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August 28, 2001

M. King Hubbert used to point out that the economy of Spain was severely disrupted during the 16th century by the gold and silver from conquests in Mexico and Peru. The gold allowed Spain to import everything from food to luxury goods and the Spanish economic infrastructure withered. After the gold and silver supply slowed down, Spain was never again a major world power.

On Aug 26, 2001, The New York Times on page 1 published a news story entitled, "Leisure Class to Working Class in Saudi Arabia." The Times reports that Saudi per capita income dropped from $28,000 in the early 1980s to less than $7000 today. The parallel is by no mean exact, but the Saudis need sharp growth in their non-oil economy to accommodate a fast-growing population. As they work on the problem, the Saudis are very aware of their position as the keepers of the holy Moslem cities. They would like to set an example for other Moslem countries and not simply implement a copy of a Western economy. Needless to say, it is not a simple or an easy task.

The Economist for Aug 25, 2001 has a survey of energy policy in Mexico. The ejection of the international oil companies in 1938 and the nationalization of the oil industry is regarded as a major defining event in Mexican history. Oil production is exclusively in the hands of Pemex, the national Mexican oil company. Although Pemex generates 37 percent of the national government revenues, capital investment in new oil and gas production has been rather limited. The Mexican intellectual baggage is obviously very different from the Saudi case, but neither country is about turn a bunch of Harvard MBAs loose to redesign their energy industries. I know, I know, Harvard MBAs also have some pretty strange intellectual baggage.

On Aug 24, 2001, page W-1, The New York Times reported that Russian oil exports increased from 3.3 million barrels per day in 1995 to about 4.4 million barrels per day in 2001. While the increase is a welcome development on the world scene, the increase is not profound compared to total world oil production of 67 million barrels per day.

In some ways, the Russian and American petroleum industries are rather similar. Both are old. When Drake drilled the "first" well in Pennsylvania, the Russians already had a billion-barrel oilfield on line. The USA and Russia are the second and third largest producing countries, Saudi Arabia being the largest. Russian oil reserves are about twice the size of the American reserves; Russian gas reserves are the largest of any country in the world.

To an outsider, the very largest missing piece in the Russian puzzle is the ability to write an enforceable contract. The Aug 24 report in The New York Times explains that the large Russian oil companies are improving the production infrastructure. Reading between the lines, I suspect that the Russian oil companies are selling oil for hard currency and are able to invest even in the absence of enforceable contracts.

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