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Page added on May 2, 2016
The Saudis may know something about oil the rest of us don’t
Investors may be salivating for a piece of Saudi Aramco when the kingdom of Saudi Arabia sells a small chunk of its gigantic state-owned oil company, probably in 2017. But potential buyers ought to beware.
“I think they’re hedging the uncertainty that their oil is going to be worth less,” Matthew Weatherly-White, founder of the Caprock Group, tells me in the video above. “Even more dramatically, there might be stranded carbon assets they own, and by that I mean assets that are simply worth nothing.”
Oil producers have already endured an enormous shock during the last two years, with the benchmark price for Brent crude plunging from $115 a barrel in 2014 to about $30 earlier this year, and now rising back to around $45. The oil bust has caused severe stress for oil producers such as Russia and Venezuela, and caused Saudi Arabia, the world’s largest oil producer, to rethink its priorities.
The Saudis plan to offer about 5% of the shares in Aramco to the public as a way to raise cash they can invest in other things, to diversify their oil-dependent economy. That gives Aramco an implied value of $2 trillion or so, which would be six times the market value of Exxon Mobil (XOM) and make Aramco the world’s largest oil company, by far.
But oil may face challenges a lot worse than the weak demand, oversupply and plunging prices of the last two years. A historic agreement made last December among 196 different countries, known as COP21, could bring strict new rules on the use of oil and other fossil fuels in many nations, essentially making it more expensive and encouraging other forms of energy use. At the same time, carbon alternatives such as solar and wind power and electric vehicles are getting cheaper and more widespread.
The two trends combined could spell a gradual end for oil and a long-term decline in the Saudis’ most valuable asset. “I think what the Saudis are doing is looking at the uncertainty in the future of oil and saying, ‘we’ve got this $2 trillion asset we’re sitting on. It’s possible it might be worth less in the future because of the stroke of a regulator’s pen, or because the market deems it to be less than it is right now’,” Weatherley-White says.
There have been many extreme predictions relating to oil, from the “peak oil” theory that goes back decades to the bottomless oil some analysts now think producers can churn out indefinitely, on account of fracking and other new technology. If there’s one constant, it’s that forecasters tend to be terrible at predicting what will happen to the price and suppy of oil.
So it might be shrewder to consider a range of scenarios that could explain the Saudis’ willingness to sell a stake in Aramco. Weatherley-White sees three: The Saudis might simply be making a modest effort to diversify and become less dependent on oil, which would be smart. Or they could be sitting on considerably less oil than the public thinks, and looking to sell while the rest of the world thinks the emperor is still wearing clothes. Or, finally, the Saudis may be running short of cash due to expensive wars with bordering states and the costly lifestyles of its royals, and looking to bolster its reserves, without explictly saying so.
If the Saudis are basically betting against the future of oil, it would probably be shrewd for ordinary investors to follow the lead and assess the vulnerability of their own portfolios. “Look at the businesses that might have some climate risk embedded in them,” Weatherley-White advises. That includes more than just energy firms. Insurers, for instance, might be exposed to rising claims caused by higher sea levels and more violent weather caused by climate change. Transportation companies might have to alter routes and incur extra costs to avoid low-lying or stormy areas. And agriculture may shift further north, as once-frigid areas warm, becoming more suitable for crops. Who knows, even the Saudis might get into farming.
24 Comments on "The Saudis may know something about oil the rest of us don’t"
Plantagenet on Mon, 2nd May 2016 8:28 pm
The Paris Accords (COP21) contain no restrictions on oil use or on the emissions of CO2. The accord simply rules out temperature increases of more than 2°C. Each country then proposed its own energy plan, which when added together will heat the earth’s climate up by as much as 5°C. —-and thats assuming all the countries follow their own plans and don’t emit even more carbon they say they will.
makati1 on Mon, 2nd May 2016 9:01 pm
They know that their wells are going dry and soon. That explains the panic there.
Boat on Mon, 2nd May 2016 9:16 pm
It would be interesting to know if Saudi market share goes with the deal.
Northwest Resident on Mon, 2nd May 2016 9:39 pm
This is a multiple choice test question. Select the correct answer:
The Saudis:
A) Are making a modest effort to diversify and become less dependent on oil, which would be smart.
B) Could be sitting on considerably less oil than the public thinks, and looking to sell while the rest of the world thinks the emperor is still wearing clothes.
C) May be running short of cash due to expensive wars with bordering states and the costly lifestyles of its royals (combined with the too-low price of oil), and looking to bolster its reserves, without explicitly saying so.
D) See the writing on the wall and realize that the good times are over, so they’re looking to make a quick few hundred billion off the many remaining suckers in the world before their gig in the desert blows sky high.
E) All of the above, excluding A
potterpaul on Mon, 2nd May 2016 9:48 pm
NW Res,
I’ll take E, all of the above, except A.
Truth Has A Liberal Bias on Mon, 2nd May 2016 11:01 pm
Saudi oil production will soon begin to decline and the cover story will be ‘that’s because we want to produce less not because we can’t produce more. You see this declining production is not thrust upon us, it is part of our plan.’ KSA is laying the ground work for the cover story so they can act like and be perceived as being in control for as long as they can after they have lost control. This is just the preamble to make their cover story more plausible to their citizenry. That’s what they think anyway. Anybody with 1/2 a brain can see they’re full of shit.
GregT on Mon, 2nd May 2016 11:56 pm
“This is a multiple choice test question. Select the correct answer:”
I’m sure that Boat’s still stuck on the above.
Northwest Resident on Tue, 3rd May 2016 1:19 am
Oil “drillers must borrow or go out of business while lenders hold their noses and lend! The alternative is an output crash; we are caught between a looming crash and conditions that are pregnant with crash possibilities. Credit access becomes a matter of desperate necessity with every borrowed dollar lodged against the lenders’ deteriorating balance sheets. At the twilight of the petroleum age, drillers survive by cannibalizing their bankers who in turn are becoming the global economic link under the greatest strain.”
Yeah, Saudi Arabian royals are feeling the heat and every action they take and every public announcement they make can be understood to be in full consideration of the consequences they (and we all) are facing, “without explicitly saying so”.
http://www.economic-undertow.com/
rockman on Tue, 3rd May 2016 6:15 am
“The Saudis might simply be making a modest effort to diversify and become less dependent on oil”. And once more a touch with reality: the KSA owning 95% of the largest oil company on the planet from which it will still receive the great majority of the country’s operating budget is NOT DIVERSIFYING from fossil fuels. Just stating a goal doesn’t change the unchangeable dynamics.
Davy on Tue, 3rd May 2016 6:47 am
Exactly NR and we are completely unprepared for a fuel shortage at all levels and globally. We are blinded by the so called oil glut and deluded into thinking global trade will continue. All of this can freeze up and stop. In 08 it almost did and what did we learn from that? Nothing, because most of us forgot about that time. It is like people that have near death experiences and forget about it as time goes on but then drift into the same stupidity that almost killed them.
Kenz300 on Tue, 3rd May 2016 7:56 am
All oil producers and fossil fuel companies need to develop a transition plan to safer, cleaner and cheaper alternative energy sources like wind and solar…….
The oil companies and the auto companies need to get their collective heads out of the sand and realize that the world is changing with or without them. Climate Change is real….. it will impact all of us…
It is time to move away from fossil fuels and embrace alternative energy sources like wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste. They need to change their business models and move from being OIL companies to ENERGY companies. The auto industry needs to move from just building compliance vehicles to embracing electric vehicles and start putting development and advertising behind them..
The world is moving to embrace alternative energy sources…….. the fossil fuel companies can transform themselves into “energy” companies or they can die a slow death. As Climate Change impacts more people there will be a bigger backlash against fossil fuels.
Kenz300 on Tue, 3rd May 2016 7:57 am
How many coal companies filed for bankruptcy in the past few years…………..
Fossil fuels are the past…….wind and solar are the future……..
Think land lines vs cell phones………
rockman on Tue, 3rd May 2016 8:14 am
How many coal companies filed for bankruptcy in the past few years…………..
Very few as shown by the fact that global coal consumption was higher in 2013 then during any other year since the coal age began. And in the US, according to the EIA:
•In 2014, U.S. coal production marked an increase of 1.5% year over year to surpass 1.0 billion short tons, reversing a trend shown in 2013, when domestic coal production fell below one billion short tons for the first time since 1993.
•Coal production in the total Western region increased in 2014 by 12.6 million short tons to 542.8 million short tons, after declining by 13.0 million shorts tons in 2013.
So even in the land of the ‘coal haters’ the industry isn’t exactly floundering. LOL
PracticalMaina on Tue, 3rd May 2016 8:25 am
Peabody is under chapter 11, has laid off many workers recently, and will eventually fuck over the taxpayers with mine clean up costs.
joe on Tue, 3rd May 2016 9:51 am
Standard Oil of Californias transformation into Aramco was mainly because of the huge profits being taken by oil in general and politics as a secondary excuse. The Yom Kippur War forced the hand of the Saudis to act, since in a fair fight and sneek attack the Arabs would have rid themselves of the Jews and at least settled the issue. America made its choice I think because if they had not helped Israel, Russia would have, and Jewish support for communism would have been secured forever. Its one of histories pyrrhic victories. From that day America would be fighting all of Israels enemies forever.
Back to oil. Since oil was nationalised to ensure profits, it has to be losses which is prompting them to sell. They know just as well as anyone that oil use will have to be limited, if only to ensure that Mecca does not become uninhabitable due to Climate Change. Oil itself as a commodity cannot undergo unlimited growth forever, that idea would be stupid. It may be possible to frack at $50 but fracking itself has a demand limit, theres still lots of conventional out there. I guess society faces a huge decision in relation to fracking, not unlike having a serious drug problem, banning or limiting such a profitable business model is not unlike the choice the British faced in relation to the opium trade it founded. Britian decided sadly to keep it going until it no longer served their interests and when China stood up to them. Humans being what they are, I believe fracking is here to stay, and oil is going to be less profitable.
rockman on Tue, 3rd May 2016 10:47 am
Practical – Yes…that’s one company. But the conversation is about the entire coal industry…not just some companies. The same as saying there’s no future in alternative energy because some of those companies (especially solar) have floundered.
That doesn’t change the data:
•In 2014, U.S. coal production marked an increase of 1.5% year over year to surpass 1.0 billion short tons, reversing a trend shown in 2013, when domestic coal production fell below one billion short tons for the first time since 1993.
•Coal production in the total Western region increased in 2014 by 12.6 million short tons to 542.8 million short tons, after declining by 13.0 million shorts tons in 2013.
PracticalMaina on Tue, 3rd May 2016 11:09 am
It isn’t just the number one in the country though, I believe the top 2 in the nation are both under chapter 11. I would also venture a guess that 2015 saw production decrease, and 2016 is setting up to see the same with layoffs and a commodities recession.
shortonoil on Tue, 3rd May 2016 11:41 am
“The Saudis may know something about oil the rest of us don’t”
The Saudis fully understand that oil is no longer capable of powering enough economic activity to generate its own demand. Of course the House of Saudi is interested in one thing, and one thing only. The preeminence of the House of Saudi for as long as possible. Their decisions, and actions are completely dominated by that intent. They will dispose of anyone, or anything to ensure that ultimate goal. There is no doubt that climate change is not even on their list of priorities.
http://www.thehillsgroup.org/
GregT on Tue, 3rd May 2016 12:19 pm
“The Saudis may know something about oil the rest of us don’t”
Of course they do. It can be traded for things like 14K gold iPhones and toilets, and silver plated Mercedes Benzes. Not to mention other fun toys like stockpiles of weapons of mass destruction, and McDonnell Douglas F-15E Strike Eagles to quickly deliver them to other people.
There aren’t too many families these days that can afford to own their own private air forces. So I’m sure that the Saudis know a little bit more about oil that the rest of us do.
rockman on Tue, 3rd May 2016 12:22 pm
Practical – And as I said…just some companies. Do you not believe the recent growth in US coal consumption as reported by the federal govt? the feds aren’t know to be friends to the coal industry. Except, of course, to all the companies producing record amounts of coal from those western federal lands.
No matter how many coal companies might go under it doesn’t change the FACT that King Coal in the US is far from dead. LOL
PracticalMaina on Tue, 3rd May 2016 12:29 pm
Rockman I believe it was up in 2014, I just see head winds in the near future-layoffs early 2016 should decrease production this year. I know that the coal industry has a long future, but I feel the days of record production may very well be behind us. Both Appalachia and Wyoming coal bizz are having a very tough time right now. It will be interesting to see the next presidents policy on coal off federal land. Hopefully they at least charged over 1$ a ton which Obama has sold at.
marmico on Tue, 3rd May 2016 12:44 pm
U.S. coal production declined by ~10% in 2015.
https://www.eia.gov/coal/production/quarterly/pdf/t1p01p1.pdf
jjhman on Tue, 3rd May 2016 8:38 pm
What we need today is one of those satellite and geographic analyses of Ghawar that we used to get periodically on The Oil Drum.
gwb on Wed, 4th May 2016 2:15 pm
I wonder if the Saudis would ever agree to an independent third-party audit of their oil reserves; all the world has had so far is their word on it. The late Matt Simmons hammered away at that for years. Investors in Aramco stock might insist on an audit before before buying.