Carragee Consulting

I read this article a couple of months ago in the Atlantic about how the Saudi’s are investing heavily in solar energy.  It calls out how distortionary the government subsidized oil is; promoting massively inefficient use of the resource domestically even while the price of oil abroad is strong.  “Most of Saudi Arabia’s power plants are colossally inefficient, as are its air conditioners, which consumed 70 percent of the kingdom’s electricity in 2013. Although the kingdom has just 30 million people, it is the world’s sixth-largest consumer of oil.”

When you think about all the factors which can influence price, it seems we don’t talk enough political influences to price and how these dynamics vary by country and governmental structure.  Its perfectly rational to distribute oil at below market prices domestically to maintain political support and family control.  The strange benefit of a stable oligarchy is that while there is massive waste today when times are good and supplies are ample, there is also an incentive to plan for a future or constrained supply.

Business cycles and executive time horizons often mirror the short sited incentives elected officials face in the US.  Its tough to price optimally over a product’s life-cycle or to phase in a new product an the right time to minimize revenue cannibalization of an existing product line, but exactly this type of long term thinking is important to do within a pricing organization.