Defense Stocks, Oil Prices Fall Despite U.S. Attack on Iraq

As U.S. cruise missiles pounded Iraqi targets for a second day, oil prices resumed their downward trend and stock prices of major defense companies finished down Thursday, reflecting the widespread belief that the military campaign will have little immediate impact on either industry.

Oil traders noted no damage thus far to Iraq’s crude supplies and only a small crimp in the flow of oil exports into an already abundant market. They responded by sending crude oil prices down $1.35, or nearly 11%, to $11.03 a barrel in New York.

Meanwhile, defense and aerospace companies saw none of the big stock jumps that followed the start of the Persian Gulf War in 1991, when traders saw the overseas action as a precursor to sharply higher defense spending.

Instead, analysts and traders downplayed the potential windfall to contractors from the latest skirmish in Iraq. The stock prices of most major defense companies on the New York Stock Exchange fell modestly Thursday, although they gave back only part of Wednesday gains.

Boeing fell 19 cents to $31.94, General Dynamics dropped 69 cents to $55.25, Lockheed Martin lost 94 cents to $94.06, Northrop Grumman eased 19 cents to $73.25, and Raytheon Class A fell 25 cents to $51.50. Litton was one of the few defense gainers, adding 56 cents to close at $58.75.

“I don’t see anything in the current campaign that indicates that there’s going to be any significant change [in spending] in the aftermath of this,” said Nick Cook, aviation editor for Jane’s Defence Weekly. “But it’s hard to read right now.”

Still, some believe the action in Iraq will bolster the growing movement in Congress to grant the Pentagon a sizable increase in its budget in fiscal 2000.

Defense Secretary William Cohen, who has been pushing for greater spending, may now have a stronger hand when he approaches the Clinton administration and Congress, said Brett Lambert, an analyst at DFI International, a Washington-based consulting firm.

“I think [Cohen] is really in the driver’s seat now on the budget. . . . He’s demonstrated now that they need to spend more because these kinds of conflicts do occur,” Lambert said. He said he now expects the Pentagon’s current $251-billion budget to grow by $10 billion to $20 billion by 2000.

“We will see an increase in defense spending, but more importantly, this could pressure Congress to spend the money a little more wisely than it has in the past,” Lambert said.

Much of that money will probably go toward troop readiness, upgrades and military salaries to improve the conditions and morale within the armed forces, analysts say. But some could also go toward bolstering equipment.

The Pentagon only rarely gets to test its major weaponry in live situations, and the Defense Department could make future contracting decisions based on the performance of various systems during the Iraqi assault.

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In its latest missions, the U.S. is again relying heavily on the Raytheon-built Tomahawk cruise missile, using “significantly more” than 200 of the weapons, according to a Pentagon spokesman. Each missile costs about $750,000.

For the first time, a majority of the Tomahawks and other missiles are being guided to their targets with the help of the global positioning system, or GPS, a government constellation of satellites.

“This conflict, more than any other, is relying on smart weapons and equipment, and they all are receiving signals from space,” Lambert said. “That has been true somewhat in the past, but it is overwhelmingly true this time.”

In addition, vast improvements in mission planning systems--including sending secure laptops into the field--have dramatically reduced the time it takes the military to plan out military strikes, according to Cook at Jane’s Defence Weekly.

Another new weapon available to the military is its information warfare squadrons, which first came into service in late 1996, Cook said. Their stated mission is to protect the U.S. against attacks on its computers and communications equipment and also to try to disrupt those systems employed by the enemy.

“People call this a new form of warfare,” Cook said. And even though the Pentagon is unlikely to talk much about its use, “I can’t imagine that the information warfare squadron would be sitting idle during this campaign. This is a classic occasion for them to go test their metal.”

Also in action in Iraq: Boeing F-18s, which is partially built by Northrop Grumman in Los Angeles, as well as Northrop-built F-14 fighters and EA-6B Prowler aircraft, which can jam radars and fire missiles to destroy them.

The Pentagon also is expected to send its Joint Surveillance Target Attack Radar System, or JSTARS, air-to-ground surveillance and battle management system into action, sources said. If the military adds the B-2 Stealth bomber to the mix, it would be the Northrop-built craft’s first combat appearance.

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Meanwhile, the oil industry also is keeping a close watch on events in the gulf.

Analysts say crude oil prices likely will return to 12-year lows going into the new year if the latest military strike on Iraq finishes this weekend without hobbling Iraq’s oil infrastructure.

“There isn’t any supply disruption, and until there is, prices will resume their downward trend,” said Peter Gignoux, head oil trader at Salomon Smith Barney Holdings Inc. “We should be wondering just how low prices will go next year.”

On Thursday, however, three major oil-exporting countries--Saudi Arabia, Venezuela and Mexico--agreed to maintain reduced output through 1999 and to seek cuts by other oil producers. That move could ultimately lead to higher oil prices.

At least half of Iraq’s allowed exports of oil will be discontinued as a result of the military action, but the effect on world supplies will be minimal, said Albert Anton Jr., a senior partner in Carl H. Pforzheimer & Co., a New York investment company specializing in international energy issues.

Under a United Nations program, Iraq has been exporting about 75% of its oil production, or about 1.7 million barrels a day. Half of that oil may continue to flow through a pipeline across Turkey, Anton said, but the other half of Iraq’s exports have been going out by tanker through the Persian Gulf. Those shipments will be effectively ended, either by the U.S. Navy or by insurance companies placing prohibitive premiums on such hazardous shipping.

Still, that will only cut about 25 million barrels a month from a global oil surplus of 500 million barrels, Anton said.

Also, Iraq must have the approval of U.N. inspectors to export oil in exchange for food and medical supplies. “And those inspectors have left Iraq,” said Anton, who believes that “Saddam may end the program altogether.”

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Times Senior Economics Editor James Flanigan contributed to this report. Bloomberg News was used in compiling this report.