Oil in Saudi Arabia & The U.S. - Different Outcomes

BigTex

It's interesting that when you look at two of the countries with the largest initial deposits of oil in the world--the U.S. and Saudi Arabia--I wonder what accounts for the fact that the U.S.'s rich endowment with natural resources is credited with turning it into a world economic power, while Saudi Arabia's natural resource endowment is credited with enriching the elite in that country and destabilizing the whole region politically.

It's strange how the same gift can lead to such different outcomes.
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arretium

bkwillia · Tar Sands Joined: Aug 20, 2007 Posts: 70

America has an excess of widely diversified resources, people and a more advanced economy that supports innovation and responds to market demand.

KSA has oil and camels and a backward culture that shuns outsiders, change and women. Its a no brainer.

America has exloited KSA just like they exploited their aboriginal population, and just about every developing nation.

KSA fought with its neighbors and fought over their own oil wealth.

Now, we have to defend the entire world from international conflict since any war would threaten America.

KSA can rest assured that America will protect its interests, but America can no longer say the same... who has really won here?

anagami

BigTex

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

BT wrote:

BigTex

Part of what I am suggesting is that the success of the U.S. is not strictly a function of a rich natural resource allotment.

Sometimes when we are discussing peak oil issues we touch on the idea that the U.S. has had a natural resource tailwind that has amplified its world standing and economic development.

It's interesting to me how for some countries a rich natural resource allotment can basically destroy the rest of the country's industries (or at least make them less competitive in foreign markets), while for other countries the natural resource allotment provides synergies with the rest of the country's economy.

Perhaps it is the amount of oil exports as a percentage of a country's total oil production that is significant.

MrBill, care to comment on the effect of oil exports on a country's other industries and on the value of its currency?
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MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

Yes, BT, it is commonly called The Dutch Disease refering to N. Sea oil production that filled Dutch coffers in the 70s, but caused the guilder to over-appreciate at that time. It made their other exports uncompetitive. Now we use the term Dutch Disease to explain this phenomenon in other countries.

One reason that some GCC states cling to a US dollar peg despite it being inflationary for their economies, and making other imports, from the eurozone for example, more expensive. Obviously ending the peg would be in their best interest, but then they would have to manage an appreciating currency as well.

In Norway's case they have tended to keep their oil revenue 'offshore' in part to keep the krona from appreciating too much and making the rest of their industry uncompetitive. However, they are not alone. Certainly, there is a tear in the fabric between resource rich western Canada and industry based central Canada. A strong Loonie is generally a good thing as for one it helps to hold down imported inflation. However, it means that central Canadian industry has to become more productive in order to remain export competitive and cannot rely on a weakening Canadian dollar to achieve that.

Also, when the Bank of Canada is setting monetary policy it has to balance faster growth and higher inflation in western Canada with slower growth and perhaps even a recession in central Canada. As I am fiscally conservative I would always try to err on the high side for interest rates to combat inflation. But then that would risk a Canadian dollar that is too strong.

It is a balancing act that central banks need to get right as capital flows can also make the currency appreciate if interest rate differentials favor the Loonie at the same time that resource exports are also booming. Then you end up with a two tier economy in which rates are too low for one region and too high for another.

So you are right, it does matter about the ratio of resource exports to manufacturing activity. Russia is struggling with this trade-off at the moment as well. So although the ruble is appreciating in nominal terms it is just not appreciating fast enough on a trade weighted basis. Inflation is quite strong as the CBR sterilizes oil and gas exports by printing rubles instead.
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TheDude

The US doesn't/didn't have the largest "initial deposits" of oil in the world, unless you're counting shale. This of course leads into the sticky subject of reserves estimation. The following graph includes both sides of the coin; the US is severely downgraded from SEC revisions, while the OPEC nations of course are under no restrictions to upgrading their reserves as they see fit:

Anyway, KSA is far from the natural resources bonanza that NA has proven to be, I don't see where you're going with that. NA was a tabula rasa for European immigrants who found a bounty to utilize/exploit without restraint. Political/sociological/geological/climactic constraints acted against a similar expansion into Siberia. Oil was the cherry on top, acting as the motive force for building modern US society.

I had to look up "Dutch Disease" to see if it wasn't one of the historical names for syphilis! Interesting stuff, Bill. I wonder what we're in for if producing nations reign in exports of oil - how their domestic economies will have to adjust to political actions of this sort. As we've seen exports can hit the floor in quite short periods of time - Mexico looks to be on the fast track right now.
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BigTex

cube · Fusion Joined: Mar 12, 2005 Posts: 3796

IMHO Saudi Arabia is actually not that "resource rich".
*everybody looks at me weird*

I think people underestimate the value of things like fresh water, rich topsoil, grazing land, and fish stocks. Imagine *VERY hypothetically* you had to rule a nation for 1,000 years. What would you rather have, a nation blessed with a one time bounty or a renewable resource? Wink

MrBill · Expert Joined: Sep 15, 2005 Posts: 5650 Location: Eurasia

Well, if I was a relatively small country in population terms that had a bounty of finite resources, but faced the long-term economic and environmental challenges of living in a desert-like environment then I would probably use the revenue from those reources to buy some medium-sized country(s) in a moderate climate zone(s) to ensure economic and cultural survival after those initial resources were depleted. I would leave just enough workers in camps to watch-over and protect those resources while extracting them. After they were gone the desert could reclaim her prize.
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BigTex