U.S. Arms Exporters Not Yet Panicking Over Oil Prices

U.S. defense and aerospace firms eventually might have to starting worrying about falling oil prices, but not quite yet. 

While $50-a-barrel oil is good news for airlines and for consumers in general, if prices stay low for the foreseeable future it could put a damper on U.S. exports to the Middle East, analysts have warned. Oil producing countries in the Middle East are among the biggest buyers of U.S. high-tech weaponry and commercial aircraft.

Executives at Lockheed Martin, which has in recent years signed billions of dollars worth of weapons sales to Middle Eastern nations, say it is too soon to panic. "I don't think any of us will be bold enough to predict how long the dip in oil prices is likely to occur," says Mike Trotsky, vice president of air and missile defense business development at Lockheed Martin Missiles and Fire Control.

"It is certainly a concern that we will be watching closely," he tells National Defense Jan. 7 during a conference call with reporters. 

Lockheed Martin has made international sales a top priority as Pentagon contracts slow down. Missile defense systems have been especially lucrative for the company as countries like Saudi Arabia seek to deploy anti-missile systems to thwart Iran's regional influence. 

Trotsky says no buyers have yet hinted they might have to cancel big-ticket weapon contracts as a result of plunging oil revenues. Crude prices are down 50 percent from a year ago. "When we talk to our customers in Saudi Arabia, Qatar and the United Arab Emirates, they are absolutely committed with going ahead with their plans for integrated air-and-missile defense over the next few years."

Among the largest systems Lockheed expects to produce for Middle Eastern buyers are missile interceptors like the PAC-3, which is sold to six nations including the UAE. Kuwait, Qatar and Saudi Arabia also have signed up to acquire the missiles. 

The first foreign sale of Lockheed's theater air defense system, known as THAAD, was to the Emirates. Initial deliveries are scheduled for 2016. Qatar recently notified Congress that it also is interested in buying the THAAD. "We'll be talking to Qatar this year," says Trotsky.

Industry analysts are not yet certain what, if any, real impact oil prices could have on U.S. defense exports. 

"This continues to be 'the issue' we get the most questions on," says Robert Stallard, aerospace and defense industry analyst at RBC Capital Markets. "My suspicion is that there will be a lot of indirect impacts that have yet to be realized," he says Jan. 7 during a conference call with clients. Just like the drop in interest rates has taken years to show its ramifications, the same could happen with oil prices.

"If oil stays at $50 there could be more broad implications than we're now aware of," he says. For now, worries about future defense exports waning are "probably overdone," Stallard says. Future exports to the region could include naval upgrades, air defense, combat vehicles and fighter aircraft at a time when regional tensions remain high due to the events unfolding around Syria and Iraq.

"The Middle Eastern countries tend to take a long-term view when investing in defense capability, and these strategies do not tend to change based on the month-to-month change in the crude price," he says.

Further, major oil producers Saudi Arabia, Kuwait, Qatar and the UAE are sitting on cash reserves of about $880 billion as of the end of 2013, according to RBC estimates. The cash would give these countries some breathing room until oil goes up again. And the security situation in the region will keep these nations in a arms-buying mood. 

"It's not a peaceful neighborhood. I would be surprised if Middle Eastern countries make a significant change to their defense policy and defense purchasing," says Stallard. 
Qatar, for instance, signed a big missile defense deal with Lockheed in December, "right in the teeth of the oil price decline." Lockheed also is marketing its littoral combat ship surface combatant to

Middle Eastern countries that are looking boost coastal security in areas such as the Strait of Hormuz, a strategic waterway.

In fiscal year 2014, U.S. arms sales exceeded $34.2 billion, slightly up from 2013 sales of about $30 billion.

Topics: International, Missile Defense