May 12, 2011
In recent years, the Congress has shown interest in powering some of the Navy’s future destroyers and amphibious warfare ships with nuclear rather than conventional (petroleum-based) fuel. At the request of the Subcommittee on Seapower and Projection Forces of the House Armed Services Committee, CBO has estimated—in a study released today—the difference between the costs of powering those new surface ships with nuclear reactors and equipping them with conventional engines.
The initial costs for building and fueling a nuclear-powered ship are greater than those for building a conventionally powered ship. However, once the Navy has acquired a nuclear ship, it incurs no further costs for fuel. Thus, determining whether nuclear or conventional propulsion is more cost-effective depends heavily on projected oil prices over the next several decades.
Under CBO’s baseline trajectory for oil prices, the hypothetical nuclear-powered fleet considered in this analysis would cost the Navy more than a corresponding conventionally powered fleet. The main reason is that the reduction in the Navy’s costs for conventional fossil fuel from using nuclear power would not be large enough to compensate for the increase in the acquisition costs for nuclear-powered ships. However, if the price of oil rose more rapidly than CBO has projected, conventionally powered ships could become more expensive than nuclear-powered ships.
CBO developed a hypothetical future fleet of 56 ships, based on the Navy’s most recent 30-year shipbuilding plan, of new destroyers and amphibious warfare ships that are candidates for nuclear propulsion systems. CBO’s main analysis compared the life-cycle costs for that fleet assuming the use of two alternative propulsion technologies: nuclear power and conventional fuel. The life-cycle costs are those over the ship’s entire 40-year service life, beginning with its acquisition and progressing through the annual expenditures over 40 years for its fuel, personnel, and other operations and support and, finally, its disposal.
CBO first calculated life-cycle costs of a conventionally powered fleet under a trajectory for oil prices derived from the macroeconomic projections that underlie CBO’s current baseline budget projections. In its January 2011 macroeconomic projections, CBO estimated that oil prices would average $86 per barrel in 2011 and would grow over the next decade at an average rate of about 1 percentage point per year above the rate of general inflation, reaching $95 per barrel (in 2011 dollars) by 2021. For this analysis of nuclear-powered ships, CBO assumed that the price will continue to grow after 2021 at a rate of 1 percentage point above inflation, reaching $114 per barrel (in 2011 dollars) by 2040.
If oil prices followed that trajectory, total life-cycle costs for a nuclear fleet would be 19 percent higher than for a conventional fleet. Specifically, a nuclear fleet would cost about $120 billion (in 2011 dollars), whereas a conventional fleet would cost about $100 billion, primarily because of the higher initial costs to procure nuclear ships. Different types of ships would be affected differently: costs would be 19 percent higher for nuclear destroyers, 4 percent higher for nuclear LH(X) amphibious assault ships, and 33 percent higher for nuclear LSD(X) amphibious dock landing ships, CBO estimates.
To determine how sensitive those findings are to the trajectory of oil prices, CBO also examined what would happen if oil prices started at $86 per barrel in 2011 and then rose at a rate higher than the growth in CBO’s baseline trajectory. That analysis suggested that a fleet of nuclear-powered destroyers would become cost-effective if oil prices grew, in real terms, by more than 3.4 percent—which implies oil prices of at least $223 per barrel (in 2011 dollars) in 2040, about twice what CBO projected. A fleet of nuclear LH(X) amphibious assault ships would become cost-effective if oil prices grew at a real annual rate of 1.7 percent or more, implying a price of at least $140 per barrel of oil in 2040—about the same price that was reached in 2008 but not sustained for any length of time. A fleet of nuclear LSD(X) amphibious dock landing ships would become cost-effective at a real annual growth rate of 4.7 percent, or a price in 2040 of $323 per barrel, almost triple the price that CBO projected.
The amount of energy used by new surface ships—particular those, such as destroyers, that require large amounts of energy for purposes other than propulsion—is another factor involving considerable uncertainty. The amount of energy consumed could be substantially higher or lower than CBO projected. Employing an approach similar to that used to assess sensitivity to oil prices, CBO estimated that acquiring destroyers with nuclear reactors would become cost effective only if energy use for the entire fleet of destroyers was more than twice what CBO projected.
The use of nuclear power has potential advantages besides savings on the cost of fuel. For example, the Navy would be less vulnerable to disruptions in the supply of oil: The hypothetical nuclear fleet that CBO analyzed would use about 5 million barrels of oil less per year than its conventional counterpart, reducing the Navy’s current annual consumption of petroleum-based fuels for aircraft and ships by about 15 percent. The use of nuclear power also has some potential disadvantages, including the concerns about proliferating nuclear material that would arise if the Navy had more ships with highly enriched uranium deployed overseas. CBO, however, did not attempt to quantify those other advantages and disadvantages.
This study was prepared by R. Derek Trunkey and Matthew Goldberg of CBO’s National Security Division.