs since FY 2009 and the factors 

that have contributed to any 

differences; and (2) the extent to which 

DOD has considered options for 

adjusting its approach to estimating 

bulk fuel costs and managing working 

capital funds in light of any differences 

between estimated and actual fuel 

costs. GAO compared estimated and 

actual fuel costs for FY 2009 through 

2013 and analyzed DOD actions to 

manage working capital funds.

What GAO Recommends

GAO recommends that DOD 

reevaluate its approach for estimating 

the components of the standard price 

and document the rationale for its 

assumptions. DOD agreed with the first 

recommendation and partially agreed 

with the second stating there is a 

closely-monitored, formal process. 

GAO continues to believe the 

recommendation remains valid as 

discussed in the report. 

What GAO Found

During fiscal years 2009 through 2013, the Department of Defense’s (DOD)

actual costs for bulk fuel differed considerably from its budget estimates, largely 

because of fluctuations in fuel price in the open market. During this period, DOD 

underestimated its costs for 3 years and overestimated them for 2 years as 

shown below. GAO identified two factors that contributed to the differences 

between estimated and actual costs—(1) fuel price fluctuations and (2) 

differences between the military services’ estimated fuel requirements and their 

actual fuel consumption. GAO’s analysis showed that the differences between 

the price DOD paid for fuel and the price it charged its fuel customers—the 

standard price—accounted for, on average, 74 percent of the difference between 

estimated and actual costs. Specifically, of the three components of the standard 

price that DOD sets each fiscal year—crude oil, refinement markup, and 

nonproduct costs, such as transportation and facilities maintenance costs—

differences in the price of crude oil accounted for most of the difference between 

estimated and actual fuel costs in fiscal years 2009 and 2010. In fiscal years 

2011 through 2013, the refinement markup accounted for most of the difference. 

Differences between the services’ estimated fuel requirements and actual fuel 

consumption accounted for an average of 26 percent of the difference between 

estimated and actual fuel costs.

Estimated vs. Actual Fuel Costs, Fiscal Years (FY) 2009 through 2013 

Since 2004, DOD has conducted reviews of aspects of its bulk fuel program to 

determine whether adjustments should be made, including managing acquisition 

strategies, managing working capital funds, and budgeting for cost fluctuations. 

However, it has not updated its approach to reflect current market conditions or 

documented its rationale for the assumptions it uses in estimating the standard 

price. GAO’s Cost Estimating and Assessment Guide and Office of Management 

and Budget guidance state that a cost estimate should be updated regularly to 

reflect changes to assumptions and actual costs, so that it always reflects current 

conditions. Furthermore, cost estimates should be supported by detailed 

documentation that describes how they were derived. Reevaluating its approach 

for estimating the standard price would allow DOD to develop more informed 

estimates and better position it to minimize risks and uncertainty resulting from 

changing market conditions. Further, documenting the rationale for its 

assumptions would provide greater transparency and clarify for fuel customers 

and decision makers the process DOD uses to set the standard price.

View GAO-14-595. For more information, 

contact Cary Russell at (202) 512-5431 or 

russellc@gao.gov.
Page i GAO-14-595 Bulk Fuel Pricing

Letter 1

Background 4

DOD’s Actual Costs Differed Considerably from Budget Estimates 

since Fiscal Year 2009, Due Largely to Fluctuations in Fuel 

Price 7

DOD Has Taken Various Actions to Manage the Effect of 

Differences between Estimated and Actual Fuel Costs 12

DOD Has Conducted Studies on Its Management of Working 

Capital Funds, but Has Not Reevaluated Its Approach or 

Documented Its Assumptions for Estimating Fuel Costs 17

Conclusions 24

Recommendations for Executive Action 25

Agency Comments and Our Evaluation 25

Appendix I Scope and Methodology 30

Appendix II Studies on Department of Defense Bulk Fuel Pricing and Management 

of the Defense-Wide Working Capital Fund 34

Appendix III Comments from the Department of Defense 37

Appendix IV GAO Contacts and Staff Acknowledgments 39

Tables

Table 1: DOD Estimated vs. Actual Fuel Costs, Fiscal Years 2009 

through 2013 8

Table 2: Analysis of Standard Price Components’ Contributions to 

Difference between Estimated and Actual Price, Fiscal 

Years 2009 through 2013 10

Table 3: Studies on DOD Bulk Fuel Pricing and Management of 

the Defense-Wide Working Capital Fund 34

Contents
Page ii GAO-14-595 Bulk Fuel Pricing

Figures

Figure 1: Components of Fiscal Year 2013 Standard Annual Fuel 

Price of $156.66 Per Barrel 5

Figure 2: Budget Process for DOD Bulk Fuel Program 6

Figure 3: Actual Cost per Barrel vs. Standard Price, Fiscal Years 

2009 through 2013 9

Figure 4: Military Services’ Estimated vs. Actual Fuel 

Consumption, Fiscal Years 2009 through 2013 12

Figure 5: Cash Balance in the Defense-Wide Working Capital 

Fund and Net Outlays for Fuel, Fiscal Years 2009 

through 2013 14

Figure 6: Defense-Wide Working Capital Fund Balance, Transfers, 

and Standard Prices 16

Figure 7: Differences between Brent and West Texas Intermediate 

Crude Oil Prices, Fiscal Years 2009 through 2013 21

Abbreviations

BBEDCA Balanced Budget and Emergency Deficit Control Act

DLA Defense Logistics Agency 

DLA Energy Defense Logistics Agency Energy Management Activity 

Group

DOD Department of Defense

DWWCF Defense-wide Working Capital Fund

FY Fiscal Year

OMB Office of Management and Budget

OUSD(C) Office of the Under Secretary of Defense (Comptroller)

WTI West Texas Intermediate

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Page 1 GAO-14-595 Bulk Fuel Pricing

441 G St. N.W.

Washington, DC 20548

July 8, 2014

Congressional Committees

For each fiscal year, the Department of Defense (DOD) sets a standard 

price per barrel that it will charge the military services and other 

customers for fuel. In setting this standard price, DOD endeavors to 

closely approximate the actual price it will pay for the fuel during the year 

of budget execution. However, due to the timing of DOD’s budget 

process, the department estimates this price almost a year in advance of 

when it will actually purchase the fuel at the current market rate. Because 

of the volatility of world petroleum prices, the standard price DOD 

establishes for a barrel of fuel may be lower or higher than the price it will 

have to pay on the world market. For example, in fiscal year 2013, the 

price DOD paid for fuel ranged from around $140 to $164 per barrel—a 

difference of $24 per barrel. If the actual market price of fuel is higher 

than the price DOD is charging its customers, DOD will have to pay more 

for fuel than it is being reimbursed. If the actual price is lower than the 

standard price, DOD will have more cash than it anticipated. Since fiscal 

year 2009, the military services have purchased an average of 

approximately 110 million barrels per year from DOD. Therefore, a 

standard price increase of even $1 per barrel would result in a $110 

million difference from their budget requests.

To manage these price fluctuations, DOD uses the Defense-wide 

Working Capital Fund (the fund), which covers DOD’s costs for 

purchasing various commodities, including bulk fuel, and is reimbursed 

through DOD’s sale of these commodities to the military services and 

other customers, such as other federal agencies and foreign military 

sales. The fund is intended to insulate the military services and DOD’s 

other fuel customers from the volatility of the market by allowing DOD to 

charge them a consistent standard price. In some instances, DOD may 

need to respond to fluctuations in world fuel prices by increasing or 

decreasing its standard price or by transferring funds from other accounts 

into its Defense-wide Working Capital Fund in order to maintain a 

sufficient cash balance in the fund.

The Senate report accompanying a bill for the fiscal year 2014 National 

Defense Authorization Act mandated that we review DOD’s approach for 
Page 2 GAO-14-595 Bulk Fuel Pricing

establishing its bulk fuel pricing.1 This report discusses (1) how estimated 

bulk fuel costs have compared with actual costs since fiscal year 2009 

and the factors that have contributed to any differences; (2) the extent to 

which DOD has taken actions to manage the effect of any differences 

between estimated and actual fuel costs; and (3) the extent to which DOD 

has considered options for adjusting its approach to estimating bulk fuel 

costs and managing working capital funds in the light of any differences in 

recent years between estimated and actual fuel costs.

To address these objectives we focused our analysis on fiscal years 2009 

through 2013. We focused on these years because this period covered 

the most recent complete year of fuel sales and provided 5 years of cost 

data to analyze any trends. To determine the reliability of the data 

provided to us by DOD, we obtained information on how the data were 

collected, managed, and used through interviews with and questionnaires 

to relevant officials and determined that the data presented in our findings 

were sufficiently reliable for the purposes of this report.

To determine how estimated bulk fuel costs have compared with actual 

costs since fiscal year 2009 and the factors that contributed to any 

differences, we compared the estimated costs for fuel against actual 

costs in the budget year of execution to identify any differences. For these 

differences, we determined the percentage of the difference explained by 

either fuel price fluctuations or differences in fuel consumption compared 

with budgeted consumption levels. We then compared each of the three 

components of the standard price (crude oil price, refinement markup, 

and nonproduct costs—such as transportation and facilities maintenance 

costs) against the actual costs for each component to determine which 

contributed most to the difference.

To determine the extent to which DOD has taken actions to manage the 

effect of any differences between estimated and actual fuel costs, we 

reviewed monthly cash balances in the Defense-wide Working Capital 

Fund for fiscal years 2009 through 2013 to examine the effect that bulk 

fuel purchases and sales had on those balances. We also obtained 

information on the number and amount of approved transfer actions 

related to fuel into and out of the Defense-wide Working Capital Fund 

during this period. In addition, we identified all changes to the standard 

 1

S. Rep. No. 113-44, at 210 (2013).
Page 3 GAO-14-595 Bulk Fuel Pricing

price DOD charged to customers and identified any fuel-related 

supplemental appropriations received into the fund since fiscal year 2009.

To determine the extent to which DOD has considered options for 

adjusting its approach for estimating bulk fuel costs and managing 

working capital funds, we reviewed documentation, including budget 

justification materials and DOD reports, that describes DOD’s current 

process for estimating bulk fuel costs and compared it with costestimating practices2 and Office of Management and Budget (OMB)3 and 

DOD guidance.4 We also performed analysis on the relationship of the 

West Texas Intermediate (WTI) crude oil benchmark with other crude oil 

pricing benchmarks to determine whether DOD’s approach to setting its 

standard price reflects current market conditions. We reviewed related 

studies and recommendations that we identified through interviews with 

DOD officials and literature searches that discuss options available to 

DOD to adjust its approach to managing bulk fuel costs and working 

capital funds. For this review we focused on relevant studies that have 

been conducted since 2004. We also interviewed DOD officials 

responsible for managing DOD’s bulk fuel program, economic policy and 

budget officials from OMB, and officials from the Department of Energy’s 

Energy Information Administration, which is the federal government’s 

primary authority on energy statistics and analysis. Appendix I provides a 

more detailed discussion of our scope and methodology.

We conducted this performance audit from November 2013 to July 2014 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

 2

GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009). The 

methodology outlined in the Cost Estimating and Assessment Guide is a compilation of 

best practices that federal cost-estimating organizations and industry use to develop and 

maintain reliable cost estimates throughout the life of an acquisition program.

3

OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget (July,

2013).

4

Department of Defense Financial Management Regulation 7000.14-R, Volume 2B 

(September, 2010).
Page 4 GAO-14-595 Bulk Fuel Pricing

In each fiscal year, DOD establishes a standard price per barrel to be 

charged to its fuel customers. The Office of the Under Secretary of 

Defense (Comptroller), in coordination with the Defense Logistics Agency 

(DLA), estimates and sets a standard price for its fuel and other fuelrelated commodities that endeavors to closely approximate the actual per 

barrel price during budget execution, which occurs almost a year later. 

The Office of the Under Secretary of Defense (Comptroller) sets the 

standard price annually based on three components.

• Crude Oil—The baseline for setting the standard price is the 

forecasted price for crude oil, which is provided to DOD by OMB. To 

estimate the cost of crude oil, the Council of Economic Advisors, the 

Department of the Treasury, and OMB—referred to as the Troika—

jointly prepare a set of economic assumptions for agencies to use in 

preparing their overall budgets. In developing the crude oil price 

projections, the Troika uses oil price projections coming from the 

prices in the futures market for both West Texas Intermediate (WTI) 

and Brent crude oil prices.5 DOD uses the WTI projection as its 

baseline. According to OMB Circular A-11, all baseline estimates used 

in the budget must be consistent with the economic assumptions 

provided by OMB.6

• Refinement Markup—DOD adds a markup for the cost of refining the 

crude oil. Because DOD and its customers use refined oil products—

such as jet fuel and diesel fuel—DOD has to include the additional 

cost of refining the fuel in its standard price.7 This refinement markup 

is estimated based on the historical price relationship between WTI 

crude oil and refined product prices.

• Nonproduct Costs—DOD adds an estimate for nonproduct costs 

associated with DLA’s overhead, including facilities sustainment, 

restoration, and modernization; transportation; and storage costs. 

Other nonproduct costs include an estimate of product losses and 

may include cost recovery adjustments for prior year fund losses to 

 5

WTI is a crude oil produced in Texas and southern Oklahoma that serves as a reference 

or “marker” for pricing a number of other crudes and that is traded in the domestic spot 

market at Cushing, Oklahoma. Brent is a blended crude oil produced in the North Sea 

region that serves as a reference or “marker” for pricing a number of other crudes.

6

OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget (July, 

2013).

7

The refinement markup also accounts for some transportation expenses incurred by the 

supplier and charged to DLA for transporting the purchased fuel to DLA.

Background
Page 5 GAO-14-595 Bulk Fuel Pricing

the Defense-wide Working Capital Fund, legal judgments, and 

rounding.

Figure 1 identifies each of the price components as a percentage of the 

total standard price for fiscal year 2013.

Figure 1: Components of Fiscal Year 2013 Standard Annual Fuel Price of $156.66 

Per Barrel

Notes: Percentages may not add to 100 percent due to rounding. According to DOD officials, the 

refinement markup is 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.

In developing their annual operation and maintenance budget requests, 

the military services use the standard price and their estimated fuel 

requirements based on activity levels (such as flying hours, steaming 

days, tank miles, and base operations). For example, the Air Force as the 

largest DOD customer for fuel, purchased approximately 49 million 

barrels in fiscal year 2013, representing 53 percent of all sales to the 

military services. In determining its Operation and Maintenance funding 

needs, the Air Force provided an estimate for fuel in its budget request 

based on an analysis of each aircraft’s fuel usage and future programmed 

flying hours. Figure 2 below generally illustrates the process and the main 

organizations involved in budgeting for fuel.
Page 6 GAO-14-595 Bulk Fuel Pricing

Figure 2: Budget Process for DOD Bulk Fuel Program

DOD utilizes its Defense-wide Working Capital Fund to purchase bulk fuel 

for customers. According to DOD’s Financial Management Regulation, 

working capital funds were established to satisfy recurring DOD 

requirements using a businesslike buyer-and-seller approach. The 

Defense-wide Working Capital Fund is the Working Capital Fund 

managed by the defense agencies. The fund consists of six activity 

groups. Three of these activity groups are operated by DLA, two by the 

Defense Information Systems Agency, and one by the Defense Finance 

and Accounting Service. The activity group related to DOD’s bulk fuel 

program is the DLA Energy Management Activity group, which provides 

worldwide energy support including bulk fuel purchasing, transportation, 

and storage for the military services and other customers.

The fund covers DLA’s costs for purchasing bulk fuel and is reimbursed 

through its sale of fuel to the military services and other customers at a 

standard price. The standard price is intended to remain unchanged until 

the next budget year. This helps to shield the military services from 

market price volatility by allowing the cash balance in the fund to absorb 
Page 7 GAO-14-595 Bulk Fuel Pricing

minor fuel price fluctuations.8 According to DOD’s Financial Management 

Regulation, the goal of the fund is to remain revenue-neutral, allowing the 

fund to break even over time—that is, to neither make a gain nor incur a 

loss. During the year the budget is executed, the actual price for a barrel 

of fuel on the world market may be higher or lower than DOD’s standard 

price. If the actual price is higher, the cash balance in the Defense-wide 

Working Capital Fund will go down. If the actual price is lower, the cash 

balance in the fund will go up. These fluctuations in the cash balance are 

known as a net outlay. To correct for these fluctuations, DOD may adjust 

the standard price for the following year. For example, DOD may increase 

the standard price to make up for losses in the previous year and bolster 

the cash balance in the fund. Alternatively, DOD may decrease the 

standard price to reimburse the services, which had paid a higher price 

the previous year. DOD can also cover fund losses during the execution 

year by obtaining an appropriation from Congress, transferring funds from 

another DOD account into the fund, or adjusting the standard price out of 

cycle.9

During fiscal years 2009 through 2013, DOD’s actual costs for bulk fuel 

differed considerably from its budget estimates, due largely to fluctuations 

in fuel price. During those years, DOD either under- or overestimated 

what it would have to pay for bulk fuel. The differences between 

estimated and actual fuel costs were accounted for primarily by 

fluctuations in the market price for fuel.

 8

According to DOD Financial Management Regulation 7000.14-R, Volume 2b, Chapter 9, 

cash levels in the Defense-wide Working Capital Fund should be maintained at 7 to 10 

days of operational cost and 6 months of capital disbursements calculated using a formula 

provided in the regulation.

9

DOD guidance requires that the department seek prior approval from the congressional 

defense committees for certain transfers between appropriations accounts and to 

reprogram funds within an appropriation above certain thresholds. 

DOD’s Actual Costs 

Differed Considerably 

from Budget 

Estimates since 

Fiscal Year 2009, Due 

Largely to 

Fluctuations in Fuel 

Price
Page 8 GAO-14-595 Bulk Fuel Pricing

In each of fiscal years 2010, 2011, and 2012, DOD underestimated its 

bulk fuel costs by about $3 billion. In 2009, DOD overestimated these 

costs by about $3 billion and in 2013 by about $2 billion. Table 1 shows 

the total difference between DOD’s estimated and actual fuel costs for 

fiscal years 2009 through 2013.

Table 1: DOD Estimated vs. Actual Fuel Costs, Fiscal Years 2009 through 2013

Dollars in billions

Fiscal year Estimated costsa Actual costs

Over- or b (under) estimate 

2009 13.5 10.5 3.0

2010 9.9 12.8 (2.9)

2011 14.1 17.5 (3.4)

2012 14.8 18.0 (3.2)

2013 17.5 15.5 2.0 

Source: GAO analysis of DOD data. | GAO-14-595 

a

For the purposes of our analysis, we calculated DOD’s estimated costs by multiplying the standard 

price per barrel by the estimated number of barrels that the military services would consume.

b

For the purposes of our analysis, we calculated DOD’s actual costs by multiplying the actual 

purchase price per barrel times the actual number of barrels sold to the military services.

We identified two primary factors that accounted for the difference 

between estimated and actual costs—(1) fluctuations in the market price 

of fuel and (2) differences between the services’ estimated and actual fuel 

consumption. Our analysis showed that from fiscal years 2009 through 

2013, the differences between the price DOD paid for fuel and the price it 

charged its fuel customers—the standard price—accounted for, on 

average, 74 percent of the difference between estimated and actual 

costs. In fiscal year 2012, for example, DOD estimated a standard price 

of $131.04 per barrel. DOD’s actual costs during that year averaged 

$167.33 per barrel—an underestimate of $36.29 per barrel—which 

represented 85 percent of the underestimate for fiscal year 2012.

Figure 3 compares the actual price DLA paid for fuel with the standard 

price DOD used to calculate its budget estimates.

DOD’s Actual Fuel Costs 

Differed from Its Budget 

Estimates

Differences between 

Estimated and Actual Fuel 

Costs Were Largely Due 

to Fuel Price Fluctuations
Page 9 GAO-14-595 Bulk Fuel Pricing

Figure 3: Actual Cost per Barrel vs. Standard Price, Fiscal Years 2009 through 2013

Of the three components that constitute the standard price, crude oil 

prices and refinement markup costs accounted for most of the difference 

between the estimated standard price and actual fuel costs during fiscal 

years 2009 through 2013. In fiscal years 2009 and 2010, differences in 

the price of crude oil accounted for most of the difference between the 

estimated and actual prices—in 2009 for 95 percent of the difference and 

in 2010 for 72 percent. However, during fiscal years 2011 through 2013, 

the refinement markup became the main driver of the difference, 

accounting for between 65 and 79 percent of the difference, as shown in 

table 2.
Page 10 GAO-14-595 Bulk Fuel Pricing

Table 2: Analysis of Standard Price Components’ Contributions to Difference 

between Estimated and Actual Price, Fiscal Years 2009 through 2013

Percentage of Price Difference Accounted for by Component by Fiscal Year

Standard price components 2009 2010 2011 2012 2013

Crude oil 95 72 25 17 17

Refinement markup 4 22 65 79 70

Nonproduct costs 1 6 10 4 12

Source: GAO analysis of DOD and Energy Information Administration data. | GAO-14-595

Note: Percentages may not add to 100 due to rounding.

For fiscal years 2009 through 2012, DOD added a markup of 30 percent 

over the price of WTI to account for refinement costs in setting the 

standard price. According to DOD officials, the 30 percent markup over 

the WTI crude oil price had been a generally accurate predictive indicator 

for the price of DOD’s actual refined fuel costs. However, in fiscal year 

2011, actual fuel costs exceeded the price of WTI by an average of 49 

percent and in 2012 by an average of 60 percent. Therefore, DOD set the 

refinement markup too low in those years. According to DOD officials, to 

account for these differences, DOD increased the markup for refinement 

costs from 30 percent to 50 percent of the WTI price when developing the 

standard price for fiscal year 2013.

Although fluctuations in fuel prices were, on average, the primary driver of 

the differences between estimated and actual fuel costs in fiscal years 

2009 through 2013, differences between the services’ estimated and

actual fuel consumption levels also contributed to the overall difference. 

These differences accounted for, on average, 26 percent of the difference 

between DOD’s estimated and actual fuel costs. In fiscal years 2009 

through 2012, the military services’ estimated fuel requirements were 

within 5 percent of their actual consumption, as shown in figure 4. 

However, in fiscal year 2013, we found that differences between 

estimated and actual fuel consumption levels became the main driver of 

the total difference between estimated and actual fuel costs. In that year, 

DOD underestimated the cost of fuel but overestimated its consumption 

by approximately 19 million barrels, or 17 percent. According to DOD 

officials, actual consumption was much lower as a result of actions DOD 
Page 11 GAO-14-595 Bulk Fuel Pricing

took to address sequestration.10 In November 2013, we reported that for 

fiscal year 2013, DOD’s Operation and Maintenance accounts were 

reduced by approximately $20 billion, or 7.2 percent, due to sequestration 

reductions. We identified several actions DOD took to address these 

budgetary reductions. For example, in fiscal year 2013, the Air Force 

initially ceased flight operations from April through June for about onethird of active-duty combat Air Force units. Also, the Army curtailed 

training for all units except those deployed, preparing to deploy, or 

stationed overseas, and the Navy limited flight training for nondeploying 

units.11

 10The absence of legislation to reduce the federal budget deficit by at least $1.2 trillion 

triggered the sequestration process in section 251A of the Balanced Budget and 

Emergency Deficit Control Act of 1985 (BBEDCA), Pub. L. No. 99-177 (1985), as 

amended. Pursuant to the BBEDCA, the President ordered sequestration of budgetary 

resources across nonexempt federal government accounts on March 1, 2013—5 months 

into fiscal year 2013.

11GAO, Sequestration: Observations on the Department of Defense’s Approach in Fiscal 

Year 2013, GAO-14-177R (Washington D.C.: Nov. 7, 2013).
Page 12 GAO-14-595 Bulk Fuel Pricing

Figure 4: Military Services’ Estimated vs. Actual Fuel Consumption, Fiscal Years 

2009 through 2013

DOD has taken actions to manage fluctuations in the cash balance of the 

Defense-wide Working Capital Fund caused by differences between its 

estimated and actual fuel costs. These actions included transferring funds 

into the Defense-wide Working Capital Fund from other accounts and 

adjusting the standard price DOD charged to its fuel customers.

DOD Has Taken 

Various Actions to 

Manage the Effect of 

Differences between 

Estimated and Actual 

Fuel Costs
Page 13 GAO-14-595 Bulk Fuel Pricing

The Defense-wide Working Capital Fund provides the cash balance that 

is used to fund the day-to-day operations for six defense-wide activity 

groups, including DLA Energy, which provides, among other things, 

worldwide energy support to the military services and other authorized 

customers for bulk fuel purchasing, transportation, and storage. 

According to a DOD report, the volatility of fuel prices has historically 

posed a challenge to managing the cash balance of the fund.12 When 

DLA pays more or less for fuel than the standard price it charges its 

customers, the cash balance in the Defense-wide Working Capital Fund 

will go down or up. For instance, if fuel market prices rise significantly 

relative to the standard price, the cash balance in the fund will go down. 

On the other hand, if fuel market prices decrease relative to the standard 

price, the fund will generate excess cash and the balance will go up. In 

fiscal years 2009 through 2013, the fluctuations in the cash balance of the

Defense-wide Working Capital Fund were partially driven by these net 

outlays for fuel, as shown in figure 5.

 12Department of Defense, Defense Working Capital Fund: Revolving Funds Operational 

Cash Balances (January 2012).

Cash Balances in the 

Defense-Wide Working 

Capital Fund Fluctuate

Due to Changing Fuel 

Prices
Page 14 GAO-14-595 Bulk Fuel Pricing

Figure 5: Cash Balance in the Defense-Wide Working Capital Fund and Net Outlays for Fuel, Fiscal Years 2009 through 2013

Note: The Defense-wide Working Capital Fund cash balance is used to fund fuel and other 

commodities and services. Net outlays for these other commodities and services can also affect the 

cash balance in the fund.

The Defense-wide Working Capital Fund is intended to provide DOD with 

the flexibility to absorb some fluctuation in fuel prices. However, in some 

instances, DOD has sought to manage the fluctuations in the fund’s cash 

balance by transferring money into or out of the fund or by adjusting its 

standard price.13 For example, in fiscal years 2012 and 2013, DOD 

transferred funds into the Defense-wide Working Capital Fund. In 2012, 

DOD transferred $1 billion into the fund from the Afghanistan Security 

Forces Fund and in 2013 another $1.4 billion from various accounts, 

 13Another option available to DOD for managing cash balance fluctuations is to request 

supplemental appropriations into the Defense-wide Working Capital Fund. However, 

during fiscal years 2009 through 2013, according to DOD budget-justification documents, 

DOD did not request supplemental appropriations into the Defense-wide Working Capital 

Fund to specifically address the effect of changing fuel prices. According to DOD budget 

materials, DOD did receive supplemental appropriations each year from fiscal years 2009 

through 2013, but these funds were primarily requested to address Overseas Contingency 

Operations transportation costs and costs associated with combat fuel losses.

DOD Used Fund Transfers 

and Adjustments to Its 

Standard Price to Manage 

Working Capital Fund 

Balances
Page 15 GAO-14-595 Bulk Fuel Pricing

including the Foreign Currency Fluctuations account, to mitigate the cash 

shortfall caused by an increase in fuel costs over the standard price. DOD 

also transferred cash out of the fund during the period of our review. 

Specifically, in fiscal year 2011, Congress reduced funding for several 

DOD operation and maintenance accounts by about $2 billion to reflect 

excess cash balances in the Defense-wide Working Capital Fund.14 In 

response, DOD transferred almost $1.3 billion out of the Defense-wide 

Working Capital Fund to fund the reduced operation and maintenance 

accounts. We found that these transfers into or out of the fund can affect 

adjustments to the standard price. For example, according to DOD 

officials, the fiscal year 2013 transfer allowed DOD to maintain the same 

standard price throughout that year even though actual fuel costs 

exceeded the standard price. A DOD study noted that the fiscal year 2011 

transfer out of the fund required DOD to increase its standard price by 

almost $40 per barrel because the cash balance in the Defense-wide 

Working Capital Fund was no longer sufficient to mitigate the increased 

costs of fuel in that year.15

DOD also used changes to the standard price to manage the cash 

balance in the Defense-wide Working Capital Fund. From the beginning 

of fiscal year 2009 through end of fiscal year 2013, DOD adjusted its 

standard price 13 times—increasing it 6 times and decreasing it 7 times. 

According to DOD, these price changes were due to changing product 

costs, approved transfers, and the availability of cash balances in the 

fund. For example, the fiscal year 2012 President’s Budget estimated a 

standard price of $131.04. However, in October 2011, DOD raised the 

standard price to $165.90. It then lowered the price to $160.44 in January 

2012, to $151.20 in June 2012 and finally to $97.02 in July 2012, where 

the price remained for the rest of the fiscal year. Figure 6 shows the 

transfers and standard prices during fiscal years 2009 through 2013 and 

the cash balances in the Defense-wide Working Capital Fund.

 14Department of Defense and Full-Year Continuing Appropriation Act, 2011, Pub. L. No. 

112-10, Division A, § 8097 (2011).

15Department of Defense, Defense Working Capital Fund: Revolving Funds Operational 

Cash Balances, (January 2012).
Page 16 GAO-14-595 Bulk Fuel Pricing

Figure 6: Defense-Wide Working Capital Fund Balance, Transfers, and Standard Prices

Standard price adjustments affect the military services. According to DOD 

officials, an adjustment to the standard price is not their preferred option 

for managing the fund’s cash balances because of the potential strain it 

places on the services’ budgets. For example, a Navy official told us that 

when the standard price is increased, the Navy must either reduce 

consumption by curtailing training or request additional funding. Fiscal 

year 2013 was the first year since 2004 during which DOD maintained its 

standard price for the entire year.
Page 17 GAO-14-595 Bulk Fuel Pricing

DOD has studied various aspects of its bulk fuel program since 2004, but 

it has not updated its current approach for setting the standard price to 

reflect current market conditions or documented its rationale for the 

assumptions it uses in estimating the standard price—even though the 

differences between its estimated and actual costs have been 

considerable since that time.

Since 2004, DOD has completed a number of studies reviewing various 

aspects of its bulk fuel program, including studies of its management of 

working capital funds. We identified six studies related to DOD bulk fuel 

pricing and management of the Defense-wide Working Capital Fund. See 

appendix II for a description of the purpose of the studies and any 

identified findings, including the status on any proposed 

recommendations.

The John Warner National Defense Authorization Act for Fiscal Year 

2007 required the Secretary of Defense to submit a report on fuel rate 

and the cost projections used in the DOD budget presentation.16 In 

response, DOD completed a study in February 2007 that compared the 

crude oil forecast provided by OMB with crude oil forecasts developed by 

the Department of Energy and 38 private forecasting companies.17 Based 

on its analysis, DOD elected to maintain its current approach—using 

OMB’s WTI forecast as its preferred baseline—because the study 

concluded that OMB’s forecasts were comparable to or better at 

 16Pub. L. No. 109-364, § 1006 (2006). 

17Secretary of Defense, Report to Congressional Defense Committees: Budgeting for Fuel 

Cost Fluctuations (February 2007). 

DOD Has Conducted 

Studies on Its 

Management of 

Working Capital 

Funds, but Has Not 

Reevaluated Its 

Approach or 

Documented Its 

Assumptions for 

Estimating Fuel Costs

DOD Has Conducted 

Various Studies on Its Bulk 

Fuel Program, Including 

Management of Working 

Capital Funds
Page 18 GAO-14-595 Bulk Fuel Pricing

estimating the actual crude oil price than the alternative forecasts it 

evaluated.18

More recently, in January 2012, in response to the Ike Skelton National 

Defense Authorization Act for Fiscal Year 2011,19 the Office of the Under 

Secretary of Defense (Comptroller) reviewed alternatives for managing 

the balances of the Defense-wide Working Capital Fund. The study found 

that fuel cost volatility poses a major threat to the fund’s solvency.20 As a 

result, the study concluded that DOD may need to request funding 

transfers that could disrupt investment programs or threaten readiness. 

The study recommended two alternatives for managing working capital 

funds. The first would allow DOD to transfer expiring unobligated 

balances from other appropriation accounts into the fund to build a cash 

reserve. The study noted that this alternative is similar to authorities 

provided to other federal agencies’ working capital funds, but that it would 

require statutory authorization. The second alternative would allow the 

fund to accumulate and reserve funds in times of positive cash flow—up 

to $12.5 billion, or two times the largest cash shortfall on record. The 

Office of the Under Secretary of Defense (Comptroller) identified several 

concerns with this alternative. For example, according to the study, DOD 

would need congressional authorization to accumulate positive operating 

results. Additionally, the study noted that maintaining a large cash 

balance in the fund to mitigate potential price risk is not a productive use 

of resources. According to DOD officials, DOD’s Financial Management 

Regulation is currently being updated with an estimated issuance of 

summer 2014 to allow for greater flexibility in developing cash balance 

targets for the Defense-wide Working Capital Fund.

The 2012 study also listed other alternatives for managing working capital 

fund balances, which it did not recommend due to certain limitations, 

 18The act further required us to review DOD’s report, including the basis for the 

Secretary’s conclusions for the preferred approach. We found that the analysis DOD was 

able to conduct did not provide a compelling reason for DOD to adjust its rate setting 

approach, but concluded that DOD would need to capture and maintain the necessary 

forecast data to conduct a more robust and extensive analysis in the future. See GAO, 

Defense Budget: Review of DOD’s Report on Budgeting for Fuel Cost Fluctuations,

GAO-07-688R (Washington, D.C.: Apr. 26, 2007).

19Pub. L. No. 111-383 § 1402 (2011).

20Department of Defense, Defense Working Capital Fund: Revolving Funds Operational 

Cash Balances (January 2012).
Page 19 GAO-14-595 Bulk Fuel Pricing

risks, and costs. These included some alternatives that had previously 

been studied and recommended by the Defense Business Board.21 For 

example, the Defense Business Board had previously studied the 

feasibility of hedging fuel on the open market, which includes purchasing 

financial instruments to minimize risk in future prices.22 However, 

according to the study, DOD has elected not to pursue hedging for a 

number of reasons including that it is outside of DOD’s current authority, 

would incur management fees that would increase total costs, and poses 

additional political and economic risk. The 2012 study also rejected the 

Defense Business Board’s recommendations to implement firm-fixedprice fuel contracts and to partner with the Department of the Interior to 

access additional funds when fuel costs increase. The study noted that 

firm-fixed-price contracts would shift pricing risk to the supplier, which 

would be likely to result in DOD paying a premium for the contracts.

According to GAO’s Cost Estimating and Assessment Guide, a cost 

estimate should be updated regularly to reflect significant changes—such 

as changes to assumptions—and actual costs, so that it always reflects 

current conditions.23 Also, according to the guide, major assumptions 

should be assessed to determine how sensitive they are to changes, and 

risk and uncertainty analysis should be performed to determine the level 

of risk associated with the estimate. Further, OMB guidance states that 

agencies should consider the effect that demographic, economic, or other 

changes can have on assumptions for program levels beyond the budget 

year.24 However, the assumptions that DOD uses for setting the crude oil 

component of the standard price do not reflect current market conditions. 

Specifically, DOD’s assumptions do not consider (1) differences between 

crude oil benchmarks, (2) differences between domestic and international 

crude oil prices, and (3) the decreasing relationship between crude oil 

and refined prices.

 21The Defense Business Board provides the Secretary and Deputy Secretary of Defense, 

as well as other senior leaders, an outside private-sector perspective on best business 

practices for consideration and potential application to DOD.

22Defense Business Board, Report to the Senior Executive Council, Department of 

Defense: Fuel Hedging Task Group, Report FY03-08 (Mar. 1, 2004).

23GAO-09-3SP.

24OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget (July, 

2013).

DOD Has Not 

Reevaluated Its Approach 

or Documented its 

Assumptions for Setting 

the Standard Price
Page 20 GAO-14-595 Bulk Fuel Pricing

DOD’s approach for establishing the standard price has not accounted for 

changes in market conditions for crude oil. As discussed earlier in this 

report, DOD’s process of adding a refinement markup to the price of WTI 

in setting the standard price has resulted in estimated fuel costs that have 

been considerably lower than actual fuel costs. We found that, from fiscal 

years 2010 through 2013, the price for WTI diverged from other crude oil 

pricing benchmarks. According to a report from the Energy Information 

Administration, WTI was selling during this period for less than other 

crude oil pricing benchmarks, such as Brent—a commonly used crude oil 

benchmark.25 The price spread between WTI and Brent reached a high of 

$27 per barrel in September 2011, as shown in figure 7. Energy 

Information Administration officials also told us that, although the price 

spread between Brent and WTI has narrowed recently, they believe that 

the relationship between the pricing of Brent and WTI may remain volatile 

and that a price spread between the two benchmarks will likely continue. 

In its April 2014 Short-Term Energy Outlook, the Energy Information 

Administration estimates that in calendar year 2015 the price of WTI will 

be about $11 per barrel less than the price of Brent.

 25Congress created the Energy Information Administration within the Department of 

Energy in 1977. As a statistical agency, it provides policy-independent data, forecasts, 

and analyses to promote sound policy making, efficient markets, and public understanding 

regarding energy and its interaction with the economy and the environment. According to 

the Energy Information Administration, the depression in the price of WTI was a result of 

rapid growth in U.S. and Canadian oil production, which overwhelmed the transportation 

infrastructure needed to move crude oil from Cushing, Oklahoma, where WTI is quoted. 

See U.S. Energy Information Administration, Annual Energy Outlook 2013, DOE/EIA0383(2013) (April 2013).
Page 21 GAO-14-595 Bulk Fuel Pricing

Figure 7: Differences between Brent and West Texas Intermediate Crude Oil Prices, Fiscal Years 2009 through 2013

Note: WTI is a crude oil produced in Texas and southern Oklahoma that serves as a reference or 

“marker” for pricing a number of other crudes and that is traded in the domestic spot market at 

Cushing, Oklahoma. Brent is a blended crude oil produced in the North Sea region that serves as a 

reference or “marker” for pricing a number of other crudes.

Recognizing this market change, other federal agencies have adjusted 

their crude oil benchmarks for estimating energy prices because of this 

price spread. For example, in its 2013 Annual Energy Outlook, the Energy 

Information Administration shifted from WTI to Brent for estimating energy 

prices. According to officials from the Energy Information Administration, 

Brent crude oil prices have become the primary international crude oil 

benchmark. Furthermore, these officials noted that worldwide petroleum 

product prices—including in the United States—are typically based on 

Brent prices. This is consistent with DLA’s analysis, which found that 

domestic refined fuel products are more closely related with Brent than 

with WTI prices.

OMB has also accounted for other crude oil benchmarks in its annual 

economic assumptions that are provided to federal agencies for 
Page 22 GAO-14-595 Bulk Fuel Pricing

budgeting purposes. According to officials from DOD and OMB, beginning 

with the fiscal year 2014 budget cycle, OMB began providing DOD and 

other federal agencies with forecasted Brent prices in addition to WTI 

prices. OMB officials told us that although OMB Circular A-11 requires 

that federal agencies’ budget estimates be consistent with OMB’s 

economic assumptions, DOD has discretion over which economic 

assumptions, such as an appropriate crude oil benchmark, to apply in 

developing its bulk fuel estimates.

We identified other market conditions that DOD has not accounted for 

with its current approach to determining the crude oil component of the 

standard price. For example, DLA purchases about half of its fuel from 

overseas refiners. From fiscal years 2009 through 2013, DLA purchased, 

on average, 48 percent of its fuel from overseas sources. However, WTI 

is a pricing benchmark only for domestic crude oil. Because DOD uses 

WTI, its baseline for setting the standard price does not account for any 

potential price differences between domestic and overseas purchases. 

Furthermore, officials at DOD also expressed concerns that crude oil may

no longer be a good indicator for refined product prices. According to an 

official from the Office of the Under Secretary of Defense (Comptroller), in 

recent years the relationship between crude oil prices and the price of 

DOD refined products has not been as closely related as it has in the 

past. This is consistent with our own analysis. Specifically, for fiscal years 

2009 through 2013 we compared the actual price DLA paid for fuel with 

the actual price of other fuel products—including WTI crude oil, Brent 

crude oil, and commercial jet fuel—to determine the relationship among 

these prices. Based on our analysis of data from the Energy Information 

Administration, we found that in each year the prices DLA paid for fuel 

had a closer relationship with commercial jet fuel prices than with either 

WTI or Brent crude oil prices.

To compensate for the limitations in its crude oil baseline, DOD has 

adjusted other components of its standard price. For example, as 

discussed earlier in this report, beginning in fiscal year 2013, DOD 

increased the refinement markup component of the standard price from 

30 percent to 50 percent to account for the divergence between WTI and 

other crude oil pricing benchmarks. DOD has continued to use the 50 

percent refinement markup in setting its standard price for fiscal years 

2014 and 2015. This practice means that DOD is using the markup not 

only to account for refinement costs, but to cover the price spread 

between WTI and other crude oil pricing benchmarks. By using the 

increased refinement markup to compensate for the price spread, DOD is 

not addressing the underlying limitations with its crude oil baseline. 
Page 23 GAO-14-595 Bulk Fuel Pricing

Rather, DOD is adding further risk and uncertainty concerning its 

estimate, because the estimate must now account for additional price 

variables.

Even though in recent years its methodology has been producing 

estimates that differ significantly from actual costs, DOD has not 

reevaluated its approach or documented the rationale behind the 

assumptions it uses for setting the standard price. DOD’s 2007 study 

found that its forecasting methodology produced results as good as or 

better than the forecasting models the study compared it with.26 However, 

that study focused exclusively on the crude oil component of the standard 

price. It did not evaluate the accuracy of the standard price methodology 

as a whole against other potential approaches. Moreover, since that time, 

DOD has not reevaluated whether using WTI as its baseline 

assumption—with the corresponding refinement markup—is still 

appropriate given recent market changes. Further, DOD has not 

considered whether a crude oil baseline is still reasonable at all. Officials 

from the Office of the Under Secretary of Defense (Comptroller) told us 

that they have held internal discussions regarding changing the crude oil 

pricing baseline used in the standard price, but no final decision has been 

made.

Furthermore, DOD has not fully documented its rationale and 

assumptions for establishing each component of the standard price. 

GAO’s Cost Estimating and Assessment Guide states that a cost 

estimate should be supported by detailed documentation that describes 

how it was derived.27 According to the guide, the documentation should 

include, among other things, the estimating methodology used to derive 

the costs for each element of the cost estimate, and it should also discuss 

any limitations of the data or assumptions. Further, a well-documented 

methodology allows decision makers to understand and evaluate the 

budget request and make proper determinations. According to an official 

from the Office of the Under Secretary of Defense (Comptroller) 

responsible for overseeing DOD’s bulk fuel program, DOD’s Financial 

Management Regulation provides overarching guidance on establishing 

prices for working capital fund products, including fuel. Specifically, the 

 26Secretary of Defense, Report to Congressional Defense Committees: Budgeting for Fuel 

Cost Fluctuations (February 2007).

27GAO-09-3SP.
Page 24 GAO-14-595 Bulk Fuel Pricing

Financial Management Regulation provides that all business areas of the 

fund are required to set their prices based upon full cost recovery, 

including general and administrative support provided by others. This 

official noted that DOD’s process for setting the standard price is based 

on this full cost recovery, as described in specific guidance in the 

Financial Management Regulation. Additionally, federal guidance also 

governs aspects of the rate-setting process. For example, OMB’s A-11 

Circular requires DOD’s budget estimates for fuel to be consistent with 

OMB’s economic assumptions. For this reason the official stated that the 

establishment of a more specific methodology could be potentially 

redundant to the existing process, and could add additional administrative 

hurdles that may not add value.

However, while DOD’s Financial Management Regulation provides 

overall principles for working capital funds, it does not require DOD to 

document its methodology for setting the standard price in a step-by-step 

process. Therefore, DOD does not have detailed documentation that 

describes the rationale for the assumptions it uses. For example, DOD 

has not documented its rationale for continuing to select WTI as a crude 

oil benchmark in establishing the standard price although OMB now 

provides more than WTI crude oil forecasts in its economic assumptions. 

Also, according to the Office of the Under Secretary of Defense 

(Comptroller) official, DOD determines its refinement markup to account 

for the fact that DLA purchases refined product and does not buy crude 

oil and that this factor is developed based on current commodity market 

experience balanced against DOD priorities. However, DOD has not 

documented its rationale or assumptions for determining these trade-offs. 

Reevaluating its approach for estimating the components of the standard 

price would allow DOD to develop more informed estimates and better 

position DOD to minimize risks and uncertainty resulting from changing 

market conditions. Further, documenting the rationale for its assumptions 

would provide greater transparency and clarify for fuel customers and 

decision makers the process DOD uses to set the standard price.

DOD has faced challenges in setting a standard price that closely 

approximates its actual fuel costs, and in recent years its estimated fuel 

prices have differed considerably from its actual costs. Actual prices have 

differed from DOD’s estimates largely because changes in fuel market 

conditions have not been reflected in the standard price. Additionally, 

DOD has not documented its rationale for continuing to use the same 

assumptions. The Defense-wide Working Capital Fund, designed to 

absorb the effects of price fluctuations, has been insufficient to absorb the 

Conclusions
Page 25 GAO-14-595 Bulk Fuel Pricing

significant net outlays for fuel. This has led to large transfers into the fund 

from other DOD accounts and adjustments to the standard price DOD 

charges to customers—disrupting other DOD programs and straining the 

military services’ budgets. Despite the recurring need for these transfers 

and price adjustments, DOD has not reevaluated its approach to setting 

the standard price since 2007. Until DOD has reevaluated its approach 

and documented its assumptions for setting the standard price, it may not 

be certain that its price reflects current conditions.

To improve DOD’s process for setting its standard fuel price, we 

recommend that the Secretary of Defense direct the Office of the Under 

Secretary of Defense (Comptroller), in coordination with the Defense 

Logistics Agency (DLA), to take the following two actions:

• reevaluate the approach for estimating the components of the 

standard price and

• document its assumptions, including providing detailed rationale for

how it estimates each of these components.

We provided a draft of this report to DOD, OMB, and the Energy 

Information Administration for review and comment. DOD provided written 

comments, which are summarized below and reprinted in appendix III. In 

its comments, DOD concurred with the first recommendation and partially 

concurred with the second recommendation. OMB and the Energy 

Information Administration did not provide comments on the draft report.

DOD concurred with the first recommendation that the Secretary of 

Defense direct the Under Secretary of Defense (Comptroller), in 

coordination with DLA, to reevaluate DOD’s approach for estimating the 

components of the standard price. In its comments, DOD stated that this 

is an ongoing effort within the department and that the Office of the Under 

Secretary of Defense (Comptroller) and DLA are continually evaluating 

methods to better estimate the price of fuel. DOD stated that this is a 

challenge because the rate-setting process takes place a budget cycle in 

advance of execution. DOD noted that fuel-market volatility affects the 

Working Capital Fund’s ability to budget for, and customers’ ability to buy, 

fuel at a stabilized price. Additionally, in its comments, DOD stated that

the department does not have the storage capacity to hold a year’s worth 

of fuel in advance, so fuel is purchased in real time throughout the 

execution year and sold at a price set 18 months prior. We agree that the 

rate-setting process is challenging, given the timing of DOD’s budget 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
Page 26 GAO-14-595 Bulk Fuel Pricing

process and when the department actually purchases fuel. However, as 

stated in the report, DOD’s current approach for establishing the standard 

price has not accounted for changes in market conditions for crude oil, 

such as the decreasing relationship between crude oil and refined prices, 

even though its methodology has been producing estimates that differ 

greatly from actual costs. Although DOD noted in its comments that it is 

continually evaluating methods to better estimate the price of fuel, it did 

not specify any specific initiatives to that end. Moreover, the report did not 

identify any studies that DOD has undertaken since 2004 that constitute a 

reevaluation of the department’s approach for estimating the components 

of the standard price. Reevaluating its approach for estimating the 

components of the standard price would allow DOD to develop moreinformed estimates and better position the department to minimize risks 

and uncertainty resulting from changing market conditions.

DOD partially concurred with the second recommendation that the 

Secretary of Defense direct the Under Secretary of Defense 

(Comptroller), in coordination with DLA, to document its assumptions, 

including providing a detailed rationale for how it estimates each of the 

standard price components. In its comments, DOD stated that the 

department does not have a “documented” specific, step-by-step process 

to develop the fuel price. DOD further stated that it prices fuel by using a 

formal process that has been presented to the department’s leadership, 

briefed to congressional staffers, discussed with the administration, and 

reproduced in various instructional and informational briefings and 

papers. In its comments, DOD stated that the process for setting the fuel 

price is similar to other Working Capital Fund products and follows the 

intent of DOD’s Financial Management Regulation and congressional 

implementing language for full cost recovery. We stated in the report that 

DOD’s Financial Management Regulation provides overall principles for 

working capital funds, but it does not require DOD to document its 

methodology for setting the standard price in a step-by-step process. 

Therefore, DOD does not have detailed documentation that describes the 

rationale for the assumptions it uses, such as its rationale for selecting 

one crude oil benchmark over another benchmark or the factors and other 

tradeoffs that it considers when establishing the refinement markup. 

GAO’s Cost Estimating and Assessment Guide states that a cost 

estimate should be supported by detailed documentation that describes 

how it was derived.28 According to the guide, the documentation should 

 28GAO-09-3SP.
Page 27 GAO-14-595 Bulk Fuel Pricing

include, among other things, the estimating methodology used to derive 

the costs for each element of the cost estimate, and it should also discuss 

any limitations of the data or assumptions. Documenting DOD’s

assumptions, including the rationale for each component of the standard 

price, would provide greater transparency and clarify for fuel customers 

and decision makers the process DOD uses to set the standard price.

We are sending copies of this report to appropriate congressional 

committees and the Secretary of Defense; the Under Secretary of 

Defense (Comptroller); the Director of DLA; the Director of OMB; and the 

Administrator of the Energy Information Administration. In addition, this 

report is available at no charge on GAO’s website at http://www.gao.gov.
Page 28 GAO-14-595 Bulk Fuel Pricing

If you or your staff have questions about this report, please contact Cary 

Russell at (202) 512-5431 or russellc@gao.gov, or Asif A. Khan at (202) 

512-9869 or khana@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributors to this report are 

listed in appendix IV. 

Cary Russell

Director

Defense Capabilities and Management

Asif A. Khan

Director

Financial Management and Assurance
Page 29 GAO-14-595 Bulk Fuel Pricing

List of Committees

The Honorable Carl Levin

Chairman

The Honorable James M. Inhofe

Ranking Member

Committee on Armed Services

United States Senate

The Honorable Richard Durbin

Chairman

The Honorable Thad Cochran

Ranking Member

Subcommittee on Defense

Committee on Appropriations

United States Senate

The Honorable Howard P. “Buck” McKeon

Chairman

The Honorable Adam Smith

Ranking Member

Committee on Armed Services

House of Representatives

The Honorable Rodney Frelinghuysen

Chairman

The Honorable Pete Visclosky

Ranking Member

Subcommittee on Defense

Committee on Appropriations

House of Representatives
Appendix I: Scope and Methodology

Page 30 GAO-14-595 Bulk Fuel Pricing

To address our objectives, we focused our analysis on fiscal years 2009 

through 2013. We focused on these years because this period covered 

the most recent complete year of the Department of Defense’s (DOD) fuel 

sales and provided 5 years of cost data to analyze any trends. To 

determine how estimated bulk fuel costs have compared with actual costs 

since fiscal year 2009 and identify the factors that contributed to any 

differences, we compared the estimated budget costs for fuel against 

actual costs in the budget year of execution and identified any 

differences. We calculated DOD’s estimated fuel costs by multiplying the 

standard price per barrel by the number of barrels the military services 

estimated they would consume. To calculate DOD’s actual fuel costs, we 

multiplied the actual purchase price per barrel by the number of barrels 

sold to the military services. We then determined which factors 

contributed to the overall differences. Specifically, we calculated the 

percentage of the overall difference explained by either fuel price 

fluctuations or differences between estimated fuel consumption and 

actual consumption. Next, we compared each of the three components of 

the standard price (crude oil price, refinement markup, and nonproduct 

costs—such as transportation and facilities maintenance) against the 

actual costs for each component to determine which one contributed most 

to the difference between the standard price and actual fuel costs. We 

also interviewed officials from the Office of the Under Secretary of 

Defense (Comptroller), the Defense Logistics Agency (DLA), the military 

services, and the Department of Energy’s Energy Information 

Administration to discuss the factors that contributed to these 

differences.1

To determine the extent to which DOD has taken actions to manage the 

effect of any differences between estimated and actual fuel costs, we 

reviewed monthly cash balances in the Defense-wide Working Capital 

Fund for the period October 2008 through September 2013 and 

determined the effect of bulk fuel purchases and sales on those balances. 

In doing so, we determined net outlays from the Defense-wide Working 

Capital Fund and compared them with the cash balance in the fund. We 

analyzed DOD financial management documents for this same period to 

determine the number and amount of approved transfer actions related to 

 1

Congress created the Energy Information Administration within the Department of Energy 

in 1977. As a statistical agency, it provides policy-independent data, forecasts, and 

analyses to promote sound policy making, efficient markets, and public understanding 

regarding energy and its interaction with the economy and the environment.

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 31 GAO-14-595 Bulk Fuel Pricing

fuel into and out of the Defense-wide Working Capital Fund and any fuelrelated supplemental appropriations received into the fund. In addition, 

we analyzed DOD budget-justification materials and other documentation 

to identify all changes to DOD’s standard price. We also interviewed 

officials from DOD and the military services to determine the effect on the 

services’ budgets of transfers and changes to the standard price.

To determine the extent to which DOD has considered options for 

adjusting its approach for estimating bulk fuel costs and managing 

working capital funds, we reviewed related studies and recommendations 

that we identified through interviews with DOD officials and literature 

searches that discuss options available to DOD to adjust its approach to 

managing bulk fuel costs and working capital funds. For this review we 

focused on relevant studies that have been conducted since 2004. We 

interviewed DOD officials to determine the status of any findings and 

recommendations from these studies related to DOD’s bulk fuel pricing or 

management of the Defense-wide Working Capital Fund. We also 

reviewed documentation that describes DOD’s current approach for 

estimating bulk fuel costs, including budget-justification materials and 

DOD reports, and discussed the department’s approach with officials from 

the Office of the Under Secretary of Defense (Comptroller), DLA, and the 

Office of Management and Budget. We compared this information with 

cost-estimating practices established in GAO’s Cost Estimating and 

Assessment Guide2 and Office of Management and Budget3 and DOD 

guidance.4 We also interviewed officials from DOD, the Office of 

Management and Budget, and the Department of Energy to discuss 

current fuel market conditions and alternative approaches to estimating 

bulk fuel costs and reviewed Department of Energy reports describing 

current fuel market conditions. To better understand the fuel market 

conditions, we reviewed DLA fuel purchase data for fiscal years 2009 

through 2013 and compared the amount of domestic fuel purchases with 

 2

GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and 

Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009). The 

methodology outlined in the Cost Estimating and Assessment Guide is a compilation of 

best practices that federal cost-estimating organizations and industry use to develop and 

maintain reliable cost estimates throughout the life of an acquisition program.

3

OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget (July,

2013).

4

Department of Defense Financial Management Regulation 7000.14-R, Volume 2B 

(September, 2010). 
Appendix I: Scope and Methodology

Page 32 GAO-14-595 Bulk Fuel Pricing

the amount of international fuel purchases. We also performed analysis 

on the relationship of the West Texas Intermediate (WTI) crude oil 

benchmark with other crude oil pricing benchmarks to determine whether 

DOD’s approach to setting its standard price reflects current market 

conditions. Further, we conducted an analysis on the relationship of crude 

oil prices with refined product costs, including the cost of commercial jet 

fuel.

To determine the reliability of the fuel cost data provided to us by DOD, 

we obtained information on how the data were collected, managed, and 

used through interviews with and questionnaires to relevant officials. We 

assessed the reliability of the data collected by analyzing questionnaire 

responses from Office of the Under Secretary of Defense (Comptroller) 

and DLA officials, which included information on their data system 

management, data quality-assurance processes, and potential sources of 

errors and mitigations of those errors. To determine the reliability of 

monthly cash balances in the Defense-wide Working Capital Fund, we (1) 

obtained and analyzed reports containing detailed data on transactions 

affecting the Working Capital Fund cash balance including collections, 

disbursements, direct appropriations to the fund, and funds transferred 

into and out of the fund; (2) reconciled year-end cash balances between 

DOD reports and Department of the Treasury records; and (3) obtained 

and analyzed documentation supporting the amount of funds transferred 

in and out of the Working Capital Fund. To determine the reliability of DLA 

fuel purchase data, we compared DLA domestic and international fuel 

purchases against fuel purchase data provided in DOD’s budgetjustification materials. To determine the reliability of the Energy 

Information Administration’s data on Brent, WTI, and commercial jet fuel 

prices, we reviewed information on its methodology and data quality 

guidelines in accordance with GAO guidance on assessing data from 

federal statistical databases. Based on our review of the data, we 

determined that the data presented in our findings were sufficiently 

reliable for the purposes of this report.

We interviewed officials, and where appropriate obtained documentation, 

at the following DOD locations:

• Office of the Under Secretary of Defense (Comptroller);

• Office of the Assistant Secretary of Defense for Operational Energy 

Plans and Programs;

• Defense Logistics Agency, Energy Management Activity Group;

• Air Force Petroleum Agency;
Appendix I: Scope and Methodology

Page 33 GAO-14-595 Bulk Fuel Pricing

• Office of the Secretary of the Air Force, Financial Management and 

Comptroller;

• Army Petroleum Center;

• Naval Supply Systems Command; and

• Headquarters, Marine Corps, Programs and Resources, Operations 

and Maintenance Budget Formulations Branch.

We also interviewed other officials from the following federal agencies 

and other organizations:

• Office of Management and Budget;

• Department of Energy, Energy Information Administration; and

• Institute for Defense Analyses.

We conducted this performance audit from November 2013 to July 2014, 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe the 

evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: Studies on Department of Defense 

Bulk Fuel Pricing and Management of the 

Defense-Wide Working Capital Fund

Page 34 GAO-14-595 Bulk Fuel Pricing

This appendix contains a list of six studies conducted since 2004 on the 

Department of Defense’s (DOD) bulk fuel pricing and management of the 

Defense-wide Working Capital Fund. Table 3 provides information on 

each study’s name and purpose, as well as any findings and 

recommendations, and DOD’s response to the recommendations or 

status of their implementation. Some of the studies listed below included 

information outside the scope of our review; however, we have only 

included findings and recommendations related to DOD’s bulk fuel pricing 

or management of the Defense-wide Working Capital Fund.

Table 3: Studies on DOD Bulk Fuel Pricing and Management of the Defense-Wide Working Capital Fund

Purpose Findings and recommendations DOD response

Defense Business Board: Recommendations related to the practical use of fuel hedging for DOD, March 2004

To examine potential ways to reduce 

DOD’s exposure to fuel price volatility by 

hedging in commercial markets.

Finding

DOD could feasibly hedge its fuel purchases, 

which includes purchasing financial instruments 

to minimize risk in future prices.

Recommendations

1. DOD should not engage in hedging in 

commercial markets.

2. DOD should propose that the Office of 

Management and Budget (OMB) consider 

seeking legislative authority for DOD to 

engage in “nonmarket” hedging by entering 

into an agreement with the Department of 

the Interior to mutually offset dollar 

variances resulting from fuel price volatility.

DOD reported that OMB is not 

supportive of an agreement with the 

Department of the Interior because the 

current arrangement is neutral from a 

government-wide budget-scoring 

perspective—OMB’s evaluation of the 

effect that changes in fiscal policy will 

have on the federal budget.

Secretary of Defense: Report to Congressional Defense Committees—Budgeting for Fuel Cost Fluctuations, February 2007

To report on budgeting for fuel cost 

fluctuations. 

Findings

• Current DOD fuel forecasting methodology 

produced results as good as or better than 

the majority of other fuel forecasters. 

• Changing forecasting sources or methods 

may not provide more realistic estimates.

Recommendations

The study did not make any recommendations.

Not applicable.

Appendix II: Studies on Department of 

Defense Bulk Fuel Pricing and Management 

of the Defense-Wide Working Capital Fund
Appendix II: Studies on Department of Defense 

Bulk Fuel Pricing and Management of the 

Defense-Wide Working Capital Fund

Page 35 GAO-14-595 Bulk Fuel Pricing

Purpose Findings and recommendations DOD response

Defense Business Board: Re-examining Best Practices for DOD Fuel Acquisition, July 2011

To identify private-sector best business 

practices for purchasing fuel in large 

volumes.

Finding

Current private-sector best practices for 

managing fuel price protection would reduce 

uncertainty and risk related to future fuel prices.

Recommendations

1. Defense Logistics Agency (DLA) should 

request fuel price quotes from suppliers both 

with and without a “price adjustment” 

feature.

2. DOD should solicit proposals for Fuel Price 

Risk Management services from private 

sector firms to advise on or manage fuel 

price exposure.

3. DOD should revisit the possibility of an 

intragovernmental price stability agreement 

with the Department of the Interior—

transferring funds between the Department 

of the Interior and DOD depending on which 

department benefits from unanticipated fuel 

price increases.

DOD reported that recommendation 1 

would result in additional expenses to 

DOD and that suppliers have indicated 

that they do not currently sell fuel to 

large customers under long-term 

contracts at firm-fixed prices.

DOD reported that the Assistant 

Secretary of Defense for Operational 

Energy Plans and Programs is 

considering recommendation 2, but 

that no decision had been made to 

pursue it as of April 2014.

DOD reported that OMB is not 

supportive of an agreement with the 

Department of the Interior because the 

current arrangement is neutral from a 

government-wide budget-scoring 

perspective—OMB’s evaluation of the 

effect that changes in fiscal policy will 

have on the federal budget.

Department of Defense: Revolving Funds Operational Cash Balances, January 2012

To determine a sufficient operational level 

of cash that each of DOD’s revolving 

funds should maintain in order to sustain a 

single rate or price throughout the fiscal 

year.

Finding

Fuel cost volatility poses a major threat to the 

Defense-wide Working Capital Fund’s solvency 

and can require funding reallocations that disrupt 

investment programs or threaten readiness.

Recommendations

1. Authorize DOD to transfer expiring 

unobligated balances, with appropriate 

controls, from its appropriation accounts to 

the Working Capital Fund cash account to 

build a reserve for fuel cost increases.

2. Allow the Working Capital Fund to 

accumulate positive operating results and 

develop a cash reserve to mitigate the 

effects of fuel market volatility.

DOD reported that OMB does not 

support recommendation 1 because of 

budget scoring issues—OMB’s 

evaluation of the effect that changes in 

fiscal policy will have on the federal 

budget.

DOD reported that it is currently 

updating its Financial Management 

Regulation to allow for greater 

flexibility in developing cash balance 

targets for the Defense-wide Working 

Capital Fund (expected to complete in 

summer of 2014).
Appendix II: Studies on Department of Defense 

Bulk Fuel Pricing and Management of the 

Defense-Wide Working Capital Fund

Page 36 GAO-14-595 Bulk Fuel Pricing

Purpose Findings and recommendations DOD response

Business Executives for National Security: Finding Efficiencies in the Business of Defense: Reducing Fuel Cost for the 

Defense Logistics Agency, February 2013

To analyze a series of prior 

recommendations aimed at improving 

DLA’s fuel procurement operations and 

highlight additional practices to improve 

DLA’s fuel procurement and distribution 

system.

Findings

• Current budgeting practices have created 

considerable budgeting inefficiency.

-In recent years the standard price has 

created additional volatility for both DLA and 

its military services customers.

• Standard price is the biggest challenge in 

the agency’s businesslike buyer-and-seller 

approach to bulk fuel.

Recommendation

Increase intradepartmental pressure to give DLA 

Energy added input into the standard price 

formulation process.

DOD reported that fuel pricing 

guidance is one of the responsibilities 

of the Office of the Under Secretary of 

Defense (Comptroller). DLA operates 

through the Defense-wide Working 

Capital Fund and is DOD’s sole source 

fuel provider. In this role DLA is an 

integral part of DOD’s price setting. 

During the price-setting process, DLA 

determines the nonproduct costs of the 

standard price, and its market research 

office provides independent product 

projections as input to the product 

costs, which are used in the 

development of the standard price. 

Institute for Defense Analyses: Fuel Price Effects on Activity and Readiness, September 2013

To provide context for DOD to assess the 

significance of the fuel pricing changes 

while considering the magnitude of 

historical unbudgeted requirements.

Finding

There is no significant evidence from the military 

services that unbudgeted fuel price fluctuations 

have caused reductions in readiness over the 

long term or within a fiscal year.

Recommendation

DOD should consider potential mitigating 

policies, including alternative budgeting 

strategies, and explore specific “what if” case 

studies on unbudgeted fuel requirements.

DOD reported that it continually 

evaluates policies and strategies to 

mitigate pricing increases. This study 

was completed too recently to be 

considered for any updated policies.

Source: GAO analysis of DOD data. | GAO-14-595
Appendix III: Comments from the Department 

of Defense

Page 37 GAO-14-595 Bulk Fuel Pricing

Appendix III: Comments from the 

Department of Defense
Appendix III: Comments from the Department 

of Defense

Page 38 GAO-14-595 Bulk Fuel Pricing
Page 39 GAO-14-595 Bulk Fuel Pricing

Cary Russell, (202) 512-5431 or russellc@gao.gov

Asif A. Khan, (202) 512-9869 or khana@gao.gov

In addition to the contacts named above, Gregory Pugnetti, Assistant 

Director; Matthew Ullengren, Assistant Director; Pedro Almoguera; 

Russell Bryan; Virginia Chanley; Stephen Donahue; Adam Hatton; 

Joanne Landesman; Amie Steele; and Michael Willems made key 

contributions to this report.

Appendix IV: GAO Contacts and Staff 

Acknowledgments

GAO Contacts

Staff 

Acknowledgments

(351876)
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