
What does it mean for American innovation to be backed by oil wealth? - dsr12
https://vicki.substack.com/p/silicon-valley-runs-on-saudi
======
jofer
One thing to point out: Oil is still _huge_ when it comes to investment and
sheer amount of financing available. Anything involving large-scale finance
will have oil money involved in it in some way.

Frankly, even at the height of the tech boom, the tech industry has never had
significant capital available compared to the oil industry. I've worked in
both... Folks in tech think 100 million in capital is a lot. In oil, that
doesn't even qualify as a project that needs sign-off by upper management.
(The last project I managed had a ~$200 million per year budget. I was a low-
level peon 5 years out of grad school in charge of it because it wasn't
considered a large enough project budget-wise to give to someone experienced.
There are a few caveats around this -- the discretionary budget was on the
order of 10 million and the rest was fixed through long-term contracts, but
still...)

Significant investments in the energy industry are measured in tens of
billions per project. Profits from each of those projects are in the
trillions, but spread out over 20-100 years.

As a result, a big chunk of the finance industry is directly or indirectly
tied to oil. There aren't many funds that don't have money somehow invested in
or sourced from the energy industry.

~~~
throwaway66920
I was at an iron works a while back where I learned that an industrial grade
blast furnace was, ballpark, $100 billion. This was built 100 years ago. That
day I decided I just didn’t and wouldn’t ever understand capital markets.

~~~
Robotbeat
Off by a couple orders of magnitude. Capital cost of a blast furnace, rule of
thumb, is ~$200 per ton of pig iron per year: [https://www.quora.com/How-much-
would-it-cost-to-set-up-a-bla...](https://www.quora.com/How-much-would-it-
cost-to-set-up-a-blast-furnace-iron-producing-unit)

The _largest_ blast furnace in the world is about 5 million tons of iron per
year (and was upgraded to that capacity in 2013):
[http://www.donga.com/en/List/article/all/20130610/406398/1/P...](http://www.donga.com/en/List/article/all/20130610/406398/1/POSCO%C2%92s-Gwangyang-
blast-furnace-emerges-as-world%C2%92s-largest)

...so that means the biggest blast furnace in the world has a capital cost of
approximately $1 billion.

More than likely the cost (in today's dollars) of that blast furnace you're
referring to is $100 _million_ , not $100 billion.

Side note: direct reduction furnaces furnaces are usually cheaper from a
capital cost perspective and can use natural gas or even hydrogen for
producing steel... We may use more of this tech in the future as we move away
from coal for sustainability reasons.... The US now produces about 10% of its
raw iron/steel using DRI and 90% by blast furnaces and the rate of DRI growth
is fantastic (going from 2 million tons in 2017 to 3.4 million in 2018, pdf
page 10):
[https://www.worldsteel.org/en/dam/jcr:96d7a585-e6b2-4d63-b94...](https://www.worldsteel.org/en/dam/jcr:96d7a585-e6b2-4d63-b943-4cd9ab621a91/World%2520Steel%2520in%2520Figures%25202019.pdf)
A few years ago, virtually no steel was made via DRI in the US. The fracking
boom has changed a lot.

------
rossdavidh
Comes close to an important point, and then misses it completely. The problem
is not that Saudi money would get them influence at new U.S. tech companies.
The problem is that Saudi money is getting pushed into "tech" companies that
have unsustainable business models, and this is sucking all the oxygen (e.g.
available developers) from other projects that could accomplish more.

Imagine two startup ideas. One, could be profitable, and eventually turn into
a $100million company that does something useful. The other, will never be
profitable, but makes promises of being worth $40billion. Which one gets the
(inexperienced VC) money? The second. Which one would be a long-term bonus for
the U.S. economy? The first.

That is the problem; too much money from Softbank (much of that from S.A.)
pushes all the developer and other resources into goofy ideas that will end up
going bust, instead of more rational ideas that could be long-term useful.

~~~
golergka
Well that just means that a rational investor would make a killing amid this
chaos, wouldn't he?

So, we have to assume that for the last decade, not a single VC in the
industry have been rational enough to pick up easy money everybody else is
overlooking?

~~~
wayoutthere
There has been too much easy money flying around the VC world for the last 30
years that people have literally forgotten how to operate any other way.
People have lived entire careers in this environment, so the rational move for
them _is_ the current status quo.

But the paradigm is shifting. Where will we end up? My money is on early 20th
century style oligarchic capitalism, but that’s not a very appealing
proposition for a lot of people.

~~~
tossAfterUsing
> My money is on early 20th century style oligarchic capitalism

I've been enjoying the historical context in this book. I'm not surprised to
be liking the book, but i'm pleased to be getting a better understanding of
what the early 20th century space was like.

[https://www.goodreads.com/book/show/36448501-the-bitcoin-
sta...](https://www.goodreads.com/book/show/36448501-the-bitcoin-standard)

~~~
wayoutthere
I wholeheartedly disagree with any decentralized approach to national
economics. Not because it wouldn’t work, but because it would. Money is power
only because power likes it that way. But power is power, and a decentralized
monetary supply does not serve the powerful. They will attack it with every
weapon they have (which is basically _all of them_ ) to ensure it doesn’t
happen until they control it.

In the early 20th century, the rich owned gold mines. Once we moved off the
gold standard, they simply took that wealth and put it into the fiat system by
owning companies. Even if we do end up on a nominally crypto-backed monetary
system, I would expect any governance (even decentralized) to favor the
incumbent wealthy as much if not more than our existing system.

~~~
Nasrudith
I look at it in a systems way. If it /doesn't/ serve those with any actual
wealth to back the currency to use it then the question becomes why would
anybody use it? I don't see how it could work at all even without some vague
nebulous bogeyman stopping it. It brings to mind the conspiratorial "big
Pharma is withholding the cure" thinking while ignoring that selling the cure
would make them way more, that the long term treatment is competitive, and a
cure effectively monopolizes the whole segment of drugs and treatments. The
real reason cures are rare is because they are /hard/.

With large buy in from lesser concentrations of wealth it could be a "peso" at
best - something used by lesser wealths to trade to their localized advantage
but lacking the power of big movers.

------
krn
> Uber. WeWork. Flexport. Slack. MapBox. DoorDash. What do all of these hip
> American companies have in common, other than appearing regularly in tech
> headlines (and, now, being leading indicators of a tech bubble)?

> They are - or were at one point - all backed by SoftBank’s Vision Fund, an
> enormous venture capital fund run by Softbank, a Japanese holding company.

If many of these startups might not have reached IPO without the investments
by Softbank, then maybe they don't have such a good business model after all?
At least, that's my first thought after thinking what Uber and WeWork have in
common.

~~~
m_ke
Unfortunately most of the companies in this generation of "unicorns" are being
pumped and dumped by VCs. This idea that you can buy your way to a monopoly,
get large market share like Amazon and Google,then figure out how to profit
from your position in the market will backfire spectacularly and public
investors will have to pay for it.

~~~
ISL
_have to_ is a strong statement. Public investors need not buy a single share
of a mis-valued stock.

~~~
cloakandswagger
That's the problem: Approximately half of the US stock market is made up of
passive funds like index trackers which make up a large percentage of American
401k and retirement plan portfolios.

As soon as a company IPOs they enter into the portfolio of millions of passive
investors, who unwittingly become bagholders for companies like Uber and
WeWork that have no sound fundamentals or viable business model.

The market has become very distorted due to this and a myriad of other
reasons. Everyone is gunning to find the next winning unicorn lotto ticket
without any regard for fundamentals in a sort of collective pump-and-dump
scheme. Thankfully there was a glimmer of rationale with Uber and Lyft's
failed IPOs, and I expect WeWork's will be even more disappointing.

~~~
rmah
Major market index funds do not buy into recently IPO'd stocks because such
stocks are not in major market indexes. While pension funds may buy in a
little, most will not because recently IPO'd stocks are considered highly
volatile and thus outside the remit of their investment objectives. Everyone
is not gunning to find the next "unicorn lotto ticket". Lots are, but they are
a minority of the money in the equity markets. Further, the equity markets are
much smaller than the debt markets (i.e. bonds) these days. Do not mistake
press attention (they go after the exciting stories) for actual market
activity.

~~~
tomp
Last but not least, some indexes (e.g. S&P 500) have recently changed
requirements so that most tech IPOs (which usually have two classes of stocks,
one "insider" class that has a lot of votes, and one "general" class that has
few (if any) votes) would be ineligible (existing members of the index were
grandfathered in).

------
mc32
Saudi wealth is seeking to diversify, so its using its patrimony to seek
alternative income streams to oil. So good for Saudis. This fund is seeking
opportunity in many places, among them SV. That’s also a good thing, for the
most part. In short, I don’t see it being so negative that it comes from oil.
It’s funneling research away from oil

~~~
GuardianCaveman
For me it’s not the oil that’s the problem. It’s the wahabi sect of Saudi, the
weekly public execution of bloggers and dissenters. The international
kidnapping and torture of journalists, the constant bombing of schools and
children in Yemen. It’s THAT money. I worked there on a foreign military sale
contract and I saw a lot that disgusted me. The male Filipino workers told me
they grow facial hair to make themselves less attractive to be raped by their
male employers and employer friends. I’d walk through chop chop square on my
way to get to the gold market downtown as they were power washing the blood
off some feminist activist off the ground of the square (officially named
Deera Square). I worked with sensitive elements of their military and am aware
of indiscriminate bombing. Hell they shot down one of their own fighters when
his wingman accidentally fingered the trigger while inspecting the lead plane
for fuel leaks he thought he was having so you can imagine the incompetence
around dropping bombs on targets, not to mention viewing Yemenis as subhumans.

Imagine if the westboro Baptists accidentally struck oil and became
billionaires and tried to export that version of Christianity and we see why
maybe it’s not good that they are allowed to participate in the international
community and invest their money that happens to come from oil into these
startups. It’s like if Epstein gave money. It doesn’t matter where it came
from but from whom.

~~~
toomuchtodo
This is exactly why Saudi investment should be rejected by the first world. No
different than the outrage over Epstein donations and MIT.

~~~
mikeash
It’s different; it’s much worse. Epstein was retail evil. Saudi Arabia is
wholesale evil. Unfortunately, human nature makes it much easier to grasp
retail-level evil, so we’re much more horrified by it.

------
daksatech
Not only is Saudi oil money flowing into SV; it's also been flowing into US
higher education institutes and media companies. Some ways they buy influence
with that oil money: [https://www.opindia.com/2016/03/money-talks-and-walks-
even-i...](https://www.opindia.com/2016/03/money-talks-and-walks-even-in-the-
virtual-world-of-twitter/)

------
shay_ker
A lot of FUD, but no evidence that Saudi investors are using their influence
to make tech companies do bad things.

If you follow the money, you'll likely find a questionable source. Americans
benefit from US military raining drone strikes in other countries. By being an
American citizen, are you tacitly approving drone strikes? No. By paying taxes
that fund drone strikes, are you tacitly approving drone strikes? No. Taking
Saudi investment is not tacit approval of their atrocities.

There's certainly a higher level of geopolitical tension there, though. I
don't really know what the US could to answer (make more money?), but I don't
think the tech companies themselves can do much about this, they're mostly
pawns in a larger game of chess.

If the US wants to regulate these investments, then by all means. Lobby for
that if you're really worried.

~~~
wffurr
Actually, paying taxes that fund drone strikes on civilians means you have
blood on your hands. I wish more people realized that...

~~~
prewett
That's a pretty unhelpfully polarizing statement for something that is a
matter of opinion, or at least situational.

Suppose you are a citizen of a country (through no choice of your own) that
uses public taxes to <immoral action>. Further suppose that you have no
ability to influence how your taxes are spent. You have to pay taxes, but it's
not at all clear that you are morally complicit for the immoral actions taken
with them. You could argue "well you shouldn't pay taxes". Well, then you lose
your liberty via jail or worse. Is that better than being arguably morally
complicit?

And, are you putting your actions where your words are? Are you not paying
your taxes, or are you accepting blood on your hands?

~~~
wffurr
I am voting against politicians who are pro-war, which is sadly almost all of
them.

------
codeulike
This article is about Saudi Arabia, not about oil per se. Link should use the
proper title of the article, which is "Silicon Valley runs on Saudi - What
does it mean for American innovation to be backed by oil wealth?"

------
dekhn
I second the author's recommendation to read The Prize by Daniel Yergin. Was
very illuminating.

------
Animats
_Uber. WeWork. Flexport. Slack. MapBox. DoorDash. What do all of these hip
American companies have in common, other than appearing regularly in tech
headlines (and, now, being leading indicators of a tech bubble)?_

The big ones bought market share by losing money?

Uber is not a "tech company". Uber is a taxi company with delusions of
grandeur. WeWork is a landlord.

~~~
wil421
Uber’s lawyers would like a word with you. They aren’t a taxi company or in
the business of ride sharing. Uber is a digital marketplace company.

It’s laughable how delusional they are:

>In fact, several previous rulings have found that drivers’ work is outside
the usual course of Uber’s business, which is serving as a technology platform
for several different types of digital marketplaces.

[https://www.uber.com/newsroom/ab5-update/](https://www.uber.com/newsroom/ab5-update/)

------
blunte
The apparent carelessness with which Softbank throws its money around makes
sense with this revelation. It's not so different from some of the really
over-the-top projects funded by oil money with respect to real estate
(particularly real estate "created" in the sea).

------
isoskeles
> But, if we do some major, major rounding, and assume that the tech industry
> is the sum of its top companies, at $1 trillion/year, $45 billion is about
> 5% of the industry.

> So, what happens when 5% of any industry is controlled by parties that are
> not direct shareholders?

This seems like an odd comparison to force arrival at a number as high as
"5%", not including the rounding. Why would you compare a single investment of
$45B to annual revenue? Control would imply ownership, so I'd expect the
comparison to be to the summed market cap of those companies, which is
obviously higher than $1T.

------
eeZah7Ux
Billionaires investing on "unicorns" aka buying monopolies means increasing
inequality. It the whole point of their strategy.

Uber is an especially good example.

------
sharadov
Salman knows that the future is tech, and he's doing the strategic thing by
moving Saudi money into other industries and outside of the country.

~~~
theklub
“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my
son drives a Land Rover, his son will drive a Land Rover, but his son will
ride a camel”

~~~
codeulike
Had to look that up, interesting.

[https://en.wikipedia.org/wiki/Rashid_bin_Saeed_Al_Maktoum](https://en.wikipedia.org/wiki/Rashid_bin_Saeed_Al_Maktoum)

------
otterley
TL;DR: Saudis invest in VC funds; we don't really know what specific impact
that has on the funds' or recipients' behavior.

------
novon
Kind of short-sighted that the US government is essentially giving the keys to
AI innovation and the military (check POTUS’ latest tweets) to Saudi Arabia’s
blood hungry elite. More reasons to use what remains of our democracy to
change course.

------
Hominum
Oil wealth comes with a lot of baggage.

------
jbottoms
Innovation in America is essentially dead. First VC's don't know a good
product when they see one, and they won't do due diligence on new products.
So, they look to the tech companies that control the markets. Second, the
services the tech giants are providing result in "soft GDP" dollars. We need
VC's to be more community aware, and stop chasing cotton candy. WeWork is a
rent seeker that has inserted another layer into the rental arbitrage process.
That does not help the U.S. economy.

~~~
ibeckermayer
What do you mean by “they look to the tech companies that control the
markets”?

~~~
jbottoms
VC's want to keep their risks low, they are more like investment bankers than
true VC's. If someone approaches them with a seemingly good idea, they will
want to unload it after a development period and realize a 10:1 return. So,
they will first talk with a couple of the big companies and try to "pre-sell"
the concept without giving away too much of tge secret sauce. In essence, VC's
are captive by the tech giants, just as are most professors, and university
curriculums.

