Pop Quiz: Which is the most profitable company in the world? Apple? Google?
No. These two don't even come close. The answer is Saudi Arabia's state oil company Aramco. In 2018, Saudi Aramco earned $ 111 billion in profits. The second most profitable company, Apple, earned $ 60 billion that year.
On November 3, Aramco officially announced its plan to go public for the first time in the company's 86 years of history. And on November 17, the oil giant announced that the company could be valued at $ 1.7 trillion. Energy historian Ellen R. Wald entered Today, Explained to explain why Aramco's initial public offering (IPO) is so important.
As the most profitable company in the world, she says, the company's IPO will set big records. And because it's the largest oil company in the world, it's likely that a lot of everyday things we use – from plastic to the energy that powers our cars – touch this company.
“In the United States,” says Wald as an example, “Aramco owns the largest refinery in the entire country. It also has Shell gas stations in the southeastern United States. Many Americans may be buying oil – or gasoline – made by Aramco, and they don't even know it. "
But some say the timing for Aramco's IPO could not be worse. One reason for this: some people think that The world has reached or will soon reach the peak of oil demand. Another, Wald explains, is the "public relations nightmare" that Saudi Arabia created with the death of Saudi dissident journalist Jamal Khashoggi:
[The killing of Jamal Khashoggi] definitely soured Saudi Arabian investors and financiers in general. The idea is that the money from this stock sale will support the Saudi monarchy that has done and continues to do many horrible things, both in terms of human rights. … And there are a lot of people out there who look at it and say, "No, I'm not messing with it because I don't want to help these people."
To understand the meaning of Aramco's upcoming IPO, you need to know the company's history. If you want to know everything, here is a slightly edited transcript of Wald's conversation with Today, Explained host Sean Rameswaram.
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What exactly drives Saudi Aramco from an extremely profitable oil company to the most profitable company in the world?
The really key year here is 1972. The United States could no longer pump more oil to meet growing demand. So instead of being able to accommodate America's vast thirst for oil at the time, they had to import oil from elsewhere. And one of the great sources of this was Saudi Arabia. And Saudi Arabia was pumping more and more to meet this demand. All those gasoline cars were meeting that demand.
And the Saudis took note of that. The oil minister of the time, his name was Zaki Yamani, he and other Middle Eastern oil producing countries were already united in the cartel organization we now know as OPEC. [the Organization of the Petroleum Exporting Countries].
And they came together and said, essentially, "We know you're in a tough position and we want to raise the price of oil because the price of oil is too low." And they negotiated with representatives of major oil companies, including the US, and could not reach an agreement. And they said, “You know what? We could not reach an agreement. [So] we will unilaterally raise the price of oil. "
They do this in conjunction with the 1973 Arab-Israeli War, along with an oil embargo. And the effect was very immediate. The price of oil has skyrocketed and indeed caused a recession in the United States.
But what it also did was help oil companies make a lot more money out of it, including Aramco and the Saudis. And what did the Saudis do with all this money? Well, they put it in their own palaces and in their own country. But they also used it to buy the American company. And then, in 1988, the Saudis finally renamed him Saudi Aramco.
Is as [the company] changed from what it was in the 1970s to now?
In the 1970s, Aramco was basically an oil pumping machine. They pumped oil from the ground and most were sold as crude to the four US companies that owned it. Now it's much more like an international oil company like BP or Exxon or Royal Dutch Shell or Total as they pump oil, they have crude oil assets, but they also have a variety of what we call "assets". downstream, "which are refineries, petrochemical companies. And they have it in Saudi Arabia, but also all over the world.
What is the relationship between this company and the Saudi monarchy now?
It is much harder now than it was. His first Saudi CEO at the time, a man named Ali al-Naimi, he negotiated with the king to keep Aramco separate from the Saudi government. Yes, they have a government-appointed board of directors that kind of approves their plans. But basically, they decide how much money they want to spend on investments, what kind of projects they want and what their strategy is. And this is unique among national oil companies.
Therefore, Aramco is not a national oil company, but neither is it a private company. It is somewhere in the middle and has a high degree of independence. This is changing, however. And we have seen this change happen since the rise of King Salman [bin Abdulaziz Al Saud] to the throne and also to his son, the young crown prince Mohammed bin Salman, and they are taking a much more active role in the broader strategy of the company.
They are not trying to run it day by day, but they are saying things like, "We want you to buy this petrochemical company" or "We want to go public and that's how it will be." very different thing for Aramco to deal with after so much independence. And that created some tension.
It seems that you are saying that it is difficult to separate the Saudi monarchy from Aramco.
It's hard to separate them from Aramco in terms of big decisions. Aramco is not as intertwined with the government as any other national oil company. But that is the real problem with this IPO. Normally, when a company makes an IPO, the money goes to the company to expand, to do new things, but that's not the case here.
The monarchy wants to monetize Aramco's stock and take the money they make from selling the stock and invest it in things that don't involve the company. So they want to put it in their sovereign wealth fund, designed to make investments both in companies in Saudi Arabia to help promote economic development and diversification, but also in international companies around the world. And use it to make investments in tech companies and all kinds of crazy companies they're investing in, like virtual reality Magic Leap or a tech company or Uber or Tesla.
This should be one of the richest countries in the world, right? How do they need the money for some "sovereign wealth fund" that will finance startups?
Saudi Arabia essentially has a one-trick economy, which is selling oil. And they did very well with that. But this is not always very good for the general economy, it does not always employ everyone. Does not promote the development of small businesses. It does not promote a vibrant economy.
What if oil prices fall and remain low for a long time? What if the oil runs out? At some point, the oil will run out. Therefore, the Saudi government has devised this plan that aims to diversify the economy so that they are no longer totally dependent on a single commodity.
Do we have any idea what the IPO will look like in December?
One of the interesting things is that this company profits $ 111 billion. That's what made a profit in 2018. Apple, I think, is the next most profitable company, [and] earned only $ 60 billion in 2018.
And people will not let it go, especially in a market today, when many of the initial public offerings that come up are companies that don't even make a profit and never make a profit and may never make a profit. Therefore, when an IPO comes up for a company that is immensely profitable, it is very difficult to give up.
If the IPO does not go very well – and there is a distinct chance that it does not go very well – this could affect the earnings of other oil companies. Although I would say that if it fails, it reflects the Saudi government more than Aramco himself.
If the IPO is not doing well and politically the Saudi monarchy looks bad, this could be very broad, especially for the United States, which has strong diplomatic ties with Saudi Arabia. So it is something that people definitely need to be aware of; This could in some ways fundamentally alter the balance of power in the Middle East.