The announcement that the state-run Saudi Aramco oil company might be partially privatized goes back to the Rockefeller roots of both the oil industry and modern Saudi Arabia. It also makes it an interesting time to trade crude oil.
By Vikram Rangala
Friday, January 8, 2016
If Saudi Aramco is partially privatized, it could, as many analysts are saying, create the world’s largest public company. With a potential market cap of over a trillion, it would dwarf Apple’s $534 billion or Exxon’s $315 billion. Saudi Aramco, already the world’s largest company, is currently owned by the kingdom. But it used to be owned by American shareholders.
Partial privatization would in a way be a return to 1933, when Standard Oil of California secured the oil rights to the Arabian peninsula from a then-relatively poor House of Saud. One of the Seven Sisters oil companies formed after the breakup of Standard Oil, SoCal (later Chevron) secured the kind of power over Arabia that only a few companies have known, like the British East India Company or United Fruit Company in the so-called “banana” republics.
Standard Oil is the parent or grandparent of Chevron, Exxon, and much of the US oil industry. How big and rich were Standard and its founder in the early 20th century? John D. Rockefeller, Sr. usually tops lists of the richest people of all time, with the only ones above him being rulers like Caesar and Genghis Khan. Bill Gates and Carlos Slim don’t come close.
Standard Oil was broken up because it was more powerful than countries. The pieces still continued to exercise power over the dictators, kings, and emirs of a number of petro-states. Four of those—SoCal (Chevron) and the predecessors of Texaco, Exxon, and Mobil—owned Saudi Aramco and their shareholders collectively controlled most of the Arabian economy. Oh, and they also owned the new Iraq Oil Company.
So it’s no wonder that in 1950, King Abdulaziz threatened to nationalize the company. Instead he got 50% of profits, but no ownership, and the US helped him consolidate his rule. A year later, Iran’s democratically-elected prime minister, Mohammed Mosaddegh nationalized the Anglo-Iranian oil company. Two years later, the CIA (with the pre-James Bond MI6) overthrew him and installed the Shah.
It was only after the OPEC oil embargo in 1973 that the Saudi government secured 25% ownership (less than Texaco or Chevron), then 60%, and finally 100% ownership of Saudi Aramco in 1980. 35 years later, with electric cars and peak oil and cheap solar on the horizon, the world’s largest company wants to go a little bit public again. Or it may be more accurate to say, public for the first time.
The IPO would have a historical resonance unlike that of previous giant IPOs like Facebook or even Alibaba. Investors would have a chance to own what once was owned mostly by the Rockefellers and their friends and more recently by the Saudi royal family. When a previous bit of the Aramco conglomerate went public, the Saudi public clamored to own a piece of it. It’s hard to underestimate how much national and pan-Arab pride will drive people to buy a piece of any new IPO.
Whether it would actually have the trillion dollar valuation some are predicting, or something smaller, depends on too many factors to calculate. For one, the Saudis would have to publicly reveal how much oil is really under the deserts, which they have never done. For another, it’s main product is massively oversupplied and cheaply priced (unlike iPhones).
With oil around $35 a barrel, cost of production becomes a huge factor in profitability and this may be Aramco’s secret advantage. Saudi oil is one of the cheapest to get out of the ground, making its sour crude oil competitive with easier-to-refine light sweet crude. Where Saudi cost of production is barely $15 a barrel, US costs are close to $70, which is why the US subsidizes its oil industry and why the Saudis can afford to drive down prices and squeeze out North American competitors.
Whether the IPO happens and however big it is, crude oil will continue to have volatile short-term movements, both up and down. Nadex crude oil binary options are an alternative to crude oil futures or energy ETFs, offering limited risk and an entry cost of less than $100 per contract. If you enjoy watching the historical events happening in the oil industry now, but also want to trade the market you’re learning about, binary options are an affordable, limited risk way to do so.
This information has been prepared by Nadex, a trading name of North American Derivatives Exchange, Inc., prepared by independent third parties contracted by Nadex or reproduced form third party news agencies. In addition to the disclaimer below, the material on this page does not contain an offer of, or solicitation for, a transaction in any financial instrument. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.