Pop Quiz: What is the most profitable company in the world? Apple? Google?
No. These two are not even close. The answer is: Aramco, the Saudi Arabian state oil company. In 2018, Saudi Aramco achieved a profit of $ 111 billion. The second most profitable company, Apple, earned $ 60 billion this year.
On November 3, Aramco officially announced its plan to go public for the first time in its 86-year history. And on November 17, the oil giant announced that the company could have a value of $ 1.7 trillion. Energy historian Ellen R. Wald has joined Today, Explained to explain why Aramco's IPO is such a big deal.
As the most profitable company in the world, the company's IPO will set important records. And since it's the largest oil company in the world, it's likely that many everyday items ̵
"In the United States," Wald says, "Aramco has the largest refinery in the country." It also owns Shell gas stations in the southeastern United States. So many Americans may buy oil – or gasoline – made by Aramco, and they do not even know it. "
But some say the timing of Aramco's IPO could not be worse, one reason being that some people believe that the world has reached oil peak demand or will soon reach it." Another, Forest explains, is the "PR "Nightmare" created by Saudi Arabia with the assassination of Saudi dissident Jamal Khashoggi:
[The killing of Jamal Khashoggi] Investors and financiers in Saudi Arabia in general definitely bothered.The idea is that the money from this stock sale of the Saudi Arabian Monarchy, which has done many terrible things and continues to do so, both in terms of human rights … And so there are a lot of people who look at that and say, "No, I do not touch that, because I Do not want to help these people. "
To Understand the Importance of Aramco In an upcoming IPO, you need to know the history of the company, if you want to learn all about it Here's an easily edited transcript of Wald's conversation with Today, Explained host Sean Rameswaram.
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What exactly makes Saudi Aramco the most profitable company in the world from an extremely profitable oil company?
The key year here is 1972. The US could no longer pump oil to meet rising demand. Instead of being able to quench the US big oil thirst, they had to import oil from elsewhere. And one of the big sources for that was Saudi Arabia. And Saudi Arabia pumped and pumped more to meet this demand. All these gas-guzzling cars met this demand.
And the Saudis took note of that. The then oil minister, his name was Zaki Yamani, he and other oil producing countries in the Middle East were already in the today known as OPEC cartel organization united [the Organization of the Petroleum Exporting Countries].
And they came together and basically said, "We know you are in a difficult position, and we want to raise the price of oil because the price of oil is simply too low." And they negotiated with the representatives of the big oil companies, including the American, and they could not reach an agreement. And they said, "Do you know what? We can not reach an agreement. [So] We will increase the price of oil unilaterally.
They are doing this together with the 1973 Arab-Israeli War and an oil embargo. And the effect was very immediate. The price of oil skyrocketed, actually causing a recession in the United States.
But it also helped oil companies earn much more money, including Aramco and the Saudis. And what did the Saudis do with all the money? Well, they put it in their own palaces and their own country. But they also used it to buy the company from the Americans. And in 1988, the Saudis finally renamed it Saudi Aramco.
How has [the company] changed from the 1970s to the present?
In the 1970s, Aramco was basically an oil pumping machine. They pumped oil out of the ground, and most of it was sold as crude oil to the four American companies that owned it. Today it is more akin to an international oil company such as BP or Exxon or Royal Dutch Shell or Total, which produces oil, has crude oil facilities, but also a number of so-called downstream plants that are refineries petrochemical companies. And they are in Saudi Arabia, but also around the world.
How does this company relate to the Saudi Arabian monarchy?
It's much harder now than it used to. The first Saudi CEO at the time, a man named Ali al-Naimi, negotiated with the king to separate Aramco from the Saudi government. Yes, they have a board of directors appointed by the government to approve their plans. In essence, however, they decide how much money they want to spend on investment, what kind of projects they want to do, and what their strategy is. And that is unique among the national oil companies.
Aramco is not a national oil company, but it is not a private oil company either. It lies somewhere in between and has a high degree of independence. That changes, however. And we have seen that this change has occurred since the rise of King Salman [bin Abdulaziz Al Saud] to the throne and also of his son, the young crown prince Mohammed bin Salman, and they are playing a much more active role in the wider enterprise strategy.
They do not try to do it day after day, but they say things like, "We want you to buy this petrochemical company," or "We want to go public, and that's the way it will be." And for Aramco it was a different story than so much independence. And it created some tensions.
It sounds as if you say it's difficult to separate the Saudi monarchy from Aramco.
It's hard to separate them from Aramco's big decisions. Aramco is not nearly as close to the government as any other national oil company. However, this is the real problem with this IPO. When a company makes an initial public offering, money usually goes to the company to expand and do new things. This is not the case here.
The monarchy wants to monetize Aramco stock and put the money it earns from stock selling into things the company does not own. They want to invest it in their sovereign wealth funds, which invests both in Saudi Arabian companies to promote economic development and diversification, as well as in international companies around the world. And use it to invest in technology companies and in all sorts of crazy companies they've invested in, like Magic Leap Virtual Reality or a technology company or Uber or Tesla. Sean Rameswaram This is supposed to be one of the richest countries in the world, right? How do you need the money for a "sovereign wealth fund" that finances startups?
Saudi Arabia has essentially a one-trick economy that sells oil. And they did that pretty well. But that's not always good for the general economy, but it does not have to keep everyone busy. It does not promote the development of small businesses. It does not promote a vibrant economy.
What if oil prices fill up for a long time and stay low? What happens when the oil runs out? Eventually, the oil runs out. That is why the Saudi government has put together this plan to diversify the economy so that it no longer depends on just one commodity.
Do we have any idea how this IPO will be in December?
One of the interesting things is that this company is making a profit of $ 111 billion. That's what it has benefited in 2018. I think Apple is the next most profitable company, [and] made only 60 billion dollars in 2018.
And people will not just throw this aside, especially in today's market. So many of the IPOs that are pending are companies that have not even made a profit, never made a profit, and may never make a profit. When an IPO goes to a company that is immensely profitable, it is very difficult to turn away.
If the IPO is not going very well – and there is a clear likelihood that it may not be doing very well – it may affect the revenues of other oil companies. I would say that if things are not going well, it reflects more the Saudi government than Aramco itself.
If the IPO is not going very well and the Saudi monarchy looks politically bad, this could be very far-reaching, especially for the United States, which has close diplomatic relations with Saudi Arabia. So it's something people need to look out for. In a sense, this could fundamentally change the balance of power in the Middle East.