Should Saudi Arabia sell $1tn Aramco?

The Saudi royals are considering selling shares in the state-owned oil business, creating the world's largest public company.

by Adam Gale
Last Updated: 08 Jan 2016

There’s a certain hierarchy among the world's oil giants. BP is big. Exxon Mobil is really big. Saudi Aramco is Godzilla on steroids. As a state owned business, it’s is often neglected in lists of the world’s largest companies, yet it pumps roughly three times as much crude as Exxon, which is valued at over $300bn (£200bn). If it were a public company, it’s easily possible that Aramco would be worth a trillion dollars.

It is not of course a public company, but it looks like that may soon change. Muhammad bin Salman, Saudi Arabia’s deputy crown prince and second deputy prime minister – this makes him sound like some sort of monstrous cross between Princess Anne and John Prescott, but in fact the 30 year-old is widely seen as the power behind his father’s throne – told the Economist that he was ‘enthusiastic’ about selling shares in the company.

‘I believe it is in the interest of the Saudi market, and it is in the interest of Aramco,’ he said, adding the idea was being reviewed, with a decision to be taken over the next few months.

Bin Salman is trying to modernise the Saudi economy and break its dependency on oil revenues. He spoke of diversifying the economy into such sectors as mining and tourism (good luck there...) and increasing non-oil revenue by privatising state enterprises, creating tradable assets from unused real estate and introducing VAT. When asked if it was a Thatcherite revolution, he replied ‘most certainly’.  

In that context, selling off a chunk of Aramco sounds perfectly reasonable. Except there is a another, broader context that can’t be ignored - the fact that the ten million barrels of crude the company produces each day are now worth $35 each, compared to a peak of $115 a year and a half ago.

The price war between the Saudi-led OPEC cartel and upstart American frackers may have weighed heavily on the latters’ wallets, but it’s costing the Saudi state dearly too. Last year the government ran a $100bn deficit – roughly 15% of its GDP, as its main source of revenue dried up. Selling just a fraction of Aramco could tide Saudi Arabia over for years.

But it would also violate one half of one of the more basic rules of the market – buy low, sell high. With the oil price depressed, most of Aramco’s major private sector competitors have lost between a quarter and two fifths of their value since last summer. An Aramco share would surely be worth less today than it would have been then.

If the Saudis believe the oil price will recover, then selling before it does so looks like either a folly or sheer desperation. After all, it’s likely that whoever buys Aramco shares will be foreign, which would create a long term net outflow of significant dividend income from the country.

The timing of these comments could be seen in a different light, however. Rather than being a sign that Saudi Arabia is cracking under the pressure of its struggle with the frackers, it could be interpreted as a warning that the kingdom will do whatever it takes to outlast its higher-cost rivals.

In either case, while selling at a time of low oil prices would be less than ideal, selling in general is a good idea. Bin Salman and his family know all too well that the age of oil won’t last forever, which is why the kingdom is investing in becoming a leading light in solar power (it does get a lot of sun...) and why nearby Dubai has been transforming itself into a financial, professional services and tourist hub.

The money from selling a minority stake in the world’s most valuable firm could be enough to fund the investments necessary to do the same for Saudi Arabia. Sweeping political and social liberalisation and a healthy dose of regional stability wouldn’t hurt either, of course.

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