Oil at Two-Year Highs as Saudi Arabia Plays Its Own “Game of Thrones”

Oil at Two-Year Highs as Saudi Arabia Plays Its Own “Game of Thrones”

- in Insight, Markets, Outlook



MBS has a supporter in President Donald Trump, though, who tweeted on Monday that he has “great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing… Some of those they are harshly treating have been ‘milking’ their country for years!”

But there’s more to the story than mere palace intrigue. The richest country in the Middle East is undergoing radical changes as outlined in its “Vision 2030” plan, unveiled in April 2016. Among its goals, headlined by the young MBS, is a push to reform the government’s role in everyday life. Today it’s estimated that around 80 percent of Saudi household income depends on government subsidies, supported by vast oil revenues. The hope is to shrink this dependency, especially now that the price of Brent has fallen significantly since its all-time high of $140 a barrel in 2008. Many state-run industries could be privatized in the coming years, including its behemoth oil industry.

Saudi Arabia is a youthful country—about 70 percent of its citizens are under the age of 30—and so the kingdom is also seeking to modernize its society and relax several restrictions that are believed to have held back economic growth. This past September, the country finally permitted women to drive, and there are targets in place to grow the number of women in the workplace.

Aramco: The IPO of the Century?

But possibly the most significant and ambitious goal in Vision 2030 is to wean the kingdom’s economy off of oil exports, which accounted for roughly 87 percent of total budget revenues as of December 2016. Toward this end, Saudi Arabia plans to privatize a part of the country’s crown jewel, Saudi Aramco, the largest energy company in the world by far. In its 2016 annual review, the state-run company said it produced an average 10.5 million barrels of crude a day. By comparison, the entire U.S. produced 8.6 million barrels a day on average in the same year.

Saudi Aramco Leads the world in oil production
click to enlarge

According to Forbes, Aramco generates more than $1 billion a day in revenues, which is a little difficult to fathom.

In an exclusive interview with Reuters, MBS said that Aramco was on track for a 2018 initial public offering (IPO) and that it could be valued at more than $2 trillion. This would make it the largest IPO in history. By floating only 5 percent of the company, MBS expects to raise as much as $100 billion, which would go into a public investment fund (PIF) to help finance other segments of the economy.

“The government should not be in control of the private sector,” Price Mohammad said. “You create opportunity, you create business, you create development, you hand it to the investor and start creating something new.”

Not to wade into conspiracy theories, but the crown prince’s anti-corruption campaign and impending Aramco IPO could be related. Saudi Arabia wants oil support at $60 a barrel before the giant energy company goes public, and a royal shakeup of this magnitude could be one way of achieving that.

The Challenges of Getting Listed

As exciting as an Aramco IPO is, I wouldn’t put my full faith in it coming to fruition. For one, the Saudi Stock Exchange in Riyadh is simply too small and undeveloped to handle the massive trading volume the biggest IPO in history would require.

Getting listed in New York has its own challenges. Although President Trump is strongly urging Saudi Arabia to float shares on the New York Stock Exchange (NYSE), the kingdom is concerned that doing so would open itself up to litigation. In 2016, a bill was passed allowing victims of 9/11 or their families to sue the Saudi Arabian government.

About the author

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

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