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How Real is the Saudi “Nightmare”?

Would a drop in oil prices really be a nightmare for the oil- rich Saudis?

March 27, 2002

Would a drop in oil prices really be a nightmare for the oil- rich Saudis?

Of course, the real question is: Why is oil at $10 per barrel a “nightmare”? It’s true that, despite the conflagration in the Middle East, the price of oil has not risen too much recently. In March 2002, it stood at a healthy $25 a barrel.

But by its own admission, it costs Saudi Arabia just $1.50 to produce each barrel of oil. Thus, even in its “nightmare scenario,” oil revenues of $10 per barrel would still equal over 6 times its cost.

That’s not too shabby. Around the world, most business would love to be in the position of selling their products for six times their cost. Competition usually shaves such margins to the point that even a two or three percent margin over cost seems pretty good.

That somebody might consider such a huge profit margin to be a “nightmare” says a lot about the odd world view of Saudi Arabia — and the oil market.

It is not just a question of the Saudis having no real sense of business — although that has long been evident. After all, aside from oil, where have the Saudi’s been successful?

What is really astounding is the departure from competitive reality that is inherent in the Prince’s statement. Even sophisticated Saudi business leaders are apparently quite isolated from the “real” global world of business and commerce.

That is quite a departure from the past. Once upon a time, the Arab world was the acknowledged leader in economic and business development.

The medieval merchants of Cairo, Damascus and Baghdad did much to foster global trade. They surely understood the value of a dinar — and the value of a monopoly that allows goods to be sold at six times their costs.

Those merchants must be spinning over in their graves at the sight of their Saudi cousins who cannot even manage the revenues of one of the most profitable businesses of all times. March 27, 2002