Is There a Correlation Between Crude Oil Prices and Military Spending?

Was the oil economy responsible for the worldwide rise in military expenditure? A recent report from SIPRI suggests that plunging oil prices made major oil economies reduce their military expenditure. A herculean fall in military spending by Russia and Saudi Arabia shows the dependency of the world on oil. The overall military spending of the world has increased for the first time since the 2008 financial crisis. However, major oil producing countries remain unaffected by the same. In fact, they had to reduce their spending. Could this be the reason Saudi Arabia led 13 oil producing nations and OPEC into production cuts?

military spending

US Champions Military Spending

 

In a recent report, the Stockholm International Peace Research Institute (SIPRI) investigated military spending of the world. The United States is still the leading military spender. In fact, the annual military spending increased in North America. This is the first time after 2010 that an increase has been noted in this region. Similar expenditures in western Europe have also risen for the second year in a row.

On the other hand, oil economies suffered major losses. Venezuela and South Sudan made the largest percentage of military spending cuts. They made 56 percent and 54 percent cuts respectively. Saudi Arabia had to decrease its spending by $25.8 billion or 30 percent, making it the biggest absolute cut in spending. Iraq and Azerbaijan made 36 percent cuts each. 13 countries out of 15 with the largest military expense decline are primarily oil economies. They include Peru, Oman, Ecuador, Angola, Mexico, and Kazakhstan.

Why is Falling Oil Revenue Responsible for Cuts?

 

After oil price crash in 2014, major oil economies faced a revenue crunch. The oil-price shock made oil exporting countries reduce their expenses, especially in military spending. Countries like the US and China, whose economies are not oil dependent, continued to pump their military expenditure in 2016. Only countries that were prepared for the oil price crash could manage their military spending well. Norway, Iran, Kuwait, and Algeria managed the price pressure well and continued to lift their military spending at a steady speed. One of the largest beneficiaries of the oil economy, Saudi Arabia, had to stop multi-billion-dollar projects too.

Geopolitical tensions have increased in the world. The South China Sea and Middle East have become battle grounds as many countries/groups have laid claims to oil fields. In between, oil prices took a massive plunge. Because of this, exporters are starved for cash while importers enjoy more reserves. If the Vienna agreement between OPEC and 13 other nations continues to help push oil prices up, then these countries may beef their military expenses.

 

Ben Myers

Ben began his long career in international finance and investing after graduating with a degree in Finance & Accounting. Prior to founding a financial advisory firm he worked with multi-national institutions including HSBC and Bank of Ireland. After several stints as a chief analyst at forex/binary options companies Ben still remains a keen trader and featured contributor on numerous financial sites.