The sharp decline in world oil prices has become a double-edged sword for the Defense Department and U.S. defense manufacturers.
For the Pentagon, the more than 40 percent decline in the price of crude oil per barrel since June could mean a bonanza in savings in fueling its massive array of aircraft, ships, tanks and other military vehicles, according to a report by Defense One.
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WHY THIS MATTERS
The sharp plunge in international oil prices is being cheered by major oil and fuel consumers like the Pentagon but is frightening U.S. defense manufacturers who fear losing out on sales to oil-rich Middle Eastern countries that are currently losing their shirts. Still, oil prices are highly volatile -- and a single crisis in Libya or some other Middle Eastern country could force a supply problem that could push oil prices back to $90 or $100 a barrel.
But the huge drop in prices could seriously diminish U.S. weapons sales to oil rich countries like Saudi Arabia and the United Arab Emirate, which have been a prime target of the U.S. defense industry seeking ways to make up for declining sales to the Pentagon.
Loren B. Thompson, a national security and defense specialist with the non-profit Lexington Institute, told The Fiscal Times on Monday that plummeting oil prices definitely could shrink the Middle Eastern market for U.S. weapons systems over time.
“The most dynamic overseas market for U.S. weapons exports is the Persian Gulf region,” he said. “But virtually every customer there is dependent on oil revenues to pay for their weapons.”
Just as average consumers are greatly benefiting from a decline in gas prices triggered by the record drop in global oil prices, the Defense Department is repeating huge savings.
DOD has budgeted $13.6 billion for fuel in 2015, according to the Defense Logistics Agency (DLA), the arm of Pentagon that purchases energy for the military services. The agency had planned to spend an average of $134 per barrel over the next five years.
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Irene Smith, a spokeswoman for the agency, told Defense One that DLA Energy awards fixed-price contracts with economic price adjustments linked to petroleum market prices. “As a result, when the market price of fuel drops, DLA Energy receives the benefit of downward market fluctuations as the contract price DLA pays its suppliers is based on market prices,” she said.
Oil prices resumed their steep downward decline on Monday, reversing the biggest one-day gain in over two years, after Saudi Arabia's powerful oil minister said OPEC would not cut production at any price, Reuters reported. The Brent Crude oil price– an international benchmark -- fell $1.33, or more than 2 percent, to $60.05 per barrel after hitting session bottom at $59.93.
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While these low prices could be viewed as a highly positive sign for the Pentagon, some experts say it is a nightmare for the U.S. defense and aerospace industry, which is dependent on sales to Middle Eastern clients for a substantial percentage of their gross revenue.
The tumbling oil prices could alter defense procurement plans throughout the Middle East, where companies like General Dynamics, Raytheon, Lockheed Martin and Boeing are all trying to sell weapons, including armored vehicles, missile defense systems and fighter jets, according to a recent note to investors from Byron Callan, an analyst Capital Alpha Partners.
“Saudi Arabia, United Arab Emirates, Kuwait, Qatar and Jordan have all been increasing defense spending in recent years. In 2015 alone, these countries are expected to collectively spend more than $95 billion, according to data compiled by Avascent Analytics, a Washington-based consulting firm that tracks global defense spending,” Defense One reported.
Between 2015 and 2019, those big five Persian Gulf countries were projected to spend more than $546 billion on defense, according to Avascent. That figure may now be highly optimistic at best.
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