If you suppose the average cost of the Saudi barrel is around $55, or that is the revenue that will run their country at a steady pace, there is a big pile of money *exported barrels times $70* that needs to be invested abroad.

Is there such a great difference between what your average sheik decides to do with his share, and what their SWF does with the portion that is channeled through their pipes?
I think the only practical difference is that the SWF is under international pressure to disclose details of what they are up to, while no one is questioning the sheik’s investments.

You are also right that the state of the Chinese economy in these times is what sets this oil shock apart from other recent ones. The net result will be a delayed bubble burst, which will stiffle the US economy for a longer period of time, than if we we had what us Westerners have come to think of as “normal times”.
The stiff demand factor outside of US and Europe is the sting in the tail, so to speak.

I don’t think the average Chinese or the average Saudi is too concerned about potential economic hardship in US or Europe. They will be more upset when they loose their jobs, which will probably be the result of less buying power in the West.

I don’t think religious belief in “democracy” will be of any great comfort to someone who’s starving, regardless of which part of the world they come from…

An *average* person has enough common sense to realize that they do not know enough about investing to make such decisions. But once they are educated (and I mean really educated), then who knows – maybe they decide that the present course of their governments’ is the right one.

Why do bankers get such exorbitant salaries, wouldn’t it be much more efficient and money-saving to just to hire a Joe-six-pack from the street?

Sure, and that’s perfectly understandable. However, this has nothing to do with democracy, and confusing American national interest with democracy and human rights has the effect of undermining promotion of democracy and human rights in the world. Mixing the two has lead to the suspicion (and in my view the correct suspicion) that a lot of the talk of democracy and human rights is merely a cover for promotion of US national interests.

If the US really wants to promote democracy, then it has to realize that any sort of democratic world is just not going to be a place in which the interests of 350 million people who are Americans are automatically placed above the several billion people who aren’t, and I think the general shift in power to the Middle East and China is on the whole a good thing.

I don’t think that the average Chinese, Saudi, or American thinks too much about their governments reserve policies. They just care that they have jobs and good standards of living. They just care about results, and how its done they leave for technical experts.

As far as being in the broad interest. I think that there *has* been a decision in both Beijing and Riyadh that pumping money into the United States is in the Saudi and Chinese national interest, and at least in the case of China, there is a lot of popular input into that decision. As the events of the past three month have demonstrated, Chinese aren’t terribly shy at screaming when they think their national interests is being threatened. If there really was a popular feeling that China is funding the US too much, the government just wouldn’t be able to do it.

And yes, if the US starts doing something that the Saudis or the Chinese believe to be against their national interests, the Saudis and Chinese will start pulling money out, and don’t think that there is any misunderstanding here at all. If the US had encouraged Taiwan toward independence or recognized the Dalai Lama as a state leader, then I don’t think that it would be getting as much funding. Keeping the US from doing these things is a large part of the reason that money is being pumped in.

and then they’ll depeg and stop buying treasuries thru london altho maybe then even not!?

In the end, the currency question is as much political as economic. The link between the dollar and the riyal (or dirham or dinar) in large part reflects the links between the U.S. and the countries that both supply American oil and depend on American might. Keeping the riyal stuck to the dollar is “the implicit way of paying back the provider and guarantor of security,” says John Sfakianakis, chief economist of Saudi British Bank in Riyadh.

but if nazif has anything to say, petrodollars should stay put to revitalise the [strike]libarary of alexandria[/strike] region’s human/social capital.

The Canadian-educated prime minister said that one of the region’s main challenges is to raise the competitiveness of its work force. “Education is a very important factor in this area. We need to make sure that the new generations are capable of competing in a global economy,” he said.

It’s not a matter of democracy, it’ll be ridiculous for any government to put eveery investment decision to the vote, or to reach consensus before making the investment, can you imagine Japan or Norway doing that before financing the US via investment in treasuries or investing in a US bank?

That might prove disastrous considering how long they took to decide on a boj governor…

At least there weren’t be banners proclaiming that each tax cut was sponsored by some gulf government…

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajkO05voC8xU&refer=home

“Never have so many oil and gas companies spent so much to produce so little.

That’s the challenge facing Exxon Mobil Corp., Royal Dutch Shell Plc, BP Plc, Chevron Corp., Total SA and ConocoPhillips, which will spend a record $98.7 billion this year on exploration and production, Lehman Brothers Holdings Inc. estimates. Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labor and material.

(…) Drillers could access only 7 percent of known world reserves in 2005, down from 85 percent in 1970 after Middle Eastern nations took control of their fields, according to a July report by the National Petroleum Council in Washington. (…) “What is happening is something different. The international companies are denied access to areas of abundant oil within OPEC, and it’s getting costlier in other areas.”

What this says is that oil majors are dying animals, with shrinking access to oil, and skyrocketing costs for those fields they still have access to. Indeed, a big sign of that is that they spend more of their money buying back their own shares (effectively liquidating themselves) rather than investing. Of course, the ever-increasing oil prices allow them to mask these worrying underlying trends under comfortable-looking profits.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aB50jeKPl7gE&refer=home

“Take away Exxon Mobil Corp., Chevron Corp. and ConocoPhillips and profits at U.S. companies are the worst in at least a decade.
Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor’s 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.

(…) “The oil sector saved the market,” said Dwane. “Ex-oil, the numbers show falling earnings and with data highlighting a U.S. recession, we can expect more earnings downgrades.”

(…) Exxon, Chevron and ConocoPhillips, the three largest U.S. producers, all produced less oil in the first quarter. Chevron['s] reserves fell to the lowest in almost a decade last year.”

Interesting combination: lower oil production, exploding production costs and capturing a shrinking fraction of oil profits has not prevented oil companies from enjoying record high profits. And these profits have in turn masked the fact that US corporate profits are otherwise in the doldrums (even excluding the devastated financial sector).

So high prices are masking the slow elimination of the oil majors, whose profits are themselves hiding the weakness of the US corporate world.

Optimists cling to the notion that this is self-correcting, ie that the recession underway will cause oil demand to shrink and prices to recede, thus allowing all of these phenomenons to go into reverse. But this ignores the fact that demand is already shrinking in the US and Europe. We are no longer driving demand: beyond China, which could be argued to have an economy still to some extent dependent on the health of our own (even though this is highly debatable), it is oil producers like Iran, Saudi Arabia, Russia or others that are enjoying the fastest demand growth – and with current prices (both external, driving their revenues, and internal, driving demand as they are kept very low) this is unlikely to change.

With that in mind, you’d expect policy to start focusing on what we can control (ie our demand) rather than to keep on doing little but the all-too familiar – and unwholesome – combination of an arrogant sense of entitlement, casual recourse to raw threats and the most abject begging towards Saudi Arabia et al.

But hey, oil profits are flowing, supply-side policies are working!

That said, part of my concerns around “democracy” reflects the fact that I am not sure the average Saudi or Chinese resident would want to invest as much in the US (whether in US debt or US banks) as their governments are now doing — i.e. the world relies on official inflows to fund large deficits without there ever being a real decision on the part of the country making the investments in the US that it is in their broad interest. That risks misunderstandings, especially when the United States creditors start taking large losses. Or when the US starts doing something that the average Saudi really dislikes and the average Saudi asks why they are financing US policies …