The Consequences of Expensive Oil on Arms Transfers

This article examines the short-term effects of expensive oil on the supply and demand patterns for conventional weapons. It pools the cross-section and time-series data on petroleum and arms trade, and uses a crossed-error regression model to estimate these effects for three groups of countries. The results offer some tentative support for several widely shared impressions. They indicate a linkage between oil and arms trade, thus providing the necessary although not sufficient condition for proving that weapons have been used by the Western industrialized nations to recycle petrodollars from the OPEC countries. They also show that dependency on foreign fuel, increasing trade deficits, and low per capita GNP do not restrain the demand for weapons by those countries that are both oil and arms net importers. Most of these countries are developing nations, and their demand seems to be relatively inelastic in the short term.