The real economy likes cheap oil

Posted by in Development, Economics

Cheap oil is frequently cited as another problem adding to share market uncertainty. But the real economy benefits as cheaper petrol and oil derivatives flow through the production chain. According to the the National Australia Bank’s chief economist Alan Oster, the oil price is helping keep a lid on prices, which is good for most Australians.

“Just because the equity market tanks doesn’t mean the real economy tanks,” Mr Oster told The Australian Financial Review. “In economics there is a famous saying: ‘the equity markets predicted 10 out of the last one recessions’.” NAB chief economist Alan Oster says that cheaper petrol is almost certainly beneficial to the economy. “I would argue at worst it’s neutral – and if you ran your traditional equations – it’s positive.

Mr Oster said that the price plunge was due to a global oversupply of oil, not some mysterious lack of global demand. Opec maintained their supply of oil when American coal gas oil came onto the market to regain their share of the market, but prices fell further than expected.

Meanwhile Saudi Arabia’s elite is thinking of privatising the one institution which powers their economy, stimulating a debate which highlights the complexity of managing middle east oil supply. The Saudi kingdom’s Deputy Crown Prince Mohammad bin Salman mentioned his interest in selling off parts of Aramco to private investors in an interview with the Economist published on Jan. 6 2016.

This reflects a fundamental shift in the way policy is made in Saudi Arabia: from the cautious, collective and consensual rule of a previous generation of princes who governed the kingdom for more than 70 years, to policy driven by the dominant personality of one young prince, Mohammad bin Salman.

Backed up by economic advisers from the private sector, he has spoken about the introduction of new taxes, the privatization of health and education services, and the trimming of the public payroll — all of which had been political no-go areas for the last five decades. Aramco produces more than 70 percent of the Saudi government’s revenue and has been a near-sacred entity ever since the Saudi state gradually bought out its original American owners in the 1970s.

The process differed from the forced nationalizations of Western oil assets in other OPEC countries: Instead of letting the kingdom’s national oil company Petromin take over Aramco, the princes decided to preserve the company’s American managerial structures and gradually “Saudiize” its ranks. Petromin, riddled by corruption like many national oil companies in OPEC, was allowed to quietly wither away.

The result has been a state within a state with its own Americanized corporate culture and social rules. Aramco compounds are the only places in the kingdom where genders mix in the workplace and women are allowed to drive. The company, whose working language is English, operates its own residential cities, hospitals, and schools. It has a unique reputation for efficiency among Saudi institutions and is the number one employer for bright young Saudis.

To preserve this exceptional status, however, Aramco has been governed like a fortress. Although leading Western executives serve on its board, the company publishes very little information about its operations, let alone finances. Royal protection has kept the rest of the Saudi technocracy, and even senior Al Saud family members, at arm’s length from the company, which enjoys a high level of operational autonomy.

Going by the value of the oil reserves it controls, Aramco could easily be the world’s most valuable company. And yet, taking Aramco out of its shell even for a minority listing would create operational and political risks for the Saudi state’s most critical asset. Given capacity constraints in the rest of the Saudi administration, the company has increasingly been used as the government’s de facto project management office for high priority infrastructure, building a $10 billion science and technology university, sports stadiums, and an industrial city in the kingdom’s underdeveloped South. Such non-core activities would be hard to reconcile with the commercial mandate of a listed company.

An IPO would also likely require the publication of updated oil reserve estimates, which have not been restated since the late 1980s, when Aramco ceased being incorporated in Delaware and become an entity under Saudi law. It would need to publish a profit and loss statement, giving detailed insights into the kingdom’s main source of revenue and thereby indirectly enforcing more transparency in the country’s national budget, about which little information is shared publicly.

This could, among other things, affect the administration of allowances for the Al Saud family’s thousands of princes, which as far as we know are deducted before the (hitherto unknown) Aramco revenue reaches the official budget. All this would constitute a radical departure from the traditional secrecy around Aramco and its revenues (source: