Sand and OilWhat is Saudi Arabia’s most valuable natural resource? It would seem like the answer is obvious: oil. The Saudis control 250 billion barrels of recoverable reserve of crude oil in their mammoth fields around the Persian Gulf. This amounts to 25% of estimated worldwide reserves. Presumably there is much more still to be discovered or made available as extraction technology improves.
The price of oil fluctuates, and in inflation adjusted 2000 dollars, reached a peak in 1980 of about 70 dollars per barrel. It hit a low of 8 dollars in 1998, and after spiking in September has finished this last year around 24 dollars, which is in OPEC’s target band. For the Saudis, lifting costs are less than a dollar a barrel, so they pretty much keep the entire sale price of the crude as profit, which is an unheard of return on a commodity.
Of course, the Saudis can’t use all that crude oil themselves; their only way to convert that buried junk into cash is by selling it to others who have a use for it. At 24 dollars a barrel, their crude deposits will eventually sell for a total of 6 trillion dollars. So is that what they are worth on the open market? Not exactly. There is no one with 6 trillion dollars who could buy and use all that crude immediately. Instead, the Saudi crude is best thought of as an interest payment that will last for perhaps a hundred years. At ten million barrels sold a day, the Saudis generate about 90 billion dollars in revenue a year. So the Saudi oil fields are equal to an investment that generates 90 billion dollars a year in profit. But this is not a risk free investment. There is political risk in the Middle East. There is long term risk related to how long the world will need crude oil in massive quantities (will it really be one hundred years?). And there is short-term risk as the price of crude may drop below 24 dollars again.
Given all those factors, what would be the sale price for the Saudi oil fields? I would imagine that 10 times cash flow is reasonable price to pay for the asset, a measure that is about what investors would pay for rental property or other income generating assets. This would mean that the rough market value of the Saudi oil reserves is about 900 billion dollars. The Saudi government would be making an even exchange if it sold all its oil rights for that amount.
900 billion is a lot of money, and certainly it would appear that our original guess was correct, crude oil is Saudi Arabia’s most valuable resource. But the Saudis are well endowed with another natural resource: sand. How valuable is their sand? Left as sand, it is near worthless. But crude oil, left as crude, is also worthless. Crude needs to be refined into useful products. Can sand be refined into something more valuable than petroleum? One of the biggest components of sand is silicon. And silicon is the foundation of semiconductors, transistors, computers, and fiberoptic cabling. These are the basic building blocks of information technology.
As I was reading the business page this morning, I came across a listing of the market price (capitalization is the formal term) of the leading American companies of silicon-based information technology. All of these companies were founded in just the last 2 or 3 decades and for the most part were very small just 10 years ago. The technology stocks, as many of us battered investors know, took quite a beating this last year. Despite that, these 6 major companies alone (Intel, Microsoft, Cisco, Sun, Oracle, Dell) combined for a market value of 900 billion dollars. So it seems that sand and oil are equal in value.
What it really shows is that natural resources are not the source of wealth. Countries do not become rich by exploiting others or preventing themselves from being exploited. Wealth is created by human ingenuity and hard work. It is the ingenuity of the technology companies that created 900 billion dollars of wealth. None of those companies exploited the third World; in fact the third World mostly exploits them by pirating software. The Saudis could have created that much wealth if they had pursued the right policies. They certainly didn’t lack sand. It is the ability and skills of the Saudi population that will determine how wealthy they become, not the price of oil. The correct answer to my first question is neither sand nor oil, but rather the people of Saudi Arabia.
Last modified on