With the recent Opec meeting we have once again been bombarded by a lot of analysis, often misguided and incorrect, both in the lead-up to the actual meeting and then after it is over. The main culprit is the phrase “cost of oil [production]”.

Let us try to understand this so we can sift through the hype and see if there are any nuggets of wisdom to be found. Our first tool is understanding the difference between average cost and marginal cost.

Let us consider as an example a company like Microsoft that develops and sells software. Whenever Microsoft develops a new version of its Windows operating system, it costs money to pay for the software developers, the buildings they work in, the computers they use and all the support staff, such as finance and HR.

Let us assume it takes US$100 million to develop the new OS. This is usually called the fixed cost or capital expenditure.

If Microsoft ends up selling 1 million copies of this software, then one might think, as a first calculation, that the average cost of the software is $100 per copy and that it should not bother selling if the price is lower.

The problem here is that the actual cost of producing a copy of the new OS for sale, which is usually delivered online, is negligible once it has been developed.

This is called the marginal, or variable, cost.

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In this article I will outline the important financial themes that I see for the GCC for this year. It starts with oil, which is at about US$38 per barrel. Estimates for the break-even price for shale oil production vary, but the consensus appears to be at least $60.

Examining these two pieces of information, it becomes hard to understand the crowd who believe that Saudi Arabia is trying to crush shale oil. The oil price is about $19 below where it needs to be to achieve this objective. For Saudi Arabia, which pumps 10 million barrels of oil per day, that is about $200m a day of unnecessary loss in this scenario, or an unnecessary loss of $73 billion a year.

One could argue that going this low, is the kingdom being safe? Surely there is some middle ground that would starve shale and inflict less pain on the kingdom? Oil at $38 a barrel is overkill.

I think that it is arrogant to assume that the Saudis do not know what they are doing, especially with oil. It seems clear that shale oil is not the target, or at least not the main one.

That leaves only one other credible target, and that is Iran, Saudi Arabia’s main adversary in the region. The timing, which comes with the US president Barack Obama’s push on the Iran nuclear issues that allowed sanctions to be lifted against Iran, is telling.

Iran’s pleas to big oil companies to develop its infrastructure so it can increase its capacity above its current 2.5 million barrels per day (bpd) have fallen on deaf ears. Why? Because it is uneconomical to invest in oilfields today after the glut of investments over the years when oil was $100 per barrel.

Critics also say Saudi Arabia cannot survive oil this low for more than three years. The country’s budget deficit is about $100bn to $150bn a year. Saudi Arabia has about $500bn in foreign reserves today. If that is all the maths that you are willing to do, then yes there are four to five years left. But anyone who thinks in this way simply does not understand Saudi Arabia.

The kingdom can and has previously borrowed large amounts locally. It can easily borrow enough to finance the current deficit for at least three years, if not five. It did exactly that in the 1980s and 1990s. This means that Saudi Arabia can withstand current oil prices for seven to 10 years to counter its adversary Iran. It is likely we will see a longer period of low oil prices.

But this takes a lot of belt tightening across the GCC. There are two main countermeasures that have been proposed and enacted – taxes and a smaller government budgets. The usual response to an increase in taxes is flight of capital, especially as a low oil price means most of the rest of the world will grow. This is the opposite of what the region needs. Shrinking budgets automatically lead to shrinking economies.

To actually complete and complement the above two actions, the GCC needs to make itself attractive to foreign capital. This begins with developing the rule of law and applying it in a consistent manner. Special exemptions, say for an IPO, need to stop. The regulation should be either applied equally or scrapped.

The next step to level the playing field is to continue to improve corporate governance. It can be appealing in times of stress to ignore the tenets of corporate governance in the name of speed or priority, but the cost will be the continued flight of capital.

The third step is liberalisation. Think if in the past 30 years all expatriates were allowed to invest freely in the UAE. Our economy would be much bigger, and as a result much healthier. In the UAE we have taken some steps in allowing ownerships of some listed shares and we have created free zones. But 100 per cent ownership of companies on federal land still does not exist. Saudi Arabia allows 100 per cent foreign ownership in most sectors. If we want to attract money, let’s give foreigners the ability to invest.

The final step is a subset of corporate governance – transparency. When things are going well, transparency is in full swing. But when there is a problem, everything becomes opaque. Corporations need to be open and honest in good times, and especially in bad ones. Anything less will lose investor confidence

Fiscal policy alone – shrinking budgets and raising taxes – will not lead to balanced budgets but will destroy the economy. Fixing the legal and governance structure of the economy might just be what the doctor ordered.

This article was originally published in The National.