Why Saudi Arabia Is Moving Its Oil to Wall Street

The longer you live, the more surprises life throws at you. At least, that’s been my experience over the past 62 years.

In the energy sector, it’s been one surprise after another. The most recent is Saudi Arabia considering an initial public offering (IPO) of Saudi Aramco.

Saudi Aramco is a nationalized Saudi Arabian petroleum and natural gas company. If it proceeds with an IPO, Aramco will be the first trillion-dollar business to do so.

[ad#Google Adsense 336×280-IA]So, why is the crown jewel of the oil patch considering this?

Simple: Saudi Arabia needs money.

Last year, 81% of Saudi Arabia’s income came from the sale of crude oil.

The average price of crude last year was $49.12 per barrel.

Earlier this week, Brent was selling for around $28 – a 41% decline.

With oil prices at current levels, Saudi Arabia has to find other ways to replace the crude revenue lost.

It has started to sell bonds, something it hasn’t done since 2007. And its new idea is to make Saudi Aramco a public company.

You see, Saudi Arabia sees the bigger picture. We are approaching the death of fossil fuels.

After the 2015 Paris Climate Change Conference, many countries made a commitment to lower greenhouse gas emissions.

And that means using fewer fossil fuels. These countries, including the U.S., Germany and others, are looking to alternative energy solutions to help reach lower emissions limits.

These changes can be explained by a few simple laws of the universe. Since I’m writing the article, I’ll call them Dave’s Laws of Technology.

Dave’s Law No. 1: Technology marches on. You’ve probably heard me mention this one before. I’ve been saying it for a while. It’s actually not my law; it’s just simple fact.

Dave’s Law No. 2: When it comes to technology, changes happen much faster than you think. A great example of this is 2-year-old price forecasts for storage batteries. We have already reached the numbers projected for 2020.

Also, look back at 10-year-old forecasts for solar installations and you’ll find they underestimated the popularity of solar by orders of magnitude.

Dave’s Law No. 3: New technology can be uncomfortably disruptive. A great example of this is Saudi Aramco’s IPO. Saudi Arabia sees the writing on the wall for fossil fuels.

Now, don’t get me wrong. Fossil fuels are going to be here for some time to come.

However, unless the world suddenly changes its mind about the negative effect fossil fuels have on our climate, their time is running out. And it’s going to happen faster than you think (Dave’s Law No. 2).

Those changes are going to be disruptive, too (Dave’s Law No. 3). But let’s get back to Saudi Aramco for a moment.

There’s no question the Saudis need more money than they’re currently getting from the sale of oil. So why not take Saudi Aramco public?

The kingdom can raise the additional capital it desperately needs. And my guess is there will be plenty of takers for shares of the world’s largest oil company.

It has the largest reserves on the planet, estimated at 260 billion barrels. It produces 10 million barrels a day.

Is it profitable with Brent selling for less than $30 a barrel? The answer is yes.

The Saudi oil fields have some of the lowest lifting costs in the world. In some fields, it’s $12 a barrel.

Those fields can be profitable for decades to come. Compare that to deepwater fields and the Canadian oil sands that need oil at $80 a barrel to make money.

Taking Aramco public now isn’t something the Saudis would even think of doing… unless they had to. And they see the climate change writing on the wall.

My guess is they do. They are running the world’s largest oil company in a country that depends on the sale of oil for 80% of its income.

Saudi Arabia sees the long-term picture very clearly. It has to diversify its funding sources, and it has to do it quickly.

It has to do this to survive as a country. And to provide its citizenry with the social services they are used to.

So, should you buy shares of Saudi Aramco if – or when – it goes public? That depends on whether you believe my argument holds water.

I’m going to watch it, but I’m not going to recommend it – at least, not yet. After all, with its cheap oil, Saudi Arabia will be the last country standing in the global oil patch.

Good investing,



Source: Energy & Resources Digest