Dutch disease and geopolitical implications

[Kalia_Test]

From wiki ----------------------- In economics, the Dutch disease is the apparent relationship between the increase in the economic development of natural resources and a decline in the manufacturing sector (or agriculture). The mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation's currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation's other exports becoming more expensive for other countries to buy, and imports becoming cheaper, making the manufacturing sector less competitive. While it most often refers to natural resource discovery, it can also refer to "any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment".[1] The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. This is now being witnessed in Venezuela as we speak. There are many political issues,etc there but this post is not about that. To quickly summarize :- 1) Venezuela is very very heavily dependent on Oil exports and that was funding its budget. When Oil prices were high, they were getting huge amounts that were used to import other goods ( instead of using the good times to diversify its economy by promoting its manufacturing or other sectors). 2) Crude price dropped from 120 odd $ per barrel to 50 odd and Venezuela economy has crashed. Their central bank has increased printing local currency and inflation is at 100 percent with long queues for food,etc. ------------------------------- It would be interesting to see what geopolitical ramifications will be there when ( very soon - with all advancements in technology and Shale gas and other stuff ) the middle-east nations will face the same phenomenon. If you just take example of Saudi Arabia ( and most Arab nations come under the below description) :- 1. They have almost nothing except Oil. Their kingdom subsidizes everything for its citizens due to its rich revenues. 2. Their citizens by and large know nothing except whiling away their time. They dont even know how to extract their own oil and are dependent on Western nations for that. 3. There is no agriculture or manufacturing or services or anything else. All of these are cheaper to import ( dutch disease). There are some other countries that are dependent on foreign aid ( which is also a cause in addition to natural resource discovery) :winky: that they are conveniently using to finance other stuff. This is to discuss if you see middle-east countries going bust ( Saudi will survive a little longer as it kept good amount of foreign reserves ) anytime soon and what might be the geopolitical implications - Obviously if Saudi gets tightened, they wont have charity money to give to others. P.S. Modiji - Make in India :hatsoff:

[G_B_]

KSA and various gulf nations are large sovereign wealth funds. Qatar for example seems to be buying up everything under the sun in london. So they are much better buffered for this than in the past.

[randomGuy]

Problem is 1. saudis have trillions of dollars of reserves. D they invest it everywhere including equities(Recently they sold stake in kotak mahindra bank at huge gains for ex.) 2. Saudi oil extraction is very very cheap(in single digit dollars per barrel) n their oil business is viable at very low costs as well. Shale will make sure that oil price doesn't go too high (say beyond $75) Main thing that prosperity is rising due to technology n lowering fertility rate n extreme poverty will vanish in decade's time due to this reasom

[G_B_]

and with India, its not just a case of Make In India, We have remittances to the tune of $70 billion and $30 billion worth of FDI. Both these segments will increase rapidly in the coming 4-5 years. Provided that Oil remains below say $75 there is a case of India actually developing a current account surplus. India also needs to move beyond its gold lust. Its literally screwing with our finances.

[G_B_]

Problem is 1. saudis have trillions of dollars of reserves. D they invest it everywhere including equities(Recently they sold stake in kotak mahindra bank at huge gains for ex.) 2. Saudi oil extraction is very very cheap(in single digit dollars per barrel) n their oil business is viable at very low costs as well. Shale will make sure that oil price doesn't go too high (say beyond $75) Main thing that prosperity is rising due to technology n lowering fertility rate n extreme poverty will vanish in decade's time due to this reasom

They also have a rapidly expanding population. Their gdp per head has fallen a lot. They cannot sustain current standards of living if oil stays below $100 to the barrel for a decade.

[randomGuy]

They also have a rapidly expanding population. Their gdp per head has fallen a lot. They cannot sustain current standards of living if oil stays below $100 to the barrel for a decade.

I was talking abt prosperity in the hard working developing world like india. I am of the view that Saudi can give almost unlimited subsidy

[G_B_]

I was talking abt prosperity in the hard working developing world like india. I am of the view that Saudi can give almost unlimited subsidy

not really... They have a population of 30 million and earn about 120 billion from their forex reserves and investments. Thats $4000 per person. So they are dependent on oil. India's economy is diverse. Its not a KSA.

[G_B_]

and as far as India goes, We need to have Forex reserves to the tune of 20% of GDP. This is purely for stability in the face of economic crisis or natural disasters. Beyond that any money should be spent in other avenues.

[randomGuy]

Think there's some misunderstanding. Only following part was for India

Main thing that prosperity is rising due to technology n lowering fertility rate n extreme poverty will vanish in decade's time due to this reason

[G_B_]

ok fair enough

[randomGuy]

not really... They have a population of 30 million and earn about 120 billion from their forex reserves and investments. Thats $4000 per person. So they are dependent on oil. India's economy is diverse. Its not a KSA.

Yar they have extraction cost of <10 $. They will NEVER suffer(unless hydrocarbons use itself is stopped). They will only need to increase production at low cost. Other oil producers will go bankrupt but Saudis will always rule.

[Kalia_Test]

I am absolutely fine with India - It has various natural resources, agriculture is OK, manufacturing is fine and we have services too...just need to keep the agriculture going as in very very bad times, this is the one thing that will shine - nothing beats food security internally and India should aim to be self sufficient in food at all times...A nation can survive years and even for decades if there is no need to depend on others for food. We need to improve our logistics and storage mechanisms though - too much wastage... Coming to oil-dependent nations, it is good if KSA has a sovereign fund ( I knew it invests elsewhere but I had no idea of the scale )...however this will prolong the bust but not avoid it...Diversified economy is the only remedy...once you start eating from returns of sovereign fund, it will take a few years before you run out of it.... Now, close to 2-3 generations of Saudis have not known that they need to work hard for their food ( and I am not exaggerating ). It is difficult to see them doing it anytime soon. In the meanwhile, there will be revolutions, agitations,etc and obviously other nations will jump at opportunities ( Israel for example )... Does Arab world have any allies that are not in for their Oil ?

[Kalia_Test]

Yar they have extraction cost of <10 $. They will NEVER suffer(unless hydrocarbons use itself is stopped). They will only need to increase production at low cost. Other oil producers will go bankrupt but Saudis will always rule.

No sir...thats not how we should look at it... Saudis might extract oil at 10$ and sell at 20$ and make 100% profit...Thats OK...But that 10$ multiplied by whatever oil they export...is that enough to subsidize all their other expenditure? That profit should be able to match their HUGE import bill for almost everything...Saudi has nothing - pls remember...nothing...from phones to everything, they need money to import..

[G_B_]

I am absolutely fine with India - It has various natural resources, agriculture is OK, manufacturing is fine and we have services too...just need to keep the agriculture going as in very very bad times, this is the one thing that will shine - nothing beats food security internally and India should aim to be self sufficient in food at all times...A nation can survive years and even for decades if there is no need to depend on others for food. We need to improve our logistics and storage mechanisms though - too much wastage... Coming to oil-dependent nations, it is good if KSA has a sovereign fund ( I knew it invests elsewhere but I had no idea of the scale )...however this will prolong the bust but not avoid it...Diversified economy is the only remedy...once you start eating from returns of sovereign fund, it will take a few years before you run out of it.... Now, close to 2-3 generations of Saudis have not known that they need to work hard for their food ( and I am not exaggerating ). It is difficult to see them doing it anytime soon. In the meanwhile, there will be revolutions, agitations,etc and obviously other nations will jump at opportunities ( Israel for example )... Does Arab world have any allies that are not in for their Oil ?

or even worse some 40-50 years from now we find a cheaper source of energy...not going to happen but still.

[randomGuy]

No sir...thats not how we should look at it... Saudis might extract oil at 10$ and sell at 20$ and make 100% profit...Thats OK...But that 10$ multiplied by whatever oil they export...is that enough to subsidize all their other expenditure? That profit should be able to match their HUGE import bill for almost everything...Saudi has nothing - pls remember...nothing...from phones to everything, they need money to import..

Saudi oil volumes will be higher at low costs. Other extractors aren't viable at low costs. So even if the profit margins are less (say 20-10=10$per barrel), the increase in volume will take care of the money they need.

[Kalia_Test]

To drive my point, below are the budgetary break even crude prices for OPEC nations...meaning what should be the crude price for these countries to match their income and expenditure For Saudi - it is 80 dollar plus...it is already using its reserves to kill Shale competition ( their attempt)

[G_B_]

Re India we do need to improve the manufacturing sector. At the very least to cover our needs domestically. This will reduce our imports. I am personally not big on the china model of pegging the currency and exporting to the world. Does not seem sustainable.

[G_B_]

To drive my point, below are the budgetary break even crude prices for OPEC nations...meaning what should be the crude price for these countries to match their income and expenditure For Saudi - it is 80 dollar plus...it is already using its reserves to kill Shale competition ( their attempt)

feck me look at Iran lol

[Kalia_Test]

Saudi oil volumes will be higher at low costs. Other extractors aren't viable at low costs. So even if the profit margins are less (say 20-10=10 barrel), the increase in volume will take care of the money they need.

1. It will deplete their resources very very rapidly. 2. There are many OPEC agreements...SA cannot just decide to supply all Oil requirement in world...Other OPEC nations will kill them. 3. Logistically too, buying oil from countries where extraction costs may be high but transport costs will be low will make sense in some cases. 4. It can't sell more than the demand ( so even a small size world slowdown will wipe it out). Also kindly look at graph posted in earlier post...It gives the true picture what price SA actually needs...

[velu]

i think we are mostly self reliant except oil .. we are not that much dependent on exports like china.. we are importing huge amounts of oil but the trade imbalance is offset by currency Repatriation.. but make in india will definitely will improve our economy exponentially