Aramco IPO: it sells oil but is its product snake oil?

Aramco — effectively the Saudi Arabia oil industry — is heading for a stock market. It will be the biggest listed company in the world, but will it offer investors a big return?

Article updated: 5 November 2019 12:00pm Author: Michael Baxter

Snake oil wasn’t necessarily a bad thing. It was first used by Chinese labourers who believed that oil from the Chinese water snake was good for aching muscles. But US travelling salesmen took oil from rattle snakes, which wasn’t much good for anything, except for the snake itself, and peddled it as a cure for all.

A few decades later, another type of oil was discovered to have properties that made it rather useful, and the 20th Century’s era of oil dependence was born.

Now Aramco is heading for the market. The market valuation “will be huge,” said Saudi’s Crown Prince Mohammed bin Salmon. He has projected a market cap in-excess of two trillion dollars — roughly twice the size of Apple, which has regained the number one spot in the current list of the world’s biggest listed companies.

Throughout the 20th Century, the lineup of the world’s largest companies was dominated by oil businesses, today it is techs. Maybe, the Aramco float will put an oil company back at the top.

The IPO is planned for next month.

Talk is that a valuation of between $1.2 trillion and $1.5 trillion is more likely than the higher figure slated by Saudi’s ruler in waiting. Indeed, if it falls at the lower end of that spectrum, it won’t be that much bigger than Apple, currently valued at over $1.1 trillion. (At least not much bigger in relative terms, the odd $100 billion seems quite trivial when discussing these companies.)

For investors, it seems the allure may well be dividends. We must await confirmation of details, but yield may be pretty high.

But this all begs the question, why now?

I find it hard to avoid the conclusion that the Saudi Crown Prince foresees a time when oil loses its economic significance. He wants the company listed, bringing in lots of cash for the kingdom, before the markets suss out what he has already realised. That is why I draw an analogy with snake oil. But is such an analogy fair?

There are two reasons to be cynical about the future of oil, and one reason to be optimistic about Saudi oil.

Reason number one is quite important, what is it now? Oh yes, oil poses an existential threat to the future of humanity. Furthermore, some, especially those in the US administration, are in denial. Such is the force of their arguments that even publications such as The Economist cite the claim from the Trump administration that demand for oil will carry on rising right up to 2050. Here is the problem, I believe if that projected rise in oil demand proves right, it will be curtains for modern civilisation. I know that humanity can be pretty stupid, but that stupid, really?

Reason number two:  well let me first explain why reason number two is not understood: linear thinking.  It is in our genes, in the hardwiring of our brain, to expect change to occur at a nice even pace. But for multiple reasons, the energy industry is changing at an exponential pace. The markets haven’t cottoned on to this. Renewables are falling in cost at a rate which make the cynicism  of their critics from five years ago seem downright stupid. Yet still they practice their dark art of cynicism. The cost of energy storage is falling at a rate that, if anything, is even faster. For example, Lithium ion batteries' cost has fallen by around 85 per cent since 2008. Another 85 per cent fall, and lithium ion can provide cost effective energy storage at approaching grid level. As they fall in cost, both renewables and energy storage become cleaner, too. Finally, AI will be used to channel energy generated from renewables when it is windy and sunny into less time sensitive uses — such as storage heaters.

The combination of falling renewable costs and fears over climate change will accelerate the demise of the oil industry.

Is there hope for Aramco?

Oil probably won’t cease to be entirely relevant for a while. Lithium ion batteries will not fall to grid level cost effectiveness for some time. An alternative means of generating energy, as a backup to renewables, will be required. The perfect complement to renewables will be a source of energy with low fixed costs that can be turned up and down. Nuclear is the worst complement to renewables, oil and gas is ideal.

Because Aramco’s oil is so cheap and is easy to extract, it does less environmental damage than other sources of oil.

I suspect that as the oil industry declines, Aramco will be the last man standing — if it sells snake oil, it maybe it is Chinese water snake oil.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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