Oil barrel prices have been stooping to record lows; the Brent futures fell to a low of $33.51 per barrel and the average nationwide price of a gallon of gas is $2.03.
Obviously, as simple economics dictates, the reason why oil prices have plunged to record lows is due to an oversupply of oil far outstripping the global demand for oil. US oil production has doubled, the OPEC cartel, due to their underlying motivation to hold on to their market shares of global oil production, has refrained from cutting production of oil and Russia, despite their economic problems, continues to pour in their share of Oil into the market alongside China. As a result, demand is falling short of supply and has led to a decline in prices of oil.
Saudi Arabia, a country which relies on oil sales for 92.5% of its budget, has been hit particularly hard by this macroeconomic trend. In fact, in 2015, the Saudi Kingdom announced that it faced a deficit of $98 billion and, in order to cover this deficit, tapped into its foreign reserves which, as a result, are down from $728 billion to $640 billion.
In response to this deficit, the kingdom has raised prices on petroleum by 50% to 24 cents (0.90 riyals) for a gallon of petrol. After all, according to Reuters and Saudi-based Jadwa Investment "the Saudi Arabian government spends around $61 billion on energy subsidies annually, almost $11 billion of that on gasoline alone".
Alongside reductions in subsidies, the Saudi government has been considering the privatization of its state-owned oil company, Saudi Arabian Oil Company, better known as Saudi Aramco, as a way to raise funds for the Kingdom.
Saudi Arabian Oil Company
ExxonMobil is the largest privately owned oil company, with a market capital of around $317 billion. However, Saudi Aramco could easily dethrone Exxon for that title.
Saudi Aramco controls about 10% of global oil production on a daily basis, and hoards reserves of 261 billion barrels which is ten times the reserves of Exxon. Given the company's large reserves, the whole of Saudi Aramco could be worth about 20x of Exxon and have a resulting market capital amounting to trillions of dollars. In fact, according to Mohammad al-Sabban, who was a senior adviser to the Saudi oil ministry, has said that Saudi Aramco's value could be more than $10 trillion.
Hence, if the Saudi Arabian government decides to file the company for an Initial Public Offering, Saudi Arabia Oil Company could be the world's first trillion dollar company.
However, before investors and banks around the world jump in excitement to get in the Saudi Aramco action, there are a few finer details that need to be hammered out.
The Fine Details
Before the Saudi kingdom can proceed to proceed with the IPO of Saudi Aramco, the board of directors need to authorize such an action.
Moreover, it is unlikely that the Saudi government will proceed with taking the entirety of Saudi Amarco public as, by doing so, the Saudi kingdom will have to expose a great deal of details of how the company has run which many not be in the Royal family's best interest. Currently, the Saudi Government has revealed very few details about Saudi Aramco and by making the entire company private, how revenues of the company are used in regards to Royal expenses will need to be catalogued as well, a move that I think, the Royal family may shy away from.
Hence, instead of taking the entire company public, the Saudi Government may just take parts of the company public which may have a market capital that is dramatically less than a price tag of a trillion dollars (perhaps somewhere in the $400 billion territory).
From an overall standpoint, it is going to be quite interesting to see how the entire IPO unfolds.
If it does, the move will be a complete reversal of Saudi Arabia's stance on its industries, as the government has usually favored having companies such as Saudi Armaco under the control of the state.
Moreover, this move is also a glimpse into how oil-dependent countries such as Saudi Arabia are coping with record-low oil prices and the beginning "green revolution" in which an increasing emphasis is being placed on finding sources of energy which are not dependent on hydrocarbons.
So, what do you guys think? Let me know in the comments!
Thanks for reading!