The Saudi government sold off a small 1.5% share of the largest oil company in the world (Aramco) about a month ago. Aramco has huge reserves and it has proven it can produce that oil at a low cost. This oil doesn’t require risky deep sea platforms, fracking, or traveling to the Arctic circle to drill. In spite of that, articles that came before the IPO were mostly negative, like this piece from the Sydney Morning Herald, which pointed out that it wouldn’t be able to raise significant amounts of money because foreigners are hesitant to buy for the following reasons:
- Oil companies are out of favor as people around the world demand we keep much of the oil in the ground. This is likely to have the following effects over the next few years:
- People are taking action to reduce their consumption of oil and gas, converting to electric vehicles and hybrids, electrifying their homes, and buying home solar.
- People are pressuring governments to force utilities to use more renewable energy and less fossil fuel.
- People are deciding to divest from fossil fuels both for moral reasons and because they see a bleak future for the industry. They also pressure college endowment and pension funds to do the same.
- The costs of renewable energy are now competitive with new fossil fuel plants in most places in the world and are becoming cheaper than existing plants in some locations, accelerating to move to renewable power without any government or public pressure.
- The company is run by the royal family for its own objectives, and investors are afraid that its objectives may not be the same as those of outside investors.
- With another undeclared war starting this week, the risk of attacks on either the Saudi oil fields, the Aramco refinery, and/or shipping oil through the Strait of Hormuz have all gone up considerably.
Those looking on the bright side, that this will push up the price of oil through supply disturbances and make more money for the company, are looking in the rear-view mirror. This will work in the short term and has worked in the past, as the world has had few good alternatives to oil and still doesn’t have a good short-term solution when prices spike. But any spike in oil prices will greatly accelerate the public’s acceptance of electric vehicles and hybrid cars, and to a lesser extent accelerate the greening of the electric grid. The market for natural gas is less global (transportation costs are more significant) and Aramco has just started to sell liquefied natural gas in April 2019, so I don’t expect the price of natural gas to be nearly as affected by Middle East wars.
Even though the Saudis technically took the company public, it is public lite. They are not listed on a major exchange, just the tiny Tadawul exchange, and word is that most of the investors bought under pressure from the royal family. As the whole world learned from the Khashoggi murder, going against the royal family’s wishes carries gruesome consequences.
The Saudi government had a chance to do the right thing. If they would have sold this huge asset to the public 5 or 10 years ago when few people knew about climate change, they could have taken the proceeds and either invested in renewable energy or just invested in promising companies in any industry. This would have benefited the Saudis (since they wouldn’t be stuck with an oil company that is headed for many years of painful cutbacks). It also would have benefited the world, because it would have satisfied investor demand for oil stocks and caused other oil companies to reduce drilling due to less capital being available.
What can they do now? They can cut back their lavish spending and use their massive resources to find innovative solutions to the world’s problems. Will they do that? I try to be an optimist, but I have my doubts.
This is not investment advice (even though it wouldn’t be easy to invest in or short Aramco, since few people have access to shares on that exchange). These are just my thoughts on the situation.
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