Updating the Oil “Head-Fake” Scenario

This cycle of spending the fruits of current production while starving investment for the future is part of what is known as the “resource curse:” nations with an abundance of resources rely on the income generated by the sale of their resources which effectively stunts the development of a diverse economy and the institutions which such a diverse economy requires as a foundation.

The net result of the resource curse is national impoverishment as the resources are depleted. Diverting the vast majority of the oil revenues to support welfare states and Elites further dooms the oil exporters to under-investment in future production. All this will play out after the head-fake oversupply vanishes; then production in the strip-mined oil exporting nations will plummet with surprising ferocity.

Commodities tend to be priced on the margin. If oil production falls 2% below demand, prices don’t rise 2%; they might rise 20% because demand for oil is not very elastic.

http://www.oftwominds.com/blogmay10/head-fake05-10.html