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By Sophia Yan

U.S. gasoline prices averaged $3.87 last week. If economists are right, rising prices will trigger the development of less cost-effective alternatives, such as fuel refined from Canadian oil sands and corn ethanol. And so they have.

However, alternative fuels that are both better for the environment and help reduce dependence on foreign oil, are lagging behind. The U.S. Navy is trying to change that.

In December, the military branch purchased 450,000 gallons of biofuels for about $26.67 a gallon. It’s a hefty price, but not as hefty as the risk of continued dependence on foreign oil. The Navy has long been a leader in research, and Secretary Ray Mabus has directed his scientists and engineers to attack the energy problem head on.

"What I'm looking for is a steady, viable alternative to oil,” Mabus said in an interview yesterday at the Bloomberg New Energy Finance 2012 Summit in New York.

At $26.67, biofuels can’t compete with traditional, $3-a-gallon jet fuels the military currently buys. Mabus says he is nonetheless confident that Pentagon demand will create a secure enough market to drive down the price enough that it can compete with fossil fuel.

The Navy has set an ambitious goal to meet half its fuel needs from biofuels by 2020. The historic December purchase is ``just a drop in the bucket,'' considering the military consumes about 4 billion gallons of fuel annually, said K.C. Healy, Deloitte's federal energy management division director, in a recent interview.

The Navy has tested biofuels made from multiple sources, including algae, switchgrass and camelina, which is an oil-rich plant able to grow in poor soil. The Navy’s only criterion is that cleaner-burning fuels must be compatible with its existing ships and planes.

Domestically produced biofuels will make the U.S. military more energy independent and shield it from rising prices or constricted supply, Mabus says. Making fuels at home would also cut into the dramatic expense of the current fuel mix. Every $1 increase in the price of a barrel of oil adds $31 million to the Navy’s annual fuel bill.

``The risk of not acting,” Mabus says, “the risk of waiting until a supply shock or price shock gives us no choice is a far greater risk.''

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-0- Mar/21/2012 19:19 GMT

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