Every $10 increase in the price of a barrel of oil adds more than $300 million to the U.S. Navy's annual fuel costs, said Mabus, the former governor of Mississippi and the U.S. ambassador to Saudi Arabia under former President Bill Clinton.

"All you have to do is read the headlines every day to see why we need to do this," Mabus told Reuters in an interview at his Pentagon office. "Just from the situation in Libya, oil prices have gone up more than $7 a barrel."

U.S. crude futures eased slightly on Wednesday in Tokyo after hitting their highest levels in two-and-a-half years as unrest in Libya reduced production there and exacerbated worries about global supply.

"It's not just availability of fossil fuels and the fact that we're getting them from potentially or actually volatile places on earth, but it's also the price shocks that can come from it," said Mabus, who drew up a recovery plan for the U.S. Gulf coast after last year's BP Plc oil spill.

The Pentagon's fiscal 2012 budget sent to Congress last week assumes a price of $131 per barrel of oil. NYMEX crude for April delivery rose as high as $96.08 on Wednesday, the highest for any nearby month since October 2008.

Mabus said the Navy and Marine Corps were making dramatic changes to meet his ambitious energy saving goals, including one to ensure that by 2020, half of all energy the Navy uses would come from non-fossil fuel sources.

The Navy uses a third of the fossil fuels bought each year by the U.S. federal government, which in turn uses about two percent of fossil fuels consumed in the United States each year.

Mabus said one Marine Corps base in Helmand province in Afghanistan had reduced its energy consumption by over 20 percent and eliminated 700 pounds of batteries by using solar panels and implementing other energy-saving technologies.

The ability to run on biofuels could also prove an important selling point for U.S. weapons exports, said Mabus, whom some defense analysts consider a leading contender to replace Defense Secretary Robert Gates when he retires later this year.

For instance, the Navy last year flew a Boeing Co F/A-18 fighter jet on a biofuel blend at supersonic speeds.

Mabus said he highlighted the fighter jet's ability to run on biofuels during a recent visit to Brazil, which is considering the Boeing plane and several European models in a competition for new fighter jets.

He said the Navy had also developed a hybrid electric drive for the USS Makin Island, a Navy warship, that would save up to $250 million in fuel costs over the ship's 30-year life span, and was partnering with other federal agencies to develop biofuel production and other alternative fuel sources.

The Navy could play an important role in creating a market for such alternative fuels, helping to drive down the price and make non-fossil fuels more affordable.

Reducing the U.S. military's dependence on fossil fuels could also save the lives of troops, Mabus said.

Last year he told Congress that one American was killed or wounded for every 24 convoys that transported fuel to military bases in Afghanistan.