{"id":20324,"date":"2011-03-24T15:30:00","date_gmt":"2011-03-24T19:30:00","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=20324"},"modified":"2011-03-24T15:30:00","modified_gmt":"2011-03-24T19:30:00","slug":"saudi-arabia-200-crude-oil-and-the-j-curve","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/03\/24\/saudi-arabia-200-crude-oil-and-the-j-curve\/","title":{"rendered":"Saudi Arabia — $200 Crude Oil and the J Curve"},"content":{"rendered":"

By Justice Litle, Editorial Director, Taipan Publishing Group, taipanpublishinggroup.com<\/strong><\/span><\/a><\/p>\n

An arcane theory known as “the J curve” explains why Saudi Arabia could be the next domino to fall.<\/em><\/strong><\/p>\n

If someone presses you as to why the Middle East will explode — and why crude oil could reach $200 a barrel — tell them about the J curve.<\/p>\n

The J curve<\/a> is the brainchild of Ian Bremmer, the president of Eurasia Group. In his book, Bremmer describes it as “a new way to understand why nations rise and fall.”<\/p>\n

Imagine the letter J on a graph, tilted to the right at a 45-degree angle. The up-and-down y-axis on the graph represents “stability.” The left-to-right x-axis represents “openness.”<\/p>\n

According to the J curve<\/a>, there are two kinds of stability — “closed” and “open.” The United States is the paramount example of a society that is both stable and open — up and to the right on the J curve graph. The enduring power of America’s institutions, coupled with free speech and retained wealth, means that the U.S. can (as a general rule) admirably endure change.<\/p>\n

North Korea, in contrast, is an example of stability that is “closed.” Countries like North Korea — or Tunisia once upon a time — rely on the constant pressure of force and a sense of being cut off from the outside world. These countries are stable in the manner of a prison lockdown. Such a setup is brittle, but can last for decades.<\/p>\n

Going back to the graph, “stable but closed” countries reside on the left-most tail-tip of the tilted J. “Stable but open” countries are at the other end, up high where the line extends out.<\/p>\n

The core message of the J curve is this: To pass from “closed” to “open,” stability must decline… sometimes violently so. <\/em><\/p>\n

The dip in the curve (and the reason for the J shape) represents a drop in stability. Countries that wish to transition from “closed” to “open” — as the whole Middle East now yearns to do — must pass through that dip.<\/p>\n

Eric Hoffer, a self-educated longshoreman turned philosopher, expressed a similar idea much earlier. In his book The True Believer<\/a><\/em>, published in 1951, Hoffer describes how iron-fisted leaders face the most danger when their grip first loosens — not when it is tight.<\/p>\n

The gist is that a populace without freedom becomes accustomed to its “stable” state. There is a weary resignation as life plods on. But give that populace a small taste of freedom — an inkling of what could be had — and suddenly new desires are alighted.<\/p>\n

The catch-22 here is that brutal dictators can never really let up if they hope to hang on to power. Once they do, the small concessions they offer will only incite greater hunger… and greater anger. Upon realizing Pandora’s box has been opened, the desire is then to slam it shut. But sometimes this can’t be done…<\/p>\n

Moving back to Saudi Arabia — the irony of current events is that Libya is a sideshow, at least as far as the price of crude oil<\/a> is concerned.<\/p>\n

While true that Libya’s crude oil is prized because it is “light” and “sweet,” the country’s 2% contribution to world oil supply is not a global growth deal breaker. And at the same time, Libya had already been taxing oil companies in the region very heavily, reducing profits to the thinnest of margins. So big oil may not see a meaningful dent if Libyan barrels go offline.<\/p>\n

Saudi Arabia, though, is another story entirely. And along with the house of Saud, there is the prospect of another producer in Libya’s range — like Algeria for instance — catching the revolution bug. Unrest in Libya thus has a sort of “last domino” quality… if even one more falls, all hell could break loose.<\/p>\n

When we look to Saudi Arabia<\/a>, the signs are not encouraging. The Saudis have sent troops into neighboring Bahrain, opening fire on protesters. The battle of Sunni Muslim versus Shia Muslim seems to be gearing up, with Saudi Arabia’s nemesis Iran quietly moving chess pieces on the other side of the board.<\/p>\n

And in Saudi Arabia itself, we see the royals doing just what Bremmer and Hoffer warn against in their various analyses. The iron-fisted leaders are loosening their grip. They are trying to buy off the protesters with bribes… insinuate promises of more freedom at the margins… and otherwise bring about cosmetic changes that could have the net effect of waving a bloody steak in front of a pit bull.<\/p>\n

As The<\/em> Wall Street Journal<\/em> reports,<\/p>\n

Saudi Arabia’s King Abdullah announced a new round of lavish public spending and enhanced benefits for Saudis, but hinted at stern measures against any would-be protesters in the conservative Islamic kingdom.<\/em><\/p>\n

The head of the world’s largest oil exporter said in a series of royal orders Friday that he was introducing a minimum wage and unemployment benefit for Saudi nationals, creating 60,000 military jobs at the Interior Ministry, addressing a chronic housing shortage with a building drive and creating a new government department to tackle corruption. He also announced more than a billion Saudi rials of spending on religious projects.<\/em><\/p>\n

Speaking live on state television, he thanked Saudis for staying loyal to the regime after they shunned a recent call for demonstrations issued on Facebook.<\/em><\/p>\n

All of that sounds good in theory. But if the transition from “closed” to “open” is any guide — as based on the historical track record of closed countries passing through the J curve — expensive bribes will not be enough.<\/p>\n

(Then there is also the factor of concealed interests, such as Iran, actively seeking to stir up Shia unrest.)<\/p>\n

This is why the “Arab spring” comes at such an inopportune time for the global economy. A mass transition from closed toward open — for a volatile region of the world where so much oil is produced — all but guarantees violence and turmoil. Those leaders holding on to power will not go quietly. When bribes do not work, they are more likely to spill blood… and use their treasure hordes to fight long and protracted wars, as Gadhafi plans to do.<\/p>\n

So far, we have been able to handle a Libyan civil war coming out of nowhere. But the next oil producer domino to fall — be it another modest-sized one or the house of Saud, the biggest domino of them all — could truly set the oil market ablaze. The J curve helps us see why.<\/p>\n

As a side note — what do you think of American involvement in Libya? Taipan Daily<\/a><\/em> readers were fiercely on the side of “Egypt for Egyptians” earlier this year, when the question was whether America should support a dictator (Mubarak) or stand aside and let him topple.<\/p>\n

But now that we are dropping bombs on Libya in a supposed humanitarian mission (much as we did in Iraq)… with no clear plans to depose Gadhafi or take control, and with no clean sense of who the “rebel interests” really are (Iraq again)… what say you? Share thoughts and opinions here: justice@taipandaily.com<\/a>.<\/p>\n

Editor’s Note:<\/strong> You could get $4,000 from an “angel” before the end of April. While alive, she was one of the most charitable people in America. Some have even called “Mary Catherine” an “angel.”<\/p>\n

Now, her estate is set to distribute the nearly $9.4 billion left over in her estate. Learn how you could get your hands on a small portion of it from this exclusive investment report<\/a><\/strong>.<\/p>\n

About the Author<\/strong><\/p>\n

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader<\/a><\/em> and Managing Editor of the free financial market news e-letter Taipan Daily<\/a><\/em>. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.<\/p>\n

Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.<\/p>\n","protected":false},"excerpt":{"rendered":"

When we look to Saudi Arabia, the signs are not encouraging. The Saudis have sent troops into neighboring Bahrain, opening fire on protesters. The battle of Sunni Muslim versus Shia Muslim seems to be gearing up, with Saudi Arabia’s nemesis Iran quietly moving chess pieces on the other side of the board.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-20324","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/20324","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=20324"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/20324\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=20324"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=20324"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=20324"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}