The Looming Bankruptcy Of Saudi Arabia

[Valin]

Forbes:

Tim Worstall

Aug. 6 2015

 

There’s two interesting little stories in this idea that Saudi Arabia is going to go bust in a couple of years as a result of the sagging oil price. Both are more general economic ideas than just the story of that oil price. The first is that mono-anything in economics is something we don’t really like. We certainly don’t like either monopolies or monopsonies, but we should also be very careful of an economy that relies on any one product or even supplier. The perils of resting an entire economy on the production of just the one commodity should be obvious here. But the same could and should be said about reliance upon any one supplier in an economy as well. We want diversity, always, of producers and suppliers. The second is that this is an object lesson in why most economists don’t really believe in the idea of predatory pricing. Sure, it’s possible for a dominant supplier to try to lower prices and drive others out of the marketplace. The idea is that once they’ve bankrupted those others then they can sweep back in, raise prices and thus enjoy monopoly profits having killed the competition. There’s an element of Saudi having tried this, trying to kill off shale. And it’s not working: and economists have never really seen anyone making this tactic work. Which is why they don’t really believe in it as anything other than a theoretical possibility.

 

So here’s Ambrose Evan Pritchard: and it should be said, love him dearly though we do, he can be just a little over enthusiastic about his latest idea:

 

 

(Snip)

 

If the oil market had had its old structure, where projects take a decade or more to even bring into production and then produce for decades more, at vast capital cost, then the sort of tactic that Saudi used might have a chance of working. If by flooding the market for a year or two Saudi can cast doubt on the financing of the next wave of such large projects then they might be able to enjoy a decade or more of high prices. Those high prices more than making up for the lost income in that period of undercutting those projects. Maybe.

 

But fracking is a very different production method, as I suggested back here:

 

(Snip)