Is it the end of the Silk Road story? It’s tempting to assume falling oil prices is bad news for the region. After all, the Silk Road accounts for 49% of the world’s oil production. Yet, oil isn’t everything. The region is also the world’s largest manufacturing hub, its factories producing everything from steel to DVD players.
It might sound surprising, but the factories matter more than the oil rigs. How so? The Silk Road is a net oil importer no different to America or Europe. A majority of its economies, accounting for 80% of the region’s total output, consume more oil than they produce. Its oil-hungry factory owners are welcoming the falling oil prices just as they are in the rest of the world.
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America’s ‘oil dependency’ was a recent flashpoint. John McCain argued to ‘drill, baby, drill’. Barak Obama proposed investing more money into renewable energies. Either way, America is on a new path. Europe is headed in the same direction. Eventually, they might just break their addition to foreign oil. This is good news. Isn’t it?
Perhaps. The problem is that an oil-hungry East will fast overtake an energy-efficient West. Indeed, China and India alone will account for nearly 50% of the increase in the world’s oil demand between today and 2030, according to a recent report by the International Energy Agency. This isn’t just a demand shift. It’s a power shift. The world’s oil producers will naturally pay more attention to their biggest customers. Increasingly, this will mean Beijing and Delhi, rather than Brussels and Washington.
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I imagine that the drop in oil prices is keeping Gulf rulers occupied. The last time oil prices fell so steeply was shortly after the Asian crisis in 1998. Oil prices fell to $10 a barrel at the time. It cost just $15 to fill up the average mid-sized car versus $55 today.
But a lot has changed in the past decade. In 1998, Gulf rulers were fixated by just oil prices. Today, they are equally fixated by stock prices. Why? The Gulf countries have over a $1,000 billion dollars invested in foreign assets. The returns are an increasingly important source of income.
Kuwait’s experience illustrates the point. I estimate its oil exports will be worth around $80 billion this year. This is roughly equivalent to $257,000 per Kuwait household. It’s not a bad annual income.
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