Everywhere? Like Under My House?

The Wall Street Journal has an article on the economics of oil. All true and very interesting, as far as it goes. If you have no exposure to the economics of oil, this gives you a few pointers and facts that will help your understanding.

What’s not in the article are some of the other issues. The authors make one statement:
By simply opening up its spigots for a few years, Saudi Arabia could, in short order, force a complete write-off of the huge capital investments in Athabasca and Orinoco.
Well, yes, in theory that’s absolutely true. In practice, it doesn’t work that way. Why? The Saudis and the rest of the oil-rich states are dependent on oil revenue. Let’s look back a few years for a cautionary tale. Houston, in the mid-80s, was dependent on oil for much of the local economy. The oil industry crashed and so did Houston’s economy. As a result, Houston’s economy diversified. There’s now much more going on in Houston than the oil and gas industry, so if that industry craters again, Houston won’t be hit as bad.

On the other hand, the Gulf states have never diversified. Take Saudi Arabia as an example. According to the CIA, the oil industry provides 75% of budget revenues, 45% of GDP and 90% of foreign exports. The Saudi economy is a one-trick pony, and the trick’s name is “pump oil”. Does anybody here honestly think the Saudis are going to drop oil prices far enough to jeopardize their own prosperity? More importantly, are they going to risk general unrest and Islamic revolution just to drive somebody else out of business? It’s not going to happen. The range of oil prices which the Saudis and Yemenis and Kuwaitis need to prop up their governments and economies is a range where other people can also make a profit. Admittedly, not as large a profit, but still a return on investment.

What this mean in a larger geo-political sense is that as companies drive down production costs for other parts of the world through improved technology, the Gulf states become less and less important. I’m thinking that’s a good thing for everyone, except a few fat old Arabs.


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