By John Richardson
SAUDI Arabia’s widely-reported interest in selling a stake in Saudi Aramco is, as the Financial Times quite rightly pointed out last week, may well be the result of oil prices:
Any move to proceed with a sell-off could indicate that Saudi Arabia is preparing for a period of low crude oil prices that could last for years, requiring new sources of income and investment.
Selling only a small stake in Aramco, which, of course has vast crude reserves and very low production costs, would still raise many billions of dollars even in a very low oil price environment.
Crucially, also, it would held Saudi Arabia raise the money it needs to diversify its economy away from an overdependence on hydrocarbons as hydrocarbons very gradually go out of fashion. It would make sense to cash-in internationally on the Aramco assets before the impact of fuel efficiency and renewables eats away as its stock market value.
The apparent interest in divesting only a small and certainly far from a controlling stake the oil, gas and petrochemicals major also tells us:
- If Saudi Arabia of all countries believes in the possibility of low crude prices for several more years, then the consensus view to the contrary needs to shift.
- Too many people are still clinging on to the view that supply and demand will soon balance out, and that by the end of this year, crude will be back above $50 a barrel again, and then start to return to the region of $70-80 a barrel, if not the $100 a barrel we often saw in 2009-2014.
For me, still, the fundamental shift that too many people still haven’t got their heads around China. It will increasingly do “more with less” as it deals with its environmental crisis, which in itself would have guaranteed lower growth in its demand for oil.
But most importantly of oil, China’s economy has fallen off a stimulus cliff. The economic growth rates we saw during the 2008-2013 were an unsustainable historical one-off resulting from excessive debt. And now that this stimulus is withdrawn they are of course will never be repeated.
Let’s extend this to the rest of the world. People took those 2008-2013 growth rates and assumed that China was becoming a middle class country, by Western standards, virtually overnight. So they built oil, petrochemicals and finished-goods manufacturing capacity to serve these exceptional growth rates that they wrongly thought would be sustained. As the slide above illustrates, this is why oil, copper, coal, iron and cotton prices have collapsed.