Story by The Wall Street Journal

The Pentagon has cut the price it charges the U.S. Air Force and other military branches for refined fuel by 12% in a rare midyear change following the swoon in global oil prices.

The Pentagon’s Defense Logistics Agency typically buys fuel at prevailing market prices throughout the year from vendors including BP PLC, Royal Dutch Shell PLC and Valero Energy Corp. and then resells it at a fixed price to its various services.

The Pentagon reduced the standard sales price of refined fuel to its services to $136.92 a barrel from $155.40 at Feb. 1, the department said in response to a request from The Wall Street Journal. It’s rare for the Pentagon to change the preset price midyear, according to defense experts.

The new sales price cuts the fuel bill for jets, ships and military vehicles, freeing up some of the funds already appropriated by Congress to cover the cost of jet fuel and diesel, according to the Pentagon’s former financial chief.

“There’s going to be a substantial windfall [for the services],” said former Pentagon Comptroller Bob Hale. He expects congressional appropriations committees to redeploy savings from the lower fuel costs into other parts of the 2016 budget that comes into effect on Oct. 1.

The Pentagon typically buys fuel three to four months before it is sold on to the services, so much of the effect of February’s price change drop won’t come until fiscal 2016, said Mr. Hale.

The Pentagon doesn’t use financial fuel-hedging tools, but differences between the market price of fuel and the price paid by the military services are absorbed by its Defense Working Capital Fund. When prices drop, the fund goes into surplus and uses this to set lower prices in future years if oil prices rise.

The price of benchmark WTI crude fell 53% between its peak last June and the end of January, while average jet fuel prices dropped 48% over the same period, according to the International Air Transport Association, an airline trade group.

The Defense Department is by far the government’s largest energy user, and spent around $13 billion on petroleum products in its last fiscal year, according to Mr. Hale, down from a peak of $15 billion when the U.S. had a larger presence in Iraq and Afghanistan.

Petroleum products account for three quarters of the Pentagon’s total energy bill, and military planners forecast demand will rise 10% between now and 2025 as thirstier new weapons platforms come on stream and more forces are deployed into the Asia-Pacific region, stretching supply lines to a region with few energy resources of its own.

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