Monday, April 13, 2015

Saudi Oil and Broadway

Saudi Arabia's Plan to Extend the Age of Oil - Bloomberg Business


                                   Image result for cartoon oil rig

The linked article very interestingly lays out the case for why Saudi Arabia has not reduced it's production of crude oil in the face of increased production from the United States and the subsequent drop in the price for oil.

Basically, after $110 per barrel oil as recently as last year, the price has recently plunged below $50 per barrel. The world over-production, combined with reduced demand is cited as the cause. In the past, Saudi Arabia being the largest exporter of crude oil, has been willing to prop up the price by lowering production, but not this time.

The article explains that now, with the emerging economies of the world seeking to develop alternative energy sources, and with China slowing it's growth and reducing its thirst for oil, Saudi Arabia is worried that it will be awash in oil that nobody will want or need, hence their willingness to allow a substantially lower price for oil. The want to assure continued demand for their oil for they fear a world with no need for it and an end to their economy that is fully dependent upon it.

This is in sharp contrast to the past decades when the highest possible price was always sought, and always gotten. From wars and through boycotts, the Saudis have always absolutely maximized their oil revenue without regard to the effects it had on their customers or the citizens of the world.

It will be interesting to see how this situation evolves in the coming years.

Which brings me to Broadway, of all things. As I read the article about the new state that Saudi Arabia finds itself in, I was struck by the odd similarities there are to the industry of Broadway.

For years, Broadway shows have been criticized for what always seemed to be ticket prices that were simply too high. Producers have always been accused of gouging ticket buyers, but always offered the defense that their costs required the exorbitant pricing.

The last ten years or so has seen the rise of "dynamic pricing", the practice of raising prices from the established price whenever it was deemed appropriate by the producers, and sustained by the "market". What were once simply expensive theater tickets suddenly became incredibly costly, marked up to stratospheric levels for the most popular shows.

Like any commodity, when the Saudis raised the price of their oil, all other producers of crude oil benefitted. Tiny United Arab Emirates, would collect the same price as the Saudis for their oil, though they only produced a fraction of the Saudi production.

When Broadway producers introduced dynamic pricing, not just the "big hits" benefitted, but all shows felt they needed to join this party. Pricing any show substantially different from a "hit" implies damaged goods, a show unworthy of purchasing tickets to. Hence, all shows suddenly offered "Premium" tickets at inflated prices, even if the demand for a specific show could not support these extra high ticket prices. An era of "$100 per barrel oil" had begun for Broadway.

In the last seven years, the world has gone through a wrenching financial and economic restructuring. The middle class has been crushed in this country, continuing the trend begun over thirty years ago. The new technologies in fracking have brought oil production back to high levels in this country with the unforeseen price destruction in oil that we are now witnessing.

When oil can be brought to the point it is now, where it is no longer absurd to consider a world with little or no need for it because of an overabundance of it, or cheaper clean alternative sources, is it such a stretch to think that the industry of Broadway, overpriced and out of reach for so long for so many, will see it's relatively stagnant audience drift away to more affordable alternative sources of entertainment in the face of $500.00 tickets?

Will Broadway have a similar reckoning as Saudi Arabia has had, that squeezing every penny from its customers will one day move those customers away from their product? Who would have thought it possible for oil? Who thinks it impossible for it to happen to Broadway?

Image result for closed theater

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