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Why the IPO of Saudi Aramco may mark the beginning of the end for big oil

It´s time for big numbers. Finally, Saudi Aramco, Saudi Arabia’s state-owned oil company decided to go public. The royal family initially targeted a valuation of 2 trillion US-Dollars. Sounds big. But we are talking about the oil company with the second biggest reserves on the planet (after Venezuela’s PDVSA) and the lowest costs of extraction/production. Sure, investors must be lining up to get piece of the most profitable company of the world with more than 355 billion Dollars in revenue in 2018. Turns out, not so.

After the first meetings with investors, analysts expect a valuation more in the tune of 1,3 trillion, 35 percent lower than the initial target. And instead of going for a big fanfare in London or New York, Saudi Aramco will start trading the shares only in Riyadh – limiting the danger of a debut going bad.

I am not an oil expert, but I have some ideas why Saudi Aramco is having a hard time selling their gold mine:

  • Investors might shy away from being drawn into the constant crisis and wars that cast a shadow over the Middle East for years to come
  • Large institutions might have problems with the governance of Saudi Aramco as well as the fact that it is financing one of the most oppressing regimes in the world with a miserable human rights record (here) – all that in a time when ESG-standards for investors are rising.
  • Strategic investors might be anxious that Saudi Arabia might have to extract more money from Saudi Aramco in the future to invest in the transformation of a country and create jobs with more than 50 percent of the population being younger than 30 years – most of them without any valuable education (here).
  • Long term investors see the transportation sector – the biggest source of demand for oil – moving towards electrification

I do think, the last point to be the most significant. It´s not as obvious as the thread of an outright war between the Saudis and Iran. But the silent revolution is here. The price of batteries keeps on falling at double digit rates year after year:


And with storage of electric energy becoming cheaper every year, carbon-less energy with renewables and storage systems (not only for cars) become viable in more and more parts of the world as full costs come close the natural gas and coal power plants in more and more places (here).

“Peak oil” for decades was about peak supply as geologists were frightened that the world would run out of oil. Today, peak oil is all about demand. Sure, the growing economies of Asia and Africa with billions of consumers will increase demand for the time being. But even Saudi Aramco’s IPO prospect flags the risk of peak oil demand – and uses the forecast from IHS Markit that puts it soon as 2035 – that´s only 15 years away (here). Maybe we will look at the IPO then and see that this was the moment indicating the start of the decline of big oil.