The economic importance of the Middle East?

Or lack thereof?:

Even beyond Iran, the region scarcely registers on multinationals’ profit-and-loss statements. The Middle East and Africa accounted for 2.4% of listed American firms’ revenues in 2019, according to Morgan Stanley, a bank. For European and Japanese companies it was 4.9% and 1.8%, respectively. Middle Easterners still buy comparatively few of the world’s cars (2.3m out of 86m sold globally in 2018). Peddlers of luxury goods like Prada, an Italian fashion house, and L’Oréal, a French beauty giant, book 3% of sales in the Middle East (not counting sheikhs’ shopping trips to Milan or Paris).

The overall regional footprint of Western finance appears equally slight. At the end of 2018 big American banks had $18.5bn-worth of credit and trading activity in the region, equivalent to 0.2% of their assets. This includes JPMorgan Chase’s $5.3bn business in Saudi Arabia and Citigroup’s $9.6bn exposure to the United Arab Emirates (UAE). European banks have, if anything, been retreating. BNP Paribas of France sold its Egyptian business seven years ago and earned a footling €121m ($143m) in the Middle East in 2018. HSBC reports a substantial $58.5bn in Middle Eastern assets, though that is still a rounding error in the British lender’s $2.7trn balance-sheet.

Here is more from The Economist, noting that energy does play a larger role in other economic sectors.  If there is any part of the world that could use more multinational activity…

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While Western businesses may have little at stake in the region, what size is the stake for south and east Asian and/or Pacific states with guest workers across the region who send cash back home?

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This is what puzzles me about why the US is so vested in sorting out the problems of the Middle East. At one time Middle East oil was strategically critical but not now.

Every repub president gets suckered into one of those Saudi oil deals which always ends up biting us.

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Formerly there were Cold War motives and dependence on ME oil.

Then, there was the global war on terror motive - fight terror where it lives.

Now, it's hard to disengage. It's like the man with a hammer seeing every thing as a nail. Us has very large diplomatic, intel, military structures. Every place (outside CONUS) looks like a good place for a war.

The US is the world's largest arms supplier. Saudi Arabia alone accounts for 12% of so of total global arms sales, 80% of which goes to the US. The CIA has rum amok in the region for 50 years proving prestige, power and lucre to the agency and its cronies. Middle-eastern powers countries provide giant lobbying payments to all sorts of DC troglodytes helping to make DC place among the wealthiest cities in the US. Troglodyte royalty such as Colin Powel, Albright, Podesta, etc. are the tip of the iceberg. Everyone in DC seems to be getting paid by someone in the region (an by Ukraine as well, which has a similar CIA connection).

For Washington elites, the Middle-east probably accounts for 30-40% of their dirty destructive "economy" - and they are working for themselves, not for the US.

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Must keep the shipping lanes open...for China.

So being polite and tolerant and open minded requires opposing Brexit? Remainers don’t get it: we like Europe, we are European, but deplore the EU monstrosity.

They chose not to get it. You racist bastard.

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My comment above, starting with "The US is the world's largest arms supplier." was supposed to go here and respond to Paul

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... "The economic importance" is huge, as evidenced by the Trillion$ spent by U.S. politicians in that region for military & political adventures.

What's the economic opportunity-cost for those expended Trillion$ ?

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Yes, it's pretty hard to do business in a region under the omnipresent threat of US sanctions and FCPA.

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Tyler, this does raise a separate economics question to my provincial mind:

how are economists, governments, and businesses able to insist that some natural resources merit being left alone?

Global oil deposits, however vast (even with no hint of Technogenic Climate Change on any horizon), presumably could be depleted within the next two centuries on the basis of 20th century rates of consumption and 21st century rates of appetite.

Okay: so perhaps possibly maybe synthetic fuels or other technologies could take the place of all oil-based products some decade soon. But what oil products and fuels would be available in the distant future (count your millennia), regardless of how we address disputes over oil consumption in this century?

Oil does not qualify as a "renewable resource", does it? While we put it to whatever economic use in our lifetimes, what if access to oil became vital to residents of distant millennia, who may in the interim have lost their ability to manufacture synthetic fuels because of interim wars, plagues, disasters, et cetera?

How are economists equipped to urge restraint in exploitation of this globe's finite resources? How does this work in practice? (You can tell from these questions I am no economist.)

Higher prices will encourage substitution towards something else, is the usual economists' story. The end of natural resources is not the end of the world; and the US are using less every year in any case. For a good starter, listen to the recent econtalk episode with Andrew Mcafee.

"The end of natural resources is not the end of the world"

Well, I am not sure you'd be saying that if you were on Earth many, many years from now and many natural resources were becoming scarce.

For the resources that we extract there's only so much in the ground to dig up and many take millennia to create. We cannot assume that adequate substitutes would be available.

I for one am glad that this is not a problem that I will ever confront.

What % of the world's resources do you think we have used up?

If the answer is 10 or 20% you may be right to be concerned. If it is something like 0.00001% then no.

I think we are closer to the latter.

I do think ocean plastic s are a big problem, but what we are doing to "address" it does address it.

"does not address it"

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Yep, it's been what, over one hundred years since Hotelling's article about the economics of non-renewable resources? And the century since has shown the validity of that model and its various updates and improvements, with various hiccups be they the 1970s energy crisis (yeah, we were going to run out of oil back then too) or Julian Simon's bet against Paul Ehrlich, along with technological progress (fracking and other secondary and tertiary extraction methods on the supply side, solar and wind on the supply side of substitute sources).

Some societies arguably did run out of their scarce resource, e.g. Easter Islanders allegedly chopping down all their trees. But before deforestation doomed countries such as England and the US, they'd already switched to coal instead of wood as their major energy source. And now we're switching away from coal, well before we've even begun to run out of it. And we may or may not be switching away from natural gas in the near future, that's one of the current debates.

There are externalities aplenty that free markets are not good at solving. Natural resources are not one of the problem areas in general.

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You are asking good questions about what we owe our descendants. I do not think that economists as a group are very inclined or qualified to answer them, however.

I think it would be very wise indeed for all generations to make sure there's enough of things for future generations. I think this is something that people and societies and governments around the world should be very mindful of.

They’re exactly the ones qualified to answer.

How do you allocate scarce resources across generations? This is literally a standard economics question.

It starts with pricing of externalities, prioritizing economic growth, and goes from there.

"This is literally a standard economics question." I dare say, but nobody sane would pay any attention to their answers.

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...the world's population will plateau and slowly decline by the end of this century.

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What have future generations ever done for me? :-)

Solid, +5 i.p.

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Market always overreacts to ME news, it's free money to be on the other side. A major blow would be interruptions to trade through Suez but that's very unlikely. All these conflicts at most amount to sectarian violence but these societies are underdeveloped and irrelevant economically.

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Even oil supply is a minor issue, there's plenty of new supplies available; russians and west africans would be happy to help OPEC, it's demand trends that set the pace.

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So irrelevant that they have the 5th fleet in the middle east. smd

Two fleets, actually - the 5th and the 6th.

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A different view: https://www.nytimes.com/2020/01/11/opinion/climate-change-bank-investment.html Then there's history: why did Alexander (and the rest) always go east? What did they expect to find? There's a lure besides oil. The land of our ancestors, perhaps.

Lebensraum and tax revenues, which WE'RE not even getting. Americans make terrible imperialists.

This. Alexander and his cohort of “brothers in arms” could wallop a few poor but fiesty Greek city states, or embark on a military campaign for the ages against some really big wealthy cities.

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A good reason, perhaps, why the world should prefer the US to Russia or China. Solve for when optimal is the inefficient?

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Well exactly, which is why the US spends trillions to make sure it stays that way.

FWIW, the Wall Street neocon boys took a shot at increasing their market footprint in Iraq - allegedly a golden opportunity for free market fanaticism to demonstrate itself at the barrel of a gun. Didn't go so well though. Seems like those tribal market heathens weren't ready for economic liberty. Back to the drawing board I guess.

which is why the US spends trillions

We don't.

I’m calling fake news on you for that

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Trillions.

https://www.businessinsider.com/the-us-has-spent-8-trillion-protecting-the-straits-of-hormuz-2013-5

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I doubt the Middle East needs any help from the United States to remain an economic backwater.

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Arms sales from various sources?

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So, when ExxonMobil sells gas from Qatar, where is the revenue booked?

Or one could read at wikipedia about Qatargas, the world's largest liquefied natural gas (LNG) company, established in 1984 as a joint venture between Qatar Petroleum, ExxonMobil and other partners.

Which again brings up the question where is Qatargas's revenue booked, and how much of it is actually revenue for ExxonMobil.

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Tell to American Congressman that the monies from Saudi Arabia and Israel are not relevant.

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The ratio to US GDP might not be impressive, but certain US companies have important markets in the area. Notice the aircraft that was shot down was from Boeing with GE engines. There is a market for advanced equipment and major projects. Boeing probably has other commercial aircraft as well as military customers. Boeing competes with Airbus and GE competes with Rolls. They want US support. GE has built power plants in Saudi Arabia and Egypt. These are significant orders for GE. GE also sold military aircraft engines to Saudi Arabia as well as radar and other aerospace equipment before it sold that business to Lockheed Martin. Lockheed Martin undoubtedly sees the area as an important market. These firms have strong connections in the DoD and want their interests protected and advanced. European companies like Siemens and Philips are probably active bidding on major projects. Japanese companies like Mitsubishi are probably active. They all have access to their respective governments.

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There are four factors at play, each of which can be broken out into several sub-factors, but also relate to one another:

1. Post-Ottoman, post-colonial legacy of a rent-seeking elite.
2. Modern imperialist intervention. One example of many: Former Iranian PM Mohammad Mossadegh believed in democracy on a deep, philosophical basis back in the 1950s! He was going to make Iran, which was already on its way to becoming a modern first world state, a full-fledged democracy. Too bad he wanted to nationalize British rights over Iranian oil, so Britain had the CIA help it orchestrate a coup in cooperation with Iran’s weak-willed, illegitimate king, from whom the crazies took power 20 years later. Iran is still reeling from the consequences, and its leaders are exporting chaos to Iraq, Syria, Yemen, and Lebanon, precluding any legitimate democracy and development in those countries.
3. Oil. Without a proper counterbalance, oil is a very anti-democratic substance. It allows a few warlords, dynasties, and crazies to lord over vast domains without any reliance on the subjugated populace. This is especially true with the highly efficient global markets of today. If America refuses to buy their oil, China happily will. Oil also fuels a new, brutal Eastern imperialism. Iran, Russia, Saudi Arabia, and Qatar are ravaging the rest of the Middle East with their dirty money and savage, well-armed proxies.
4. The Middle East has a small fraction of the world’s population. This is the simplest, but least important factor. It somewhat helps contextualize the numbers cited by Cowen though.

Edit: I belatedly inserted Russia in the list of imperialist powers. Of course, I am aware it is not physically in the Middle East. Tyler please add time-limited edit functionality. The discussion system on this blog needs updating.

What? Russia has over 4,000 soldiers in Syria. Since 2015 The Russian Air Force has flown over 19,000 sorties over the Middle East. Turkey even shot down one of their fighters. Russia brags that over 48,000 of their soldiers have gained combat experience in Syria since the civil war started.

Russia also has had a military presence in numerous countries in the ME through arms sales and supplies, military advisors, etc. There are Russian military advisors in Iran. And so it goes.

Of course, I meant in a geographic sense.

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#2 seems hard to attribute theocratic revolutionaries across the ME to Western interventions. seems like an endemic, endogenous ME thing.

#3 does oil really help anti-democratic rulers maintain power without regard to their people? It seems like it mostly helps them buy them off and makes them impassive to social movements, not repressive. If those countries had a populace tending towards a high level of education or "skill", not much of an internal clan dynamic or ethnic substructure (had an actual demos), lacked any particularly high religious commitment that impeded a secular basis of law... They would likely "get to Denmark". If they did not, it seems unlikely that they ever would.

You’re bending over backwards to see the Middle East as an unflappable failure that will never change. However, we’re talking about a place that made a disproportionate contribution to civilization as we know it. Syrians invented agriculture and sedentary, urban life and spread it to Europe. Iraqis refined and exported the idea of an efficient, centralized city state. Egyptians were building pyramids when Europeans were stacking twigs. Syrians/Lebanese went back at it again by inventing the alphabet (as Phoenecians). This was all before Islam. Then the Greeks and Romans had their heyday.

But after Islam, the Middle East had yet another great awakening. While Europe languished under feudalism and disease, Muslim Middle Easterners made novel discoveries in mathematics, medicine, astronomy, etc... The European Enlightenment was directly inspired by the oeuvre. When did the Islamic Golden Age end? When the particularly tyrannical Ottomans conquered the Arabs and subjugated them to the area now known as Turkey. Here’s just one example: the Ottomans banned the printing press for over 300 years so that Arabs don’t create and spread ideas independent of the Ottoman state. When someone in Venice invented accounting and spread dual-entry bookkeeping all throughout Europe, contributing to the capitalist explosion emanating from the Netherlands, the Arabs couldn’t get their hands on a darned copy. Innovation was dangerous to the Ottoman rulers, and they squashed it until Arabs forgot how to innovate. Large corporations were basically out of the question. As if that wasn’t enough, Britain and France took over from the Ottomans and were even more rent seeking and extractive than their predecessors. Taking things out of the ground and sending most of it to the person higher up in the hierarchy became the Arab way of life.

It’s only been 2-3 generations since colonialism ended, so it’s no surprise that Arab rulers are also rent-seeking dictators (they come in different flavors, “religious” and “secular”, but power=God for both). Moreover, the factors I mentioned keep them in power for the time being. However, as the Arab Spring and recent protests have demonstrated, the people are becoming frustrated with the status quo. The Arab Spring may have failed, but there’s nothing stopping an Arab Summer. Arabs and Persians went from the top of the world to the very bottom of a crude barrel. There’s no reason to believe they couldn’t rejoin the civilized world that they helped create.

This guy gets it.

Henry the Navigator also bears some responsibility for undermining the importance of the ME. So once the Silk Road was replaced by shipping the ME began its decline. A similar dynamic happened with respect to the American Midwest once being near coal and iron ore weren’t as important for manufacturing.

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Excluded middle. I don't know if I'd say the Middle East can "never change" but certainly characteristics run deeper than can be attributed to shallow impacts of oil or a random influence from totally chance political Iranian events or (most laughably of all) a very brief colonial history. The reasons for the Middle East's backwardness are probably almost completely endogenous and probably require completely removing Islam's outsized role in political life and fundamentally changing how people think about cultural values and religion.

(It's not the fault of the Ottoman Turks either; frankly no region of the Middle East where the Ottomans didn't rule did better, the Ottomans were not particularly opposed to market or technological innovation, and the Ottoman heartland of Turkey where they'd have most impact if anything probably still converges best today with "civilization" as you put it. "Turk blaming" is a ridiculous exercise by Arabophiles, Persophiles and Islamophiles - the Turkic expansions probably did nothing bad).

It is an interesting question: while the West was rising during the Age of Exploration, Industrial Revolution, etc. the civilizations that had previously been at the forefront -- China, the Middle East, maybe India -- stagnated or at any rate didn't progress in the same way.

Why not? In China's case, historians and even Jared Diamond seem to be at a loss and throw up their hands and can only say the the emperors (or some people blame the eunuchs) were more interested in internal affairs and palace intrigue than exploration, seafaring, and trade.

I haven't read as much about the Middle East. The "blame the Ottomans" explanation has some appeal, reminiscent of the explanations for China's failure to progress. But I suspect you're right that they're a convenient scapegoat.

So now only Greeks get to Turk-blame?

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China and the Islamic world suffered immensely from the Mongol invasions, while Western Europe was 100% spared. I wonder what kind of long-term effects such horrors can have on a people.

Right, but I think it would have to be hidden or secondary long-term effects. China experienced a bit of a renaissance when they threw off the Mongols with the rise of the Ming dynasty. Which is worth mentioning because early in the Ming dynasty was when China created massive "treasure fleets" of massive ships that explored the oceans of southeast Asia and west all the way to Africa. They were more than poised to begin the Chinese Age of Exploration, they actually did begin it.

And then, for mysterious reasons, they pulled back and the emperors told the admirals to stop all that sailing around. Ironically, or coincidentally, this was just a few decades before the Portuguese started their epic explorations. They kept at it, and were followed by other European countries, whereas China even with new emperors remained self-constricted.

Maybe whatever caused that self-centeredness was due to the Mongols, but we have to stretch a bit. The Mongols certainly had no compunction about going outside their borders to trade and conquer (or perhaps more accurately, to trade and then conquer). So maybe the Chinese were so traumatized by their experience that they wanted to be the anti-Mongols? But then what explains their initial interest in the treasure fleets?

My preferred explanation for why the Chinese stopped global navigation is similar to my remark about the Ottomans: they found that globalism would empower non-Ming actors, and potentially lead to a partial demise of the old elite along with a loss in politically derived economic rents. At first, global trade seemed like a low hanging fruit that can lead to new rents for the old elite. Upon further exploration, they found that globalism was getting out of their control and they stopped it. Of course, European rulers made a very different choice, but that was due to their different esoteric circumstances (geography, distribution of economic centers, neighbor-state competition for New World colonies, religion as a secondary justification, the whims of European rulers, etc...).

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If there were such effects on GDP/capita at least, then the apparently best estimates suggest that in China you wouldn't see them by the Ming, which is broadly on the same level as the Song (which anyway declines from its heights, well before the Mongol take over). Most likely there were no such effects.

See Broadberry's latest historical national accounting from 2018-
https://www.cambridge.org/core/journals/journal-of-economic-history/article/china-europe-and-the-great-divergence-a-study-in-historical-national-accounting-9801850/6451E62524E28874293D8ED6DED9A24F/core-reader . (This is a re-estimate from previous estimates overstating a Song Dynasty boom, which prompted much pointless ink to be spilled on notions of a "Song Dynasty Industrial Revolution" strangled in its cradle by the monstrous Mongols)

Or a digestible Economist readover - https://archive.md/n9pvD).

(But anyway of course this is just GDP per capita, and divergences in other aspects surely begin earlier).

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Mossadegh was many things, but deeply committed to democracy he was not. This is after all a man who asked for and got, "emergency powers" to decree any law he found "necessary" for a wide variety of areas (finance, electoral reform, judicial reform, and education). Likewise, this was a man who won a referendum to lengthen his enabling decree by the margin of 2,043,300 to 1,300. Even though the speaker of the Majlis opposed him. And lastly there was that whole bit where he suspended the democratically elected government "indefinitely".

Frankly the "crazies" in the Ulema had been running the place for centuries. The only reason there was Majlis in the first place was that the Shi'ite Ulema had demanded one back in 1906. There simply was never a large constituency for democracy in early 20th century Iran. The crazie, the Tudah, and the Shah all commanded significant loyalty and support; democracy at the expense of party goals? Not so much.

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precluding any legitimate democracy

What makes you think that democracy is any more legitimate than any other form of government?

It allows a few warlords, dynasties, and crazies to lord over vast domains without any reliance on the subjugated populace.

No "warlord" can be successful without the support of numbers and at least the acquiescence of the rest of the population. With any form of government there will be some kind of opposition. See USA, France, United Kingdom 2020. The USA has governmental dynasties itself, see the Adams family, Kennedys, Bushes, Clintons, D'Alesandro/Pelosi, and so on. The crazies? No shortage of mental defectives operating in American politics and government.

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The Middle East was very important up until 2009 when fracking was proven economical. So macroeconomists needed to have a basic understanding of the first law of thermodynamics to understand the post-WW2 American economy. So the dysfunctional 2001-2008 economy was the product of a quiet energy crisis in which our energy intensive consumer spending economy could not deal with high energy prices...and this led to malinvestment. Now thanks to fracking we not only have relatively cheap energy but we have a way to deal with high energy prices if they ever return (which I doubt they will in the foreseeable future).

Don’t be too sure. Alberta has some of the largest oil reserves in the world, but our economy is cratering and energy prices increasing because environmentalists in our federal government are essentially blockading our province’s oil from getting to market.

Elizabeth Warren promises to end fracking and offshore oil drilling. She’s the best friend ME despots and Russian Oligarchs ever had. And her brand of craziness is catching on.

In fact that is why Canada’s economy was on the metrics better than America’s economy from 2001-2008, because it did have energy resources to exploit during the quiet energy crisis as well as other commodities during the commodity supercycle...so during those years capital flowed to the proper investments unlike in America.

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Y'all just need to leave Ottawa.

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What is the question the article is trying to answer? "Important" is an ill defined concept.
Let's try a different question: What is these places share of world GDP [at PPP]?
https://www.economywatch.com/economic-statistics/economic-indicators/GDP_Share_of_World_Total_PPP/
says it's 7.6 % of world GDP for ME, Africa, Pakistan and Afghanistan. I'm guessing that these countries' share of world population is larger, so that they - on average - are poorer than average.
Boy, did we learn a lot! :-)

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The real question is not how much money flows through, but how much can put towards issues beyond national borders. Europe may be massively richer and have higher tax rates, but the vast bulk of Europe's monies are tied down to the welfare state and what is left over after that is very difficult to mobilize for anything transformative.

In the Middle East you have a large amount of funding controlled by just a few power brokers with basically no restraints. Want to export violent revolution? They have a few billion for that. What to launch a mass ideological movement to change the stated beliefs of a large fraction of the global population over generations? Done that too.

When it comes to international concern the question is not who churns the most widgets, but who can most direct the largest bank account to some favored task. Combining large discretionary budgets with largely autocratic societies is exceedingly more worrisome than larger markets that are committed to many expensive things and have a myriad of checks and balances.

In the long run, Iran and Saudi Arabia have the potential to do far more damage than China or Russia.

Actually the existential threat to Saudi Arabia is high oil prices. So if oil is $75 a barrel then natural gas to liquids becomes viable. So natural gas can be converted into jet fuel and diesel. Cruise ships are already converting to LNG in order to comply with pollution regulations. This will help island nations transition to LNG power generation instead of oil. With respect to gasoline Tesla is the most valuable car company in American history. The new hybrid RAV4 gets 40 mpg and carries a mere $800 premium. The RAV4 prime will go 40 miles in EV mode and is the performs better than the regular gasoline model. Saudi Arabia will still be able to make a lot of money on oil for quite some time but they now have to behave because technology has made them dispensable.

Technology will likely find increased uses for oil as well. Remember, crude oil was first used for lighting, a niche that has been dead for over a century. Plastics, lubricants, and many of sectors might see revived demand and some of those may even be low carbon emitting industries. But who knows, maybe it will all become fertilizer.

I have no idea how the future will pan out, but the chemistry of oil suggests that the Saudis have a highly valuable stock which will eventually find its way out in some manner or another. The long term killer is not removing the premium for energy density, but the development of a cheaper (in whatever regulatory framework), more versatile energy economy. Be it nuclear, solar, or something else, when it becomes cheaper to pull CO2 out of the air as a carbon source than using crude oil pumped from the ground, then I will start writing down the Middle East as a significant player.

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Do not confuse a shift in the demand curve for one commodity with a movement along the supply curve of another commodity. :-)

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The cost of production of Saudi and Iraqi oil is so low that it could easily dump cheap oil and destroy the new American oil industry. Europe (which is larger than the USA) depends on ME oil and gas. Should the ME slip from American hands, it could cause quite a disruption.

Actually the prospect of cheap Iraqi oil contributed to the dysfunctional global economy of 2001-2008. So one reason we invaded Iraq was because in order for the global middle class to expand more oil supply was needed. So Bush/Cheney understood China’s inevitable economic boom would lead to a commodity supercycle and that Iraq had the most obvious oil reserves to meet the demand. So from 2001-2008 every major commodity saw an increase in price and production on the global market except one—oil.

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Taxing net emissions of CO2 would reduce the importance of the Mid-East even more. It doe have some nice locations for solar power if transmission-storage costs come down, but who knows it that can compete with nuclear.

Taxing CO2 emissions is just what a statist would advocate. Extract more wealth from the citizens in response to a fictional crisis that can be used to further inflate government. Moving Mid-East solar energy from the desert to places that need it, like Sweden or Nigeria, is simply an issue of transmission cost. OK.

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The economic significance of the middle east is that the concentration of wealth and the lack of accountability allows for widespread bribery of US elites and out-sized influence on US policy-making.

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