The spike in gas prices is wreaking havoc, once again, on the Defense Department’s budget.

DoD planned on spending about $88 for a barrel of oil in 2012, but as of Wednesday, the commodity traded at $107 a barrel.

For every dollar above $88, it costs the Pentagon $31 million.

Robert Hale, the DoD comptroller, said if the price of oil stays this high, DoD will have to dig even deeper to find the money.

“We do what’s called a mid-year review. We’ll look first at any operating accounts that are under executing. But frequently the sources come from the investment accounts,” Hale said Thursday during the 2012 Pentagon Conference sponsored by Credit Suisse in Arlington, Va. “We look at unobligated balances, hopefully at systems where we don’t do too much damage to the plan. But you don’t want to do this if you can avoid it.”

Hale said DoD spends about $17 billion a year on gas, and if gas continues to be 25 percent higher than it budgeted, the military will have a serious budget problem.

Moving to alternative fuels among highest priorities

The Pentagon placed moving to alternative fuels among its highest priorities. Last June, DoD sent its first operational energy strategy to Congress detailing how it will use more non-petroleum-based fuels. DoD accounts for 70 percent of all the energy purchased and used by the government. Among the goals DoD has laid out for the services is to cut fuel consumption by 50 percent at bases by 2013.

Each of the services is taking on the challenge to figure out how to reduce their fuel consumption.

The Navy is among the leaders. Secretary Ray Mabus said the service is doing several things, including expanding its test of a hybrid engine for ships.

Mabus said the USS Makin Island already has shown an electric/gas engine could work on an amphibious ship-the electric engine for speeds 12 knots per hour or below and gas for speeds above 12 knots per hour. Now the service wants to test the engine more on a Destroyer.

Mabus said the Navy also will conduct an exercise in July where the fleet and planes will be run only on alternative energy, nuclear or biofuels.

The Marines Corps also has found success by using solar energy to cut fuel consumption at forward operating bases by 25 percent in Afghanistan.

Units are also experimenting at Quantico in Virginia and 29 Palms in California with alternative fuels so the warfighter doesn’t have to depend on convoys for re-supply as often. These convoys are among the most dangerous missions the military undergoes.

“When the uprising in Libya happened, the price of a barrel of oil went way up and I had only one place to go to pay for it, operational accounts which meant less training, less time patrolling and less time meeting our mission,” Mabus said.

The Navy is experimenting with solar, wind, geothermal, hydrothermal and even developing a microgrid for electricity just in case there is ever a problem with the commercial grid.

Additionally, the Navy is partnering with the Energy and Agriculture departments to spend $500 million on research and development of alternative fuels.

Budget 9 percent less than planned

The move to alternative fuels still is years away so in the short term Hale and other senior leaders said DoD would double down to find savings not only to pay for the increased costs for energy, but because they have to.

Ashton Carter, the Defense deputy secretary, said the military’s budget is 9 percent less than they had planned for it to be.

Carter said services have been looking and would continue to look in “every nook and cranny” for savings. DoD has committed to saving or avoiding spending $259 billion over the next five years and $489 billion over the next 10 years.

The military said a part of that $259 billion — about $60 billion — would come from efficiency savings around technology, acquisition and other back office administrative services.

Hale said each of the services have goals to reduce spending. Hale and Beth McGrath, the deputy chief management officer, oversee the process and are doing periodic reviews of military service and agency progress.

“Last year we had some things that were just plans or commitments, same thing this year,” Hale said. “We’ve taken last year and made them specific, and we will do the same thing again. We recognize we’ve got to do it and I think the services are fully on board.”

But he said DoD would have a harder time finding areas to cut spending as the services addressed many of the “low-hanging fruit” in the first round.

“The civilian personnel cap has been a difficult one, especially a year ago because we weren’t coming down very much in end strength,” Hale said describing the challenges of further efficiencies. “Maybe it will be a little easier now that we are taking units out. We’ve tried to make some reductions in our contractor workforce without demonizing contractors; we have to have them. It’s hard to measure them. We don’t have very good data systems.”

One area where he doesn’t foresee further reductions beyond what was proposed in the fiscal 2013 budget request for DoD civilian or military personnel.

Squeezing more out of acquisition

Carter said acquisition continues to be one of the most obvious places to find savings, but not necessarily by cutting contracts. Carter said DoD and industry need to change their processes.

“We are looking for better value in services. There is no question about that,” Carter said. “That has a lot of different dimensions, and contract type is just one. That has to do with how we do requirements, how disciplined we are, how good our people are in conceiving requirements. It has to do with recompetes and frequency thereof and quality thereof and lots of other things. We need to improve our tradecraft in the acquisition of services. We are doing better. You can see that in some of our statistics that we track. We are counting on doing better in the future. When I say we have some of that taken into account in our budget plans, we really do.”

He added DoD will look for savings by using more small and medium sized businesses, trying to get rid of cumbersome bureaucracy, emphasizing exports and trying to benefit from globalization.

“Poorly performing programs will not survive in this environment,” Carter said. “That makes our Better Buying initiative more important and we are continuing to press forward. We understand in a broadest kind of analogy our industry will need to make structure adjustments in view of the circumstances we jointly find ourselves. Our philosophy is this, in the main we will rely on normal market forces to make the most efficient adjustments in the defense industrial base.”

Also, DoD wants agencies and vendors to sharpen their pencils when it comes to figuring out cost.

“We’ve got this standardized budgeting process now called ‘will cost,’ and we need to look at what could be the cost and what will it be based on past history,” said David Van Buren, the Air Force’s service acquisition executive. “But the charge Dr. Carter gave us is to do better than that and give the money back to either the taxpayer or to the service chiefs and secretaries for use in more high priority programs. The whole cost activity is working quite well in the building.”

He said five of the service’s major programs have or are undergoing this, including the KCX-Tanker program. In fact, Van Buren said the tanker is meeting cost, schedule and performance goals and has not required one change order in the first year.

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