Saudi Arabia: A Day Late and a Dollar Short?

Warren Buffet once disclosed his main investment strategy, which many people today struggle to fully understand. The Oracle of Omaha says to “buy low, and sell high.” And this has been the continued winning strategy of Buffet’s success.

With oil prices depressed, it wouldn’t seem like an ideal time to be selling oil related investments. And yet, that’s what is happening with the state-owned company Saudi Aramco. The company, which controls the largest amount of proven oil reserves in the world, announced its intention to have an IPO to sell roughly 5% of the company. This is seen as a move to raise cash, in light of depressed oil prices, and possibly part of a strategy to diversify investments into something other than oil.

It would seem like an unfavorable time to have an Aramco IPO. If the value of oil is depressed, naturally the company would be valued as less. It seems like it would have been better to consider this IPO while oil prices were much higher, but then I am sure they didn’t feel the pinch of lower revenue. I suppose hindsight is always 20/20.

Some spectators indicate it may be a symptom of long-term problems Aramco is starting to acknowledge. There is no shortage of news which suggests oil prices might remain low for some time, or at least not return to the $100/barrel level for several years. This is due to fracking technology making several oil reserves feasible, and the decreasing price of alternative fuels too.

I feel there is an irony about the energy situation in which we find ourselves. Once we were desperately concerned that we might run out of oil. I grew up with people talking about “peak oil,” which is a situation where people speculated we would realize a time of maximum oil output/extraction. After this point, it was feared we would be faced with a painful decline in oil usage, as we couldn’t find more oil and the known reserves would continue to dry up. As it turns out, the exact opposite transpired.

The reality is, we became so good at finding and extracting new sources of oil and other fossil fuels, that we flooded the market with supply and kept them cheaper for longer than we thought possible. And we were able to burn so much fossil fuels, that we contributed significantly to changing our climate. To this end, it is not “peak oil” that has come to give us heartburn over uncertainty, but the abundance of oil and what that means for future emissions. Now, scarcity is likely to have less influence over the future price of energy, and it may instead be the cost of regulation that will drive prices up while also driving down demand.

Now let’s look again at Aramco’s decision to sell part of the company. Sure, the price of oil is down, and so too the price of the company. But, the future uncertainty about demand and regulation could make for an even worse situation for Aramco than what it is experiencing now. If Aramco expects oil consumption will be more heavily regulated and taxed going forward into the future, then now might be a great time to start selling off after all.