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Forgive the naivety, but after a certain point doesn't cash just make more cash, and didn't the Saudis hit that a long time ago? I figured they got rich on oil

Forgive the naivety, but after a certain point doesn't cash just make more cash, and didn't the Saudis hit that a long time ago? I figured they got rich on oil, but could now stay rich through investment.

nkoren 8y ago
The tl;dr for you is that the Saudi people made more people faster than their cash could make more cash. And as an extraction-based economy they made more jobs even more slowly than that. So now they've got a glut of young people, not enough cash to keep them complacent, and not enough jobs to keep them occupied. What do you think will happen next?
simonh 8y ago
The problem is much of that wealth has been appropriated as personal assets by members of the Royal Family. A lot of it has also been squandered on extravagant projects that will never have anything close to a real ROI. They _could_ have managed it better and ended up living off it indefinitely, but SA is no Norway.
swarnie_ 8y ago
Your thinking of Norway's approach where the state uses oil to reinvest and pay for future generations. Saudi is trying to do this by spinning off part of Aramco in to public ownership and by stealing wealth from top officials. realistically they should have started 30 years ago.
- gaius 8y ago
  Or their investment in SoftBank. It’s got to be pretty weird to work for or in a WeWork and know what sort of regime you are sustaining.
rleigh 8y ago
I'm no economist, but isn't one of the primary problems here that they don't have a well enough developed and diversified economy to invest in, and expand their economy and benefit their society in a virtuous cycle of investment and growth? They have the option to invest in western companies, but isn't that rather risky? And it's also ultimately just monetary gains; they haven't gained materially as a nation unless they also spend that money on products and services from other nations. Eventually, it's left their economy and been frittered away. Also, how much is invested versus being spent lavishly on their princes and populace to keep them happy?
Kadin 8y ago
That would be the case if they were investing the "rent" from extractive industry (oil) in productive industries above-ground. Or even just putting it into the market so that somebody else puts it to productive use. If you do that, you're well-positioned for the day the oil runs out or becomes uneconomical to extract. But the Saudis have the same problem nearly every other petro-regime has, which is spending that money on unproductive personal property (palaces, fancy cars, private jets, etc.) as well as unproductive state property (defense, mostly). They have built some universities and other public goods, but I suspect it's a small fraction of the wealth that's been extracted. They have no comparative advantage over other nations in anything other than petroleum, and religious tourism. There's no particular reason why you'd want to build a factory or move your multinational company there. They could create reasons for people to want to do that, but it would probably be expensive (they'd need to have low wages, probably artificially depressed or subsidized, or a very lax regulatory environment, which has its own costs, or both). In the short term I'd look for them to start borrowing to keep their budget balanced, using the oil still in the ground as collateral, basically. (They're effectively borrowing against future income.) If they do enough of this and build productive, sustainable economic assets, they might do okay. But eventually the cost of borrowing might get high, because as demand for oil falls and extraction costs increase, there will come a point where it's no longer economical to extract anymore and they'll have a load of "stranded assets" on their national books. The day they finally have to write those down will be the real day of reckoning, financially. If the ruling class is smart, they'll make it seem as though it's all a big Western bankster conspiracy (when in doubt, blame the Jews), not their own long-running incompetence, because the immediate cause of the pain will probably be a debt crisis or default.

nkoren 8y ago

The tl;dr for you is that the Saudi people made more people faster than their cash could make more cash. And as an extraction-based economy they made more jobs even more slowly than that. So now they've got a glut of young people, not enough cash to keep them complacent, and not enough jobs to keep them occupied. What do you think will happen next?

simonh 8y ago

The problem is much of that wealth has been appropriated as personal assets by members of the Royal Family. A lot of it has also been squandered on extravagant projects that will never have anything close to a real ROI. They _could_ have managed it better and ended up living off it indefinitely, but SA is no Norway.

swarnie_ 8y ago

Your thinking of Norway's approach where the state uses oil to reinvest and pay for future generations. Saudi is trying to do this by spinning off part of Aramco in to public ownership and by stealing wealth from top officials. realistically they should have started 30 years ago.

gaius 8y ago
Or their investment in SoftBank. It’s got to be pretty weird to work for or in a WeWork and know what sort of regime you are sustaining.

rleigh 8y ago

I'm no economist, but isn't one of the primary problems here that they don't have a well enough developed and diversified economy to invest in, and expand their economy and benefit their society in a virtuous cycle of investment and growth? They have the option to invest in western companies, but isn't that rather risky? And it's also ultimately just monetary gains; they haven't gained materially as a nation unless they also spend that money on products and services from other nations. Eventually, it's left their economy and been frittered away. Also, how much is invested versus being spent lavishly on their princes and populace to keep them happy?

Kadin 8y ago

That would be the case if they were investing the "rent" from extractive industry (oil) in productive industries above-ground. Or even just putting it into the market so that somebody else puts it to productive use. If you do that, you're well-positioned for the day the oil runs out or becomes uneconomical to extract. But the Saudis have the same problem nearly every other petro-regime has, which is spending that money on unproductive personal property (palaces, fancy cars, private jets, etc.) as well as unproductive state property (defense, mostly). They have built some universities and other public goods, but I suspect it's a small fraction of the wealth that's been extracted. They have no comparative advantage over other nations in anything other than petroleum, and religious tourism. There's no particular reason why you'd want to build a factory or move your multinational company there. They could create reasons for people to want to do that, but it would probably be expensive (they'd need to have low wages, probably artificially depressed or subsidized, or a very lax regulatory environment, which has its own costs, or both). In the short term I'd look for them to start borrowing to keep their budget balanced, using the oil still in the ground as collateral, basically. (They're effectively borrowing against future income.) If they do enough of this and build productive, sustainable economic assets, they might do okay. But eventually the cost of borrowing might get high, because as demand for oil falls and extraction costs increase, there will come a point where it's no longer economical to extract anymore and they'll have a load of "stranded assets" on their national books. The day they finally have to write those down will be the real day of reckoning, financially. If the ruling class is smart, they'll make it seem as though it's all a big Western bankster conspiracy (when in doubt, blame the Jews), not their own long-running incompetence, because the immediate cause of the pain will probably be a debt crisis or default.