Military Connection: How Oil Prices are Impacting the Military

Americans are relishing the falling prices at the pump when they fill up their gas tanks. The lower fuel prices that we are enjoying should cause a ripple effect that could see lower prices for most other goods as a result of lower costs of transporting them to your neighborhood. The current fuel prices are a result of a more than 40% drop per barrel in the price of crude oil.

While the American gas-buying public is enjoying savings at the pump, the price of crude oil could be damaging to the U.S. Department of Defense (DOD) and to the U.S. economy, as privately-owned defense firms sales of weapons to oil-rich nations could be affected.

Over the last several years, oil-rich countries, including Jordan, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates have all been increasing defense spending, with the majority of their money going to the DOD or private U.S. firms. In 2015 alone, these countries are expected to spend more than $95 billion on defense. These projected numbers could take a dive if the price of oil continues to drop.

Some have speculated that the DOD would see a savings in its cost to fuel the military, and then float this money to benefit research and development or other costs. But this, unfortunately, is not so.

The current price of oil has dropped below $50 per barrel. The division of the DOD that purchases energy for the U.S. military, called the Defense Logistics Agency (DLA), uses a set price to buy its oil. That price is currently at $134 per barrel. Because the price of oil fluctuates, the DLA uses this set price, and has both benefitted and suffered from the rise and fall of crude oil prices. That means that right now, the DLA, and subsequently the DOD, is taking a loss of more than $84 per barrel of crude oil. Either Congress or the secretary of defense could ultimately force the DLA to lower its rate, but that is unlikely, as the price of oil will eventually rise again. And while the price that the DLA is paying per barrel is a loss, it is a cost that is already factored in to the defense budget.

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