I refer specifically to this article in which Andrew Critchlow paints a pretty dire view of the Australian economy.

The line which challenged my priors was:

Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

This did not match my perception of the Australian economy at all.

What similarities does the Australian economy have with the Saudi economy? Is the comparison fair? In particular, I am interested in structural issues the economies face.

Secondly, is the quoted line accurate? My understanding was that the extraction cost for oil was very low in the gulf and the lower prices served to make other countries unprofitable before it cost them.

  • $\begingroup$ Perhaps you could add a short description to the new tag that you just created :) $\endgroup$ – FooBar Jul 20 '15 at 7:12
  • $\begingroup$ @FooBar good idea. will do. Very surprised the resource curse hasn't come up yet. $\endgroup$ – Jamzy Jul 20 '15 at 7:55

It's an analogy. The Saudi economy as an analogy for the Australian economy. Like any other analogy, you can stretch it to a certain point, but then it breaks.

The article sets out the ways in which the analogy holds. Stretching it further will probably break it. Let's look at how the article says the analogy holds:

  • both economies have a significant dependency on exports of a very small number of commodities: for Saudi, it's oil and gas; for Australia, iron and coal.
  • both boomed during the good times of the commodity super-cycle, both fuelled in part by huge and rapidly-rising demand from China; this flattered their domestic economies.
  • both now see a large drop in export revenues from falling demand and falling global prices in their key commodities; this exposes weaknesses elsewhere in each of their economies.
  • In Australia's case, this has caused a rapid increase in its net foreign debt; for Saudi, they're eating into their foreign reserves. So in each case, they're taking a big hit to the balance sheet, and for both countries, net foreign reserves have decreased a lot.
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  • $\begingroup$ That is sort of what I was thinking. It seemed like a sensationalist comparison. There are many other resource rich economies experiencing similar problems to Australia, many without authoritarian governments. Thanks $\endgroup$ – Jamzy Jul 20 '15 at 22:55
  • $\begingroup$ Then where does the analogy break in this case? How are the two economies different? $\endgroup$ – dbm Jul 21 '15 at 19:59
  • $\begingroup$ @dbm oh, a thousand places; type of government; extant economic diversity; distributions of income and wealth; alternative domestic economic options; workforce skillset ... $\endgroup$ – 410 gone Jul 21 '15 at 21:16
  • $\begingroup$ @EnergyNumbers, I mean in terms of the possibility of 'recession/slow down' in near future. The article alluded to this worry with an analogy of Saudi Arabia. In that sense, where does the analogy break down? Or you think the slow down is also going to struck Australia soon? $\endgroup$ – dbm Jul 21 '15 at 21:20
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    $\begingroup$ @dbm prediction is very hard. Especially when it's about the future. The analogy breaks down partly because as of this moment: (1) Australia has more economic diversity, so better chance of surviving a commodity supercycle trough, if that's what we're in. But (2) Saudi has huge reserves, which could allow it to weather the storm better, and to transform into some other kind of economic powerhouse. Solar power? Innovative plastics? Whoever guesses right, stands to make some serious money on that bet. $\endgroup$ – 410 gone Jul 21 '15 at 21:28

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