The Price to Watch in Oil—$40 a Barrel

Oil prices are wallowing in the $65 a barrel territory these days, less than half the level crude hit this summer. It even dipped below $60 briefly. But the real number to think about is $40 a barrel, a former oil exec turned investor told me.

Why? Well, $40 a barrel is the level that many Middle Eastern OPEC nations need to achieve to continue to fund their somewhat lavish public works and social programs, the exec estimated. Dubai, Abu Dhabi, Saudi Arabia and Kuwait aren’t cheap countries to run. The economic explosion in the past few years has caused a building boom in Dubai, which in turn has meant more public works projects. Some of the newest, smoothest pavement in the world can be found there.

Many countries also offer massive incentives to U.S., European and Asian institutions to install offices and facilities there. In Dubai, for instance, chip companies can qualify for tax holidays that last 50 years. Texas A&M, Cornell, Northwestern, Georgetown and Carnegie-Mellon have all opened satellite campuses in Qatar while NYU and MIT are opening campuses in Abu Dhabi. Building a school out of scratch isn’t easy. The hospital associated with Cornell’s medical school has an endowment in the billions.

Citizens often tend to expect cushy, well-paying jobs from their home governments. Many governments are trying to phase out these programs, and hope that the universities will generate opportunities for private sector jobs in the region, but workfare-like employment persists.

OPEC nations probably aren’t too terrified of oil skirting the $40 a barrel level just yet. The current drop in prices has largely been caused by a decline in demand due to economic conditions and the bursting of the speculative bubble in commodities. It did not result from new oil strikes outside of OPEC or the sudden availability of cheap ethanol or electric cars. An economic turnaround, combined with a further dwindling of existing supplies, could perk prices back up.

Nonetheless, the outlook for oil producers is certainly less optimistic than it was a year ago and transportation technology continues to improve. So keep that number in mind.