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Nouriel Roubini: Cheap oil won’t last

Nouriel RoubiniNouriel Roubini
Nouriel RoubiniPhotograph by Jerome Favre — Bloomberg via Getty Images

The falling price of oil continues to be the most important macroeconomic event of the day, with the price of WTI crude declining again to under $45 per barrel Tuesday, the lowest since April 2009.

So far, OPEC has declined to cut its production to support prices, and many oil exporting countries are feeling the pressure of declining revenues. Indeed, if you look at the effect that declining oil prices has had on GDP, Saudi Arabia is the biggest loser of all.

But economist Nouriel Roubini argued at a forum on Tuesday hosted by Time that while low oil prices might harm Saudi Arabia in the short term, there’s a good reason the country isn’t leading the charge for OPEC to cut production and raise prices. Said Roubini:

Their behavior is like a typical oligopoly using predatory pricing. If you keep prices low for long enough, you get rid of those who are high marginal-cost producers, whether it’s shale gas and oil, or Russia, or Venezuela, you name it. Secondly, you commit to your fixed investment schedule and continue to increase capacity. That’s going to lead to everybody else to underinvest in increasing capacity. In the short term, you have lower oil prices, but in the medium term you’ve flushed out your competition … you take the pain for the next 12 to 18 months, but the result is higher prices and market share down the road.

So, if you agree with Roubini’s logic, what looks like a terrible trend for the Saudi government may actually be a good thing for the country in the long run. The U.S. fracking industry, on the other hand, might not have reason to be so optimistic.