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 fuel- related 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. 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. 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. 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 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. 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. 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 minor fuel price fluctuations. 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. 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. 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. 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. 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. 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 took to address sequestration. 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 one- third 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. 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.