Yves here. This is a useful and compact recap of why and how quickly the Saudis have cooled on the US and why the US is no longer in a position to do much about it. You might consider circulating it to friends and family who are not up to speed on this development. Watkins is not an anti-globalist and is clearly describing waning US power.
One aspect Watkins chose to omit was the Biden Administration’s open hostility to Mohammed bin Salman. Mind you, the US intel state had never been keen about him, since he was not expected to come out on top of the 2017 succession struggle and the US preferred all other candidate to him. The butchering of Jamal Khashoggi didn’t help, but it was Biden, almost as soon as he took office, that made clear the US would implement a “relationship downgrade” of Saudi Arabia over MbS’s intransigence.
And now US is upset at what it set in motion. It appeared not to have occurred to them that the Kingdom had options and could and would find other allies.
From CNBC, mid-February 2021, Biden’s snub of Saudi Crown Prince Mohammed bin Salman is a ‘warning’ signaling a relationship downgrade:
President Joe Biden’s press secretary delivered a striking message to Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman, this week. Jen Psaki told a news conference, using diplomatic language, that the U.S.-Saudi relationship — particularly that with the kingdom’s crown prince — is being downgraded.
“On Saudi Arabia I would say we’ve made clear from the beginning that we are going to recalibrate our relationship with Saudi Arabia,” Psaki said Tuesday from the White House….
The quotes drew instant attention from regional analysts and foreign policy experts, and likely leaders in the Gulf as well, as a blatant snub of Saudi Arabia’s 35-year-old heir to the monarchy and arguably the most powerful man in the region….
The snub to MBS represents a warning to Saudi Arabia,” Torbjorn Soltvedt, principal MENA analyst at Verisk Maplecroft, wrote in an email note Wednesday, referring to the crown prince by his initials. “It will be seen as a disapproval of MBS’s leadership which has been characterized by unpredictable decision-making and a much less consultative approach than in the past.”
And the administration’s apparent intention to sideline the crown prince represents a dramatic departure from the Trump White House, which made Saudi Arabia the former president’s first overseas visit, signed major arms deals with the kingdom in defiance of congressional opposition, and refrained from criticizing the kingdom over its human rights violations.
This shouldn’t come as a huge surprise, since Biden early on promised a harder line on the oil-rich Islamic monarchy. During a primary debate in early 2020, Biden pledged to make Saudi Arabia “the pariah that they are.”
And now the Administration is upset that the Saudis got their message and were not cowed. Lordie.
By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai. Originally published at OilPrice
- Optimism over a possible rapprochement between Saudi Arabia and the U.S. is fading.
- The large unexpected production cut yet another sign that Saudi Arabia is moving closer to Russia.
- Both Saudi Arabia and Russia need Brent crude prices well above $80 per barrel.
The surprise huge new cut in oil production from ‘OPEC+’ – the Saudi Arabia-led OPEC group of countries ‘plus’ Russia – highlights that any optimism over a possible rapprochement between Saudi Arabia and its previous key superpower ally, the U.S., is ill-founded. Instead, newly emboldened by the Beijing-brokered Saudi Arabia-Iran deal to resume relations, followed by the approval of a plan to join the Shanghai Cooperation Organisation (SCO) as a ‘dialogue partner’, Saudi Arabia has now decisively shifted into the China-Russia sphere of influence. Prior to the surprise additional oil production cut by OPEC+ announced on 2 April, early February had seen Saudi Arabia lead its OPEC fellow members and OPEC+ into sticking with its previously agreed oil production cuts quota of 2 million barrels per day (bpd). This cut represented only around 2 percent of the recent historical mean average of supply in the global oil market. Additionally, it left oil prices at levels that barely helped Saudi Arabia in budgetary terms at all, with a fiscal breakeven oil price forecast of US$78 pb of Brent in 2023, compared to over US$80 pb of Brent in the previous year. Significantly as well, oil prices at that point in February were way below the level that Russia wants, with a fiscal breakeven oil price of US$114 pb of Brent this year, up from around US$64 pb before its invasion of Ukraine. It was thought then by several oil market observers that the oil production in February by OPEC+ might have been a sign that Saudi Arabia was open to thawing out frozen relations with the U.S.
What changed between February and April was the Saudi Arabia-Iran resumption of relationship deal, brokered by China. Although at the time of the announcement of the deal, White House national security spokesperson, John Kirby, tersely observed that the deal done on 10 March between Iran and Saudi Arabia to re-establish relations “is not about China”, it absolutely was about China. What it absolutely was not about was the U.S. The biggest diplomatic coup in the Middle East since at least the signing of the Joint Comprehensive Plan of Action (JCPOA) between the P5+1 powers and Iran in 2015 had been brokered by China, without any involvement at all from the U.S., and every country in the world and in the Middle East knew it. The landmark deal between the two longstanding arch-regional enemies – Shia Iran and Sunni Saudi Arabia – was just the sort of far-reaching geopolitical coup that the U.S. had wanted to achieve in its ‘relationship normalisation deals’ program that had followed its unilateral withdrawal from the JCPOA in May 2018, as analysed in depth in my latest book on the global oil markets. In short, at that point more than any other of the major advances that the China-Russia axis has made in the Middle East, it was clear that this axis was winning the superpower battle for the Middle East and not the U.S. and its allies.
Saudi Arabia and Russia know perfectly well that the U.S. and its major allies do not want oil prices over US$80 pb of Brent. For the U.S. and its allies, sustained oil prices above that level, and corollary rising gas prices, mean that inflation will remain higher for longer, which will keep interest rates higher for longer, which increases the threat of severe economic damage to net importers of either. For the U.S. these fears have very specific ramifications: one economic and one political, as also analysed in depth in my latest book on the global oil markets. The economic one is that historically every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost and the U.S. economy suffers. The political one is that, according to statistics from the U.S.’s National Bureau of Economic Research, since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the U.S. economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. This is not a position sitting President Joe Biden, or the Democratic Party, wants to be in one year out from the next U.S. election.
The U.S., since the end of the Second Oil Price War that ran from 2014-2016 – instigated by Saudi Arabia with the specific intention of destroying or disabling the threat from the then-nascent U.S. shale oil sector – has wanted oil prices in a Brent price range from US$40-45 pb on the floor to US$75-80 pb on the ceiling, as also analysed in depth in my latest book on the global oil markets. This ‘Trump Oil Price Range’ was set at the lower end to reflect the price at which most U.S. shale oil producers could breakeven and begin to make a decent profit at that stage (US$40-45 pb) and at the higher end to reflect the price at which the inflation/interest rate mix might begin to threaten the U.S. economy. For many years before the Second Oil Price War, Saudi Arabia’s budget breakeven Brent oil price was about US$80 pb and for many years after the War it was well over US$84 pb.
Given these economic and political necessities in the U.S. and its allies, former President, Donald Trump, rigorously enforced the price range. When Saudi Arabia (with the help of Russia) was pushing oil prices up over the US$80 pb of Brent level in the second half of 2018, President Trump sent a clear warning to Riyadh to stop doing this. In a speech before the United Nations General Assembly, Trump said: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it.” He added: “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” As the Saudi Arabian- and Russian-led OPEC+ oil production cut agreement continued to push oil prices up in September 2018 to slightly over the ‘Trump Cap’, Trump made the same warning again, even more clearly at a rally in Southaven, Mississippi, in October 2018. He said: “And I love the king, King Salman, but I said, ‘King we’re protecting you. You might not be there for two weeks without us.’” In short, during Trump’s entire presidency, the ‘Trump Oil Price Range’ was breached only once for a period of around three weeks (toward the end of September 2018 to the middle of that October).
Saudi Arabia’s malleability at that point to Trump’s (and the U.S.’s) wishes for the oil price was due in very large part to the fact that it was still heavily reliant on the U.S.’s protection, principally from its main regional threat, Iran. At that stage, the U.S. and its allies could offer protection to Saudi Arabia from Iran through several methods. One was monitoring, as laid down in the Joint Comprehensive Plan of Action between the P5+1 group of nations (U.S., U.K., France, China, and Russia, ‘plus’ Germany) and Iran. Another method was U.S. and allied forces on the ground across the Middle East.
This leverage over Saudi Arabia ended, firstly with the U.S.’s unilateral withdrawal from the JCPOA and secondly with the Iran-backed Houthi attacks on Saudi Arabia’s key oil facilities in September 2019). Saudi Arabia was not then reassured either by the U.S.’s withdrawal from Syria (in 2019), Afghanistan (2021), and Iraq (2021). It was obvious to Saudi Arabia from the Iran-backed Houthi attacks on its oil facilities in September 2019 that it could not rely on the U.S. and its allies for its protection and alighted instead on Russia and China. Russia had already helped Saudi Arabia out by supporting it from the end of 2016 in the newly formed OPEC+ grouping, which was instrumental in allowing Saudi Arabia to rebuild its finances after the Second Oil Price War. China had made a face-saving offer to Saudi Arabia’s Crown Prince Mohammed bin Salman that he had never forgotten, as also analysed in depth in my latest book on the global oil markets. It is little wonder then that Saudi Arabia now holds the U.S. and its allies in such contempt that he refused even to take a telephone call from President Biden just after Russia had invaded Ukraine in which the President wanted to ask for Saudi Arabia’s help to bring oil prices back down.
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Jamal Khashoggi was an agent of the US intel state, his murder was considered a major insult to that establishment and shouldn’t be underestimated as a cause for the US/SA relationship rupture.
Also, Russia has a fiscal breakeven oil price of $70 this year, not the $114 Watkins claims. I have no idea where he got this number. Incidentally, Russia’s budget swung into surplus for February, which is pretty extraordinary considering it’s at war.
Thanks. I was wondering about that $114 right through the article. Good that you are quoting a figure that feels more appropriate and in line with analysis I have seen before.
If you google breakeven oil price Russia 2023, you get this: ‘S&P Global Commodity Insights estimates Russia’s fiscal breakeven oil price at $114/b in 2023, up from $64.47/b before its invasion of Ukraine, as the Kremlin’s outgoings to fund the war add to its overall budget spending.’
It is true though that fiscal breakeven figures have been much abused and are not particularly reliable: according to the Council of Foreign Relations, IMF updates of its own estimates varied by more than 20%.
https://www.cfr.org/report/fiscal-breakeven-oil-prices
Also, I would be interested if you have a reference for your claim that Russia’s budget ‘swung into surplus for February’. According to Reuters this is simply not happening: ‘Russia’s federal budget balance sank to a deficit of 2.4 trillion roubles ($29 billion) in the first quarter of the year as Moscow spent heavily and energy revenues fell, the finance ministry said on Friday.’
https://www.reuters.com/markets/europe/russia-swings-29-bln-first-quarter-budget-deficit-2023-04-07/
So being a bellicose bully is not working out for the Biden administration…who da thunk it?!
I really should make that stupid bellicose bully, but the problem is that most of the administration, particularly the guy at the top, are not so much stupid but slyly manipulative They also did not recognize that their past “success” has been because they were only tools to others who are better at recognizing the big picture and manipulating it. They were never instrumental.
I go with stupidly manipulative. There’s the defensible theory that even pre mental decline Biden just wasn’t very smart. Obama himself said it with his “never underestimate Joe’s ability to fuck things up.”
Isn’t a mental weakling addled by age much more easily controlled by the true “powers-that-be” or, if you will, the deep state? When is his next press conference?
The Saudi US break was heading this way for a while. I think the only thing holding it together, in recent years, was an alliance against Iran.
From a US standpoint, dating back to 9-11 and then the Saudi efforts to break shale oil, the US should have been quietly preparing for this day. But breaking the addiction to cheap oil is… inconvenient.
From a Saudi standpoint, the US moralizing, meddling in Iraq and other parts of the Arab world, intransigence towards Iran, and intransigence for Israel… why would the Saudis tolerate that now that the center of trade has moved East.
LY:
That is a key phrase:
That statement can be generalized to “why would the rest of the world tolerate the West’s bullying now that the locus of trade flows has moved to the non-West?”
Trade flows tell the tale. Capital has to move to where the trade is, or it dies off.
Sanctioning the banks that conduct trade in the non-West will continue to marginalize the West’s banks, and the rest of the world is eager to take their place.
If only the West could produce something the rest of the world really needs.
Lately I read a quote – I can’t find the source, so I have to paraphrase:
“the only thing the West brings to the party is a gun”.
Just remember: it doesn’t have to be this way. The West is capable of producing some great, great stuff, if only we’d decide to.
Back when I was a young man, it seemed like a whole lot of garages had tools in them, and gadgets-in-the-making, and new company formation was happening almost everywhere.
I keep thinking we’re capable of doing that again.
Hudson: Well, the United States and Europe say, — Our role is to refrain from bombing you. Our role is not to treat you like we’ve treated Libya and Iraq and Syria. We can offer you not-bombing-you like we did in these countries. That’s all we can offer.
We need an industrial policy. The “information economy” was built on the backs on the old phone companies (MA Bell). There was a wild west on what particular electronic bulletin boards would win, but those garage companies were functionally tinkering around the edges before getting caught up in a larger company if the actually make stuff like Microsoft and IBM.
Don’t eulogize Steve Jobs. Woz built a “consumer friendly” personal computer for doofuses willing to overpay for stuff they don’t need, but building personal computers was going on with parts available at places like radio shack and then plugged into phone lines with instructions sent in the mail. That is it. No one is building a practical hydrogen powered engine (insert tech you want) in their garage that hasn’t been built in Detroit. Detroit own take those steps because of concerns about shareholder values and risk. There was the documentary “who killed the electric car”. Xi wouldn’t put up with that nonsense. While the electric car was withering, guys like Clinton were cutting federal regulators.
As bad as the Saudi plantation owners are, I think they know the US is run by “End of History” ideologues who have no concept of how the US was built. I wonder if they see the old Ottoman Empire in the US.
This is going to be fun.
I agree that we need an industrial policy. First Japan, then Korea, then China ate our lunch because we didn’t have one. We need one badly, and it’ll be the perfect tool for a leap-frog move on the competition.
I disagree on most other points of your post. There was a lot of little companies that “made stuff”. 3Com. Plantronics. All those 3rd party board-makers that built the accessories for the early PCs. HP started in a garage. Apple was the first to effectively market a PC outside Geekville. I’m not eulogizing Jobs, don’t like the guy much, but I don’t have to like him to admire what he did.
The economics of manufacturing have changed. Entry barriers are falling rapidly, and while some products require massive capital to do (chips, solar cells) most of mfg’g is assembly and easy stuff (injection mold or 3D print parts, sheet metal, etc.) that can readily be done on a distributed, smaller scale basis – and still be quite profitable. Especially if you combine light mfg’g, assembly, training/support, repair and mat’ls reclamation at end-of-life-cycle functions into into distributed facilities. Tell me why that wouldn’t make econ sense.
While the U.S. leadership really is totally hosed, there are plenty of ways to build new products off their reservation. And a lot of mid-sized and small mfg’g companies here in the U.S. are run by very talented people.
And speaking of getting off the capital-intensity and wealth-concentration reservation, consider local ag as an example of this – it happened in spite of Big Ag, and it’s going to continue to grow and reduce Big Ag’s market share for decades to come.
Sometime read the history of Alibaba in China. It was a marketplace of garage-built components. Anybody could play, and did. It was a perfect super-nova of new business formation, bottom-up product development and an amazing training ground for China’s bazillion little mfg’g companies.
I can’t think of a good reason why that couldn’t happen here in the U.S.
The “end of history” ideologues have just a few short years left before they get run out on a rail. It’s not just here @ NC that they’ve been thoroughly discredited.
All the “with us or agin’ us” and “watch what you say” info-repression moves are the last line of defense before the perception dam breaks.
This might turn out to be a lot of fun. Imagine how good it’ll feel if the country actually starts to do smart stuff again. Wouldn’t that put a spring in your step?
While I admire and envy your optimism I cannot share in it.
“…Japan, then Korea, then China ate our lunch because we didn’t have one[an industrial policy].” Looking back on what happened during that period of u.s. history I hope you can dissuade me from believing that the u.s. did indeed have an industrial policy — fostering the out-sourcing of u.s. industry and systematically co-opting or destroying the power of u.s. Labor. Of course back in the day there were a lot of little companies that “made stuff” and started in garages … and Horatio Alger pulled himself up by his bootstraps. How many of the parts in a Plantronics headset are made in the u.s.a? I do not know, but I doubt that many, if any originate from the u.s.
You suggest that “The economics of manufacturing have changed.” They have indeed, but I cannot conclude with you that “Entry barriers are falling rapidly…”. You overlooked the horrendous level of consolidation strangling industry and market outlets in the u.s. You undercut your claim of easy entry into manufacturing with this suggestion — “…if you combine light mfg’g, assembly, training/support, repair and mat’ls reclamation at end-of-life-cycle functions into into distributed facilities.” Add up the costs of establishing working operations to execute each of the functions you outlined. I do not arrive at a level of investment I would call easy entry to the market. I cannot visualize how a manufacturing capability supporting the like of knicknacks on Etsy could be leveraged to capitalize the end-to-end facilities you posit. Rents alone cripple small ventures — and ‘medium’ ventures are far beyond the means of all but the relatively wealthy to initiate … and they enjoy far too many, far less risky ways to grow their wealth.
“…a lot of mid-sized and small mfg’g companies here in the U.S. are run by very talented people.” I do not doubt the very talented people. However, I am not aware of all the “mid-sized and small mfg’g companies here in the U.S.” that you are referring to. If you might point to a few, I believe they could be of interest as place where an ordinary man might obtain financial returns greater than bank interest and less risky than Wall Street. I have lived all over the u.s. and although I have seen a lot of the carcasses of older companies and the ruins of the communities they once supported and that once gave them support — I have not seen much evidence for the mid-sized and small mfg’g you allude to. However, in my wanderings about the web, I have noticed many small and medium sized companies that appeared promising. Unfortunately, on further investigation, few of those companies were indeed independent, and of those that were, many/most were wholly privately owned and few lacked strong ties with existing much larger corporate entities that effectively controlled their prospects for the future.
I believe you need to read a little more deeply into the history of iconic startup companies. If you do, I suspect you might find some of the nuances that taint the glory of Microsoft’s meteoric rise, among other much touted success storied. I believe there is much more importance to the good fortunes of timing in explaining the rise of small concerns. I knew and talked with the founder of an electronics parts catalog that grew to fantastic success. Every time I spoke with him, that founder told me how fortunate he had been in the timing and particular marketing approach he and his wife had executed. He told me the same approach would fail today[from a time in the 1980s]. I would be loath to suggest that the present times have become more fortuitous for the prospects of small ventures in the u.s. I seriously doubt that all the wonders of “injection mold or 3D print parts, sheet metal” bending and punching have somehow offset the costs of injection molding, 3D print parts or the bending and punching of sheet metal in a country of low cost labor and low cost rents supported by low cost international shipping.
I wish I could share your optimism. I sincerely hope you might sway me. I am old and my only hopes for the future are contained in the slogan that echoes in the halls of Wall Street: “I’ll be gone. You’ll be gone.” — [before the shit hits the fan]. I like to extend this slogan to: “I’ll be gone. You’ll be gone. So drink and party on! Dance, Dance, Dance til the music stops.”
Jeremy: There’s a lot of meat in that post, and I want to give it my very best riposte. Got must-do’s right now. Pls circle back tomorrow, let’s go another round.
Quick hits now: yes, U.S. industrial policy was to squash labor, and also to position for long-term rent-seeking in Asia. Labor was squashed, but long-term rents from Asia seems … elusive.
Consolidation is a great reason for the small guys to design new products that _leverage_ small scale and local.
What you think is a structural barrier to entry because of prohibitive startup costs (light mfg’g, assembly, training, support, repair and reclamation) is (mostly) what my local car repair shop does, and they are thriving. Bonkers. Lot is full of cars, they charge what they want, etc.
If products were actually designed for repair and reclamation, the local enterprise has an automatic advantage (closest to end-user, and end-of-use event). Central mfg’g can’t compete in that game, and central mfg’g (consolidation) _certainly_ doesn’t want to compete in the “build once, use and repair forever” game. Big advantage to local outfit that makes money repairing, and even mfg’g replacement parts.
Next time you get a sec, look up your local metal fabrication shop – most big cities have them. They are loaded with CAD/CAM gear that is just like the ones the big guys use. You design a part on your desktop CAD system (really good ones are free!) and you send it out for fabrication. Small lots are pretty cost-competitive.
Most of the parts used by the big guys are made by someone else (not the “mfg’r”). Manufacturing is as much integration and supply chain mgmt as it is actually making stuff.
Little guys can do that, too.
So, yes, consolidation is a problem, but the economics – the start-up costs of production have never been lower. What lacks now is some new product designs that favor local / small scale (I’ll name some tomorrow), more local fabrication job shops (there are many now, and they seem to be doing well), and some mat’ls suppliers. My local metal supplier is as busy as I’ve ever seen them, and they’re not doing big-lots for the majors.
I’ll stop there for now, and try to do better tomorrow AM. and thanks for that great, great post!
I will check back. I could use something to brighten my outlook.
Good. Thx for your ideas and skepticism, Jeremy. You’re voicing the concerns we all have, and doing a fine job of it.
Jeremy: see above or below for my response, not sure where it’s going to be placed. May take a few mins to come out of moderation.
If they tried that in USA today, most of them cottage companies would be carpetbombed into the ground by corporate IP lawyers.
A repeat pattern in Shenzhen etc is that once a product get some traction, like say them “hoverboards”, a multitude of clones will spring up almost over night. Their quality will be all over the place though, often dangerously so.
Reply to Jeremy Grimm’s post below. Goes here because this will take up a lot of space, need full screen-width.
Summarizing your points – pls update if I didn’t hit all the main points:
* Tom overlooked impact of big-capital consolidation of mktplace
* can’t find small-cap publicly-owned companies to invest in
* rents cripple small guy
* add up cap costs of fabrication, sales, support, repair, reclamation; big up-front cap costs, got to play big guy’s game, get outside cap, lose control, have to get bigger to be competitive
* how does capacity to produce knick-knacks for sale on Etsy scale up to legit product that wins and retains market share
* country is replete with carcasses of former mfg’rs and the dead towns they once supported
* timing and luck big factor in success of “stars”
* all functions named above (mfg, sales, support, repair, reclamation) available from global supply chain for less. Local not competitive
Responses below.
Start with competitive strategy. Products need to be designed to be and do what the big guys cannot or will not do. Big 3 auto mfg’rs got their clocks cleaned by Datsun, Toyota and then Tesla because they would not adapt. That reality still pertains. What’s wrong with the current approach is that we’re playing the game according to the Big’s rules, and we’re not formulating products that are strong where the Bigs are weak. Localness confers major strengths.
Consolidation. The purpose of consolidation is to extract bigger rents by constraining supply. “put a moat around it”, to use Buffet’s phrase. The higher the rents, the more incentive and pricing latitude the little guy has. Use their strength against them.
Can’t find publicly-traded little guys to invest in. That’s a clue; the survival strategy for the little guy is to remain private. They are purposefully avoiding the arena that will weaken them (got to capital mkts, be public). That’s a feature, not a bug. It has implications for the cap strategy and growth plan for the little guy. Avoid debt, and avoid loss of control via bringing in outside capital.
Avoid rents. Americans have a lot of very underutilized, paid-for assets. House, garage, land, basement, computer, car. These are cost-centers, not profit centers. Dead towns are also sources of low-cost facilities; those towns are giving away (practically) commercial bldgs, houses, land in order to attract new blood. This is just one example. Avoid rent. Use what you already have, or can get cheaply. The internet permits people to move to low-rent areas and take their high income with them, providing capital for investment.
Cap costs of performing mfg’g, sales, support, repair, reclamation. Don’t do it all at once, start small, stay local, iterate and incrementalize to addn’l functions. Patience pays dividends. I’ll elaborate on this more below.
Timing and luck are big factors. Yes, and always will. However, there are strategies of product development to wring out the luck factor, and to sense for the timing factor. More on that one below, also.
All those functions (mfg’g, sales, support, repair, reclamation) can be done via global supply chain cheaper than the little guy. Mfg’g yes, probably sales, yes. Support (training), repair, reclamation … no. Local has the advantage in those functions.
Now let’s talk product development. It’s a lost art among the little guys. They don’t really know how to do it at a professional (viable) level. Let’s start with “what’s the product be and do that the bigs can’t” question. This is the pivot around which all the rest of prod devel rotates.
Bigs can manufacture, source, distribute more efficiently. They are also charging as much as possible to do so. The benefits of their efficiency are often captured by them, not passed on. Shipping. I just bought some LED light fixtures from China. Cost of fixture was about $250, shipping $150. 1/3 of my cost was shipping. That’s not going change.
Bigs can’t do other functions as cheaply as local. If – and this is a key “if” – the product is designed to last forever, is designed for easy repair and reclamation, then the product is something valuable to the customer, has functions the Bigs don’t want to provide (reduces long-term rent stream), so advantage the little guy. Point: design the product to be and do what the Bigs will not, and that customers want.
Local is at disadvantage only in mfg’g and sales, but is advantaged for the rest of the product’s (long) service life. Your HVAC tech makes a little money off the initial sale, and a lot of money from parts and labor across life-cycle. Same for autos, and other big-cap items @ household level. It’s a viable strategy, so we little guys should use it.
Now let’s talk about capacity-building, and how to go from knick-knacks on Etsy to viable, legit product. This is a lost art in the U.S. I recently wrote a Product Development Guide whose function is to address this very problem. First draft is written, it’s out for review. When the feedback from the reviewers is layered in, I’ll release it for public review. I hope you’ll read it and comment on it, Jeremy. I think you’ll find it professional, thorough, accessible.
Remember the notion of incrementalism. Etsy is a good first step, lot of lessons to be learned from it. Going up the learning and capacity curve, if done right, can be risk- and capital-cost reduced significantly. The Guide also stresses team-building, which is also a lost art here in U.S. That has to change, and the Guide offers some very good ideas on how to do the changing. Recall Japan’s Keiretsu. Do it on a small scale.
Got the stuff to do small-scale keiretsu? Some, but the tools to do it are missing. Need to fill that gap, too.
Lastly, let’s touch on sales. The cost of promotion has fallen like a rock in last 2 decades. Facebook, Google, Youtube, Craigslist, Ebay….make reaching your customer with your message trivial. There’s a bunch of retailing website tools you can integrate into your blog to enable on-line sales. This is a monster advantage the little guy didn’t have until very lately.
That’s maybe a good place to stop for now. I hope you’ll continue this dialog in other threads, and please continue to hammer on these ideas. This is exactly the discussion, in my opinion, that we need to be having.
Right now we are passively awaiting and abetting our own economic and environmental demise. The ideas set out here offer the beginnings of a pathway out. We need more discussion and more involvement to get some good pathways opened up.
Designing products that do what the big guys cannot or will not do is a difficult strategy to attempt. Many of the products or services the big guys cannot or will not undertake are too often products or services that will not yield adequate profits. Consolidation, which I regard as a shorthand reference to monopoly and monopsony power, confers much more advantage than just the ability to extract bigger rents. Big competitors can control access to the marketplace, including access to the goto webvendors and websites. Big competitors can easily establish and maintain a local presence where there are profits to be made. They can sustain losses much longer than smaller competitors to drive them out of business. Large concerns can easily avoid rents by buying real property outright … and they can usually procure nice savings on local/regional taxes that a small startup seldom has access to. Those functions where you suggest local has the advantage — “support (training), repair, reclamation” — can all be performed by big competitors. Nothing stops big competitors from building a local presence directly or through franchising.
Your idea of a small-scale local keiretsu is interesting. The keiretsu idea has already been pushed to its limits by big competitors. The long narrow supply chains supporting global business extend the keiretsu concept beyond the local to distant realms where costs are lower and where a big concern can organize its supply chains to maintain monopsony leverage over its suppliers.
In the future, the future this post portends, local definitely has definite advantage. That future will be a future without cheap readily available fossil fuel energy to support cheap transportation and cheap manufactures of products that require large inputs of energy — like glass, cement, and steel to name a few items and do not forget the energy costs of producing solar cells, wind turbines, and batteries. I believe businesses in this brave new world will be much more like the enterprises John Michael Greer imagines. The future will be mining trash dumps and dead cities for metal and usable artifacts from their past — our present.
In the u.s. fracking oil is already beginning to play out and the other sources of petroleum in the world are not infinite. I recall reading that Russian oil may play out in a decade or so and no one outside Saudi Arabia is quite sure how much Saudi petroleum remains.
My comment only touches on some of your points.
All you said seems reasonable to me, but now I challenge you :
a. Name me some Bigs who did local. I can’t think of any. Amazon’s purchase of local groc stores is not a big success, for ex.
b. How come local ag, incl farmers’ markets, isn’t dominated by Bigs.
c. Why can’t small enterprises flourish where Bigs’ cost structure requires profits higher than smalls can live with?
d. Your prognosis depends upon calamity (end of cheap energy). That’s been predicted a long time, still not here, may not get here for a while.
e. You didn’t address the ability of households to develop production processes that leverage their paid-for assets, serve local markets (with the loyalty that suggests), and provide benefits the Bigs won’t provide, like build-once-use-forever
I think you’re believing too much of the “there is no alternative” story, Jeremy. I ask you, are there no examples of little people identifying holes in the Bigs’ strategy, and exploiting them? If not, how does guerilla warfare succeed so often?
And you didn’t respond my request to read the product development guide. Why is that? There are many millions more littles than bigs, and if one were to properly equip the littles…does that not have an effect?
I think it’s time we constructive types put the brain into 2nd gear, and did some major innovation.
And a few more points:
a. doom-saying is click-bait for attention-seekers. Don’t forget to attribute human motivations to these people – on both ends of the spectrum.
b. There are _always_ alternatives to addressing the problem. The trick is to keep the mind in motion, probing all the crevices of possibility
c. We will run out of environment before we run out of fossil fuels.
d. The rich and powerful will convert the many to slaves before the rich and powerful feel any pain. They are predators, and they are secure. The little people need to learn to think like predators, too. Being nice in the face of a predator doesn’t increase survival chances.
Allow me to re-state: this dialog is rich stuff. I’m much enjoying this, and I hope you are, too.
I would make an effort to read your product development guide but I was not sure how. I did not respond because I got lost in responding to your comments.
a) Bigs with local presence: Automobile dealerships with service centers and parts, Walmart, HomeDepot, Midas Mufflers, supermarket chains, Eyeglass retailers, Dollar stores, endless franchise stores and fast food. Many of the small dairy farms, the primary agricultural enties around where I live are going out of business — driven out by the control wholesellers have over access to the market and the low prices they will pay for milk. All the contracts with wholesellers I have heard about strictly forbid local sales of a dairy’s milk.
b) The farmer’s markets near where I live are small affairs where little money exchanges hands, most of the local products are more expensive than they are at the supermarket, a local garden and vegetables market or one of the larger farms an hour drive away where I bought potatoes for the Winter. At least where I live, the most successful sellers make a little cash to supplement their Social Security checks and the rest make a little pin money. Hardly tempting to Big players. Where I used to live, the big commercial farmers sold their produce at wholesale through a co-op to the little vendors running the vegetable and fruit stands that show up along the roadside in the warmer months. Even the bigger commercial farmers were constantly complaining to the co-opt that handled the wholesaling that they needed larger volume.
c) Small enterprises can successfully run small specialty retail outlets and service companies. Check the local members of the chamber of commerce. But many of these smaller concerns exist because their market share and future prospects are not tempting to larger concerns.
d) I would prefer that a few of the existing laws against the creation of monopolies were enforced, existing monopolies were dismantled and small businesses were protected with more than empty rhetoric. In the u.s. of today I doubt any of that will happen before the end of cheap energy.
e) Zoning ordinances most places I know of make enterprises run from home problematic and whether paying rent or mortgage payments there are not that many paid-for assets.
One way a ‘small’ enterprise might be able to compete is if that small enterprise possesses some basic patents and is large enough to engage the efforts of aggressive patent attorneys. Qualcomm might be an example of sorts, although I am not entirely sure just how small its available resources when it started up. There is also a glass bending firm in Pennsylvania started by some Russian Ph.D.s with several patents on the use of high power microwave beams generated with a Russian technology to make car windshields and perform other operations on glass — Gyrotron Technology, Inc. but like Qualcomm I am not sure what resources were available to this startup. I also know of a radio station in Walla Walla Washington founded by the format director and and a chief ad salesman working for a station in a larger marker. This unlikely team discovered an area with a big hole in the FM coverage where they could apply for a broadcasting license. Obtaining investor funds to build a station and receive the license was a difficult year-long process only successful at the last moment in part by luck and part by the guts of the two guys who found the coverage hole.
I did not begin life as a doom-sayer and I prefer not to attract attention — that can be dangerous these days. I look at the evidence and judge based on what I see, what I experience, what I hear, read, feel and guess at based on events.
Jeremy:
I hope you circle back and see this. This medicine _needs_ to be taken (by me) – the deck is truly well-stacked against the little guy.
Here’s some medicine for you: the little guy is mostly passive, isn’t using our advantages (numbers) correctly, doesn’t use strategy, doesn’t know how the world really works, and doesn’t use his/her creativity. We are our own worst enemy, Jeremy.
There are products to be built, cultures to be built, teams to be built which address each of those shortcomings. That’s what I want to do.
I got a kick out of the assertion that “If it’s worth their while, they’ll come for you” – there are no desirable niches avail to the little guy. We’ll see. But in order for a little guy niche to exist, we’re going to have to learn how to do guerilla warfare.
I’ll make sure you get notified once that prod devel guide gets out of review. I want your opinion on it, for sure.
We’re _not_ done yet! :)
And….I acknowledge that I didn’t thoroughly address the excellent points you (Jeremy) made above. If you’ll be kind enough to raise this subject again on a not-dead thread, I’ll be happy to weigh in, and others will, too.
Remember that all the Bigs are using little guys to do their work for them. Most of the Bigs only own and operate a fraction of what they present to the marketplace. For ex: home depot contracts out installation, mfg’g, distribution, store cleaning, inventory, repair. They used to have knowledgeable sales people, much less now. They pay poorly, and work their people to death. I used to be a big HD customer; now I buy there only in extremis.
Just one example, but if you want quality, responsiveness, attention to detail, etc. you don’t buy from the bigs. If it’s price you’re buying, then shop with the bigs.
Re: farmers’ markets. If you’re buying price, not the right place. Quality? Supporting your values? Keeping your money circulating in your neighborhood (building your local economy)? OK, then farmers’ market’s the ticket.
Tom/Jeremy: Thanks for your extremely interesting conversation (I’m always a day or so late, so I’m glad you continued it today). There is good reason for pessimism, but it only benefits the Bigs to be paralyzed by despair. Like Tom, I think there must be opportunities for alternative strategies.
Adding my own couple of thoughts to the mix:
* The new antitrust movement (the “neo-Brandeisians”) is starting to have an impact: you can tell because the old-guard antitrust bar (i.e. promonopoly Bork-ists) are livid. There are laws on the books, and enforcement of them can make a difference in the power of monopolists. There’s cause for optimism here.
* The contention that the only space left available to Smalls are niches and boutique offerings (“artisanal pickles” as Lambert put it once) is real, and the power of Bigs to keep it so is real. If you somehow managed to get big enough to attract attention, they will come for you.
* Change won’t happen only by plucky, lucky, savvy kung-fu-like small entrepreneurs outfoxing the Bigs. There probably have been many already, and they either got crushed, sold out, or took over and became a big themselves, but that’s partly because they were alone. So you also need the resurgent labor movement, and the anti-monopoly/anti-consolidation movements more than ever too. This isn’t a recipe for utopia: good guys will still fail, and bad guys will still win.
Oguk: Glad you checked in. Please keep the antenna up for when this sort of discussion happens on other threads. You seem to have a good handle on this subject, and I’m sure others would like to hear what you’ve got to say.
My slant on this subject is “make new products! They are the stepping stones from where we are to where we want to get”.
Think about it. Products are what you use to do what you want to do. Don’t have electric cars? Tuff, gotta pollute. Appliances wear out in just a few years? Tuff. Buy a new one.
The bigs are not going to give us products which meet our needs but not their needs. We won’t get “forever” products, repairable-at-home products, resource-reclaimable products, etc. because the bigs don’t want to make that sort of product.
The bigs don’t want us to make products for ourselves that enable us to capture all the benefits of our own productivity. _They_ want those benefits.
So I say “(&*&^ them!”. I have already demonstrated that I’m good at developing products, and I wrote a Guide to help others do so, as well.
Let me know if you want a copy. You sound like someone that might offer up some good feedback.
Your point about “cheap oil” is going to be the kicker for America. As fuel prices rise, everything will become more expensive, because everything is railed, shipped, or trucked from beginning to end point in America. This will cause a noticeable fall in the American standard of living. [I am not so sanguine as to expect the Elites to share any of their ill gotten gains.] As readers will know, falling standards of living domestically soon evolve into political conflict. Having the bulk of that fall in the standards of living concentrated at the lower end of the financial distribution curve will manifest itself as more “robust” class conflict.
Someone in the East has made a major Geostrategic win.
Stay safe in our new, soon to be legitimately All Third World America.
Yes high gas is a heartland emergency. Will Biden drain the SPR dry to combat?
Gas over 6/7/8$ a gallon makes living in the US virtually impossible to afford. The irony is if we had a real commitment to green transition we wouldn’t have to worry about gas prices or our relationship with oil dictatorships. And we need it desperately to combat climate change. NatSec types love to talk about severing dependance on foreign oil, but none of those ppl want to do the obvious thing to solve it. But we’d also have to rebuild our entire urban infrastructure in most cities to remove car-dependence, and invest in non-truck distribution systems. But none of that is going to happen unfortunately because our domestic politics is owned entirely by big oil/banks.
One can’t help wonder how the world would be today if the T-Ford had never happened.
> the deal done on 10 March between Iran and Saudi Arabia to re-establish relations “is not about China”, it absolutely was about China.
Sooo, soft-pinning March 10 as the Fall of the Wall 2. That’s the last time US intell was “blindsided” by the geopolitical event of the decade.
Middle East, gone.
Africa, gone. (See ‘seems like a European problem’.)
The wings of the Eagle
Are Albion and Oz
The tailfeathers flutter in the breeze
Even Trump had good relations with Saudi Arabia so the present mess is all on old Joe. Maybe old Joe just wanted to deal with the King – who is also an elderly man not firing on all his cylinders anymore. I have the impression that old Joe was trying to undermine MBS and have him pushed aside for another member of the Saudi family that would be more amiable to Washington’s demands. MBS proved too ruthless for that and squashed any opposition to him. I have the impression too that MBS is growing into his role of leader of Saudi Arabia and as he is only 37 years old, he is thinking more and more long term and how he wants the next thirty or forty years of his reign to play out. If Joe had backed MBS and had not kept on insulting him, it may have played out a bit different but that boat has long since sailed. And so here we are.
“If Joe had”……..the list is endless.
I am really impressed by how MBS has developed over the last decade. Never underestimate a scion of a dynasty of survivors in a (literal) cutthroat game of politics, I need to remind myself
I don’t think that one can understate U.S. Sec of State Antony Blinken’s murderous disdain for the Arabs; it is well documented.
As staff director of the Senate Foreign Relations Committee it was Blinken who herded the Dems into supporting the useless occupation of Iraq and Afghanistan; he ran Obama and Clinton’s disastrous policies of causing mass deaths in Libya and Syria; and he was prominent in the Situation Room when OBL was gunned-down in cold blood.
Blinken spent his late childhood and teens living in Paris after his mother dumped his father, Donald Blinken of Warburg Pinkus. One wonders if he often got punked by the Arab boys who ran the banlieus. His decades-long brand of bullying Arab sovereignty has been both inexplicable and destructive to Arab lives and long-term American economic interests.
I’ll swing for the fences here: the military non-base in Syria will be in deep trouble by the end of the year. The rapprochement of the two Houses of two billion Muslim must draw the eye of Erdogan. With Russian responses at least matching escalations, what’s been done in Ukraine can be responded in kind in Syria. And Mr T already gave the order to get out of Syria, which was ignored, so US foundations are built on sand internally.
Back in the days when Pat Lang was still sane, he told a story of his experience that seemed to sum up Biden’s worldview neatly. As I remember the story, Lang had a Middle Eastern acquaintance who liked to meet and shake hands with important people, so Lang arranged to have him meet some members of Congress for small talk, which included, unfortunately for Lang’s acquaintance, Senator Biden. Apparently, the poor man was subject to basically a racist tirade about how contemptuous Biden was of the man’s country and Arabs generally while how he was with Israel on everything Middle Eastern. Apparently, Lang was also completely blindsided by this as this outburst came out of nowhere. I was a bit incredulous when I first read it, but seeing Biden’s conduct since 2021, I am convinced that that is the real Buden.
I think a lot of this hidden under the surface is the Eurozone has been working hard to suppress oil prices for obvious reasons. OPEC cuts are a big slap in the face to the Davos crowd who are itching closer to actual survival mode.
On another angle: I wonder if the illegal “sanctions” were lifted on Venezuela and Iran and they ramp up production to near full capacity, how far oil prices would plummet?
BigOil profits are at record levels at the moment, so the manipulated shortages, and blatant price-gouging is good for them. On the other hand, as the article points out, the US political class want oil to be at a reasonable price to keep inflation down etc. But why not lift the (illegal) sanctions? It seems the US wants the cake and to eat it too.
Also: since KSA, ruled by the House of Saud, was a creation of the British Empire; and has no legitimate claim to rule the territory, I would think the Saudi regime as fragile. Without the support of the US Empire and vassals, will the House of Saud be able to maintain it’s head-chopping, tyrannical rule? Is “regime change” for KSA being planned if they go too far? (like stop rolling over their petrodollars into US weapons, and financial assets etc.)
I am skeptical that the US wanted suddenly to quell Sunni-Shia hostilities, after fomenting them for so many years. That the author adopts this pose lets him avoid the stunning US policy failure that rapprochement between these two sides represents. Without ‘divide’, can you have ‘conquer’?
A ludicrous claim, that betrays Mr Watkins’ disdain for his readers.
In another article written 2-3 months ago for OilPrice, he acknowledges that the US manufactured the Saudi-Iran conflict for its own benefit, writing approvingly about America’s imperial strategy of shattering foreign nations (which he references as ‘target areas’!):
‘From when the Oil Crisis ended in 1974, the U.S. was determined to minimise the degree to which it was subject to the whims of Middle Eastern oil producers – especially Saudi Arabia – and to this end it pursued the ‘Kissinger Doctrine’ in its Middle East strategy. This Doctrine was a variant of the ‘triangular diplomacy’ that he advocated in formulating the dealings of the U.S. with the two other major powers of the time, Russia and China.
In essence, it was a ‘divide and rule’ idea, in which one side was played off against the other, leveraging whatever fault-lines ran through target areas at either a community, national or international level. These fault-lines could be economic, political, or religious, or any combination thereof. In more recent years the fault-line used has been the Sunni-Shia divide running across Islam, as exemplified in Saudi Arabia and Iran, respectively.’
https://oilprice.com/Energy/Energy-General/Has-Saudi-Arabias-Relationship-With-Russia-Reached-Its-Limits.html (I edited out some sentences for concision, without harm to the general meaning.)
Idle thoughts…
I wonder how much prod must be cut to get price to $100/b, which imo would put saudi well into the black.
Cheap energy supports all economies, but we’re running out of places to look for cheap oil to replace depleting old fields. ‘Twilight in the desert’ was premature 20 years ago, but a lot of oil has been produced since then. How much longer to when cuts become involuntary?
A great question. Russia says “quite a while yet”, but they’ve been shut out of West markets.
For the West? Well, we’ll have to see how fast the fracking depletes, and how durable the sanctions are. Right now, domestic fracking production costs are reported to be well below those of the other major intn’l producers. How much of that is hype? I, at the moment, don’t know.
Interesting times ahead.
Another question is “how much more production of fossils before our environment tips over into feedback-loop territory?”. Yet another fine question that I’m not waiting around to hear the answer to. Not liking the trend-lines, am I.