The Saudi's are selling Aramco, the question is: why now?
A few days ago Saudi Aramco was listed on the Riyadh stock exchange raising about $25.6 billion from the five per cent sold, valuing the firm at $1,7 trillion. $1,7 trillion is a gigantic sum, indeed according to Gapminder the Gross Domestic Product (GDP) of the Saudi Arabian economy in 2013 was $1,5 trillion. Despite the gargantuan valuation the listing was a disappointment in Riyadh as Crown Prince Muhammad Bin Salman had hoped the firm be valued at $2 trillion. The lower valuation could be explained by the current geopolitical climate with trade wars, a slowing global economy and attacks on Aramco facilities in September, but I think it might be due to anxieties about the environment.
Saudi Arabia’s rationale for listing Saudi Aramco, or to sell the family jewels as it were, is to diversify its economy away from oil. The Saudi economy has been reliant on oil for a long time, and it hasn’t tried this tactic before. Surely there’s been a better time to sell off parts of Aramco than in 2019? Perhaps in the 90’s in an era of global cooperation and stability it would have made sense to try to diversify the economy, especially with the birth of the digital age the proceeds from selling a part of Aramco could have been used to invest in internet access or digital businesses. Or perhaps the 80’s would have been a good time to list Aramco? Sure it might’ve been a pain to list Aramco in the midst of the Iran-Iraq war but the money could’ve been used to help with the war effort or the reconstruction. I'm not convinced the need to diversify the Saudi economy is new, and since there hasn't been an attempt to list Aramco and use to proceeds to invest in other industries before why now?
The reason I think the Saudi’s figure the Kingdom has to sell parts of Aramco and diversify its economy is that they figure they’re on the wrong side of history. Oil is becoming less and less popular and it's not unreasonable to think that investors will find investing in oil toxic in the not too distant future. It's in a way strange that it has taken this long for oil to start to be seen as a less than ideal investment, given how tumultuous the 70’s was for oil. After all, in 1973 the oil embargo of those countries who the Organisation of Arab Petroleum Exporting Countries thought were supporting Israel made the global oil price rise dramatically and making the oil importers realise that their addiction posed a risk to their economies. And the year before the first United Nations Earth summit was held in Stockholm where the issue of the environment was first raised on a global level. Still, no real attempt was made to sell off Aramco and to diversify the economy.
What’s changed then? I think there are three main reasons why the issue of climate change has become so important as to mandate listing Aramco; increased frequency of abnormal weather, a strong central symbol for the climate movement in Great Thunberg, and an American President who seems not to care. I think that recent extreme weather makes environmental issues feel more pressing as there are more tangible consequences. Meanwhile, seeing that one of the world’s most important leaders isn’t doing anything makes it more difficult to pass the buck. Many political issues are easy to leave to politicians, after all it’s their jobs to solve them, but when important politicians are unconcerned it forces regular people to have to take a more active role in fixing the issue. Couple this with a symbolic leader for the movement in Great Thunberg and it’s easy to see how the mood have shifted to climate change being a pressing issue when it’s been around, and in most circles mostly ignored, since the early 70’s.
In short, the Saudi’s are selling because they think oil as a profitable investment is slowly coming towards its end, and they want to sell while their stocks are still worth a lot.
What do you think? Is the Saudi sell off unrelated to climate politics?
If you found this post interesting please share it with a friend or coworker, and come back next sunday night for a new post. You can read last week's post about the film Joker here, and you can find my beginner's guide to oil here. You can find me on Twitter @ipolecoblog.
Written by Karl Johansson, Founder of Ipoleco
Sources:
1, The Economist: https://www.economist.com/business/2019/12/07/saudi-aramcos-ipo-is-the-biggest-ever
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