Saudis see writing on the wall, move to get economy off oil before it’s too late

A $2 trillion Saudi Aramco IPO will monetize oil reserves before demand peaks and price collapses for good.

Russian Energy Minister Alexander Novak and Saudi Energy Minister Khalid Al-Falih speak to press after December 2016 OPEC meeting in Vienna. AP/Ronald Zak.
Russian Energy Minister Alexander Novak and Saudi Energy Minister Khalid Al-Falih speak to press after December 2016 OPEC meeting in Vienna. AP/Ronald Zak.

What does a country do when in its entire economy is built around a natural resource that the world is starting to shift away from?

In the case of Saudi Arabia, they plan their own shift off oil — financed by the world’s largest initial public offering (IPO) of stock, some 5 percent of Saudi Aramco, the world’s largest oil company.

Last year, deputy crown prince Mohammed bin Salman announced the plan to take Aramco, which the Saudis value at some $2 trillion, public. Last month, the Financial Times reported those plans are on track for an IPO next year, noting that Saudi advisers say a successful IPO “is essential to the deputy crown prince’s radical efforts to wean the kingdom off oil through his Vision 2030 programme.”

Credit: Financial Times
Credit: Financial Times

The 2014 collapse in oil prices caused a serious economic slowdown in the country, which shattered the faith of many Saudis in the long-term viability of a pure petro-state. “We have a state of addiction in the Saudi Arabian kingdom, by everyone, and that’s dangerous,” the deputy crown prince told Al Arabiya television in 2016. “That is what held up many sectors from developing in the past years.”

The December 2015 Paris climate agreement underscored the risk for the Saudis, as 190 nations (including Saudi Arabia) unanimously agreed to leave most fossil fuels in the ground in an effort to avoid catastrophic climate change. Compounding the problem for oil is the stunning drops in the price of batteries, which is enabling the first serious challenge to petrol cars — affordable, long-range electric vehicles.

An October study by the credit rating agency Fitch concluded that advanced batteries could “tip the oil market from growth to contraction earlier than anticipated,” leading to an “investor death spiral” as savvy investors — and then everyone else—pull out of oil company assets (bonds and stocks).

The Saudis intend to turn Aramco from “an oil producing company into a global industrial conglomerate,” according to Vision 2030. Another way they plan to diversify the economy away from oil is to use money raised in the IPO to turn the country’s Public Investment Fund into the largest sovereign wealth fund in the world.

The Saudis already have a sprawling array of investments in every kind of tech startup from clean energy to big data. CB Insights, a private market intelligence firm, has mapped those investments out:

CREDIT: CB Insights
CREDIT: CB Insights

The Saudi’s are already pouring tens of billions of dollars into a technology investment fund. Their goal is to have their sovereign wealth fund as large as $1.9 trillion by 2030.

This is a staggering amount of money, but the Saudis estimate their crude oil reserves at over 266 billion barrels. In December, they pumped 10.5 million barrels a day, Bloomberg reports. With oil prices around $50 a barrel, the math adds up.

But Bloomberg New Energy Finance told investors last year to expect the ‘big crash’ in oil prices by 2028 — and as early as 2023. As a result, the Saudis clearly need to get their IPO out as soon as possible. Many investors are already divesting from fossil fuel companies, and Bloomberg offers this warning:

“One thing is certain: Whenever the oil crash comes, it will be only the beginning. Every year that follows will bring more electric cars to the road, and less demand for oil. Someone will be left holding the barrel.”