Saudi Aramco made headlines last week when it dethroned Apple as the most valuable company in the world, hitting a market cap of $2.43 trillion as of last Wednesday. How did this happen in the era of Big Tech and the pariah oil industry? The answer to that is easy enough. Oil prices have been on a strong, almost uninterrupted rise since Russia’s invasion of Ukraine and the Saudis, who have substantial spare capacity and plans to boost it further, had done pretty much nothing to rein them in.
That’s the most obvious part of the answer. The other part is that demand for oil—and for gas—is also rising. It would have to be, to keep prices so high. Even a recent prediction by the International Energy Agency that the world would be able to weather the effect of the loss of Russian oil barrels did nothing to push prices lower: both Brent and WTI were trading above $113 per barrel at the time of writing.
As a result of the gap between supply and demand, Big Oil has been posting massive profits. Aramco, while not one of the supermajors, is in a sense the ultimate oil major and booked profits of $40 billion for the first quarter on the back of higher oil prices and strong demand. That was an 82-percent increase on the year, in line with what the private Big Oil majors have been reporting.
It appears that the tables have turned, and while investors are cooling off towards Big Tech amid continued inflation fears, they are warming to the previously considered pariah industry of oil and gas production. Oil and gas may be dirty, but investors are making money from their holdings in these companies.
The S&P Energy Index has gained 45 percent since the start of the year, while the wider S&P 500 index has shed 14 percent, Bloomberg reported last week. Investors are flocking to oil and gas because they provide a natural defense against inflation, especially energy inflation, which is a huge part of the broader inflation landscape right now. It really is a no-brainer.
Related: China’s Oil Demand May Rebound If Shanghai Reopens In June
In the Big Oil world, however, Aramco is a special case. Only a small portion of the company is listed and available to investors. The majority shareholder remains the Saudi government, and it is Aramco’s first priority, as the Wall Street Journal’s Rachelle Toplensky noted in a recent report on the company.
This, Toplensky argued, made Aramco a second-class stock, unlike, say, Apple. Because of the majority ownership of the Saudi government, Aramco may make decisions that ultimately end up hurting it, such as its current plans to increase capital expenditure when hardly anyone in the industry is doing it. Keeping prices higher for longer could prompt a switch to alternatives that would hurt long-term demand, Toplensky also said, among other points.
On the other hand, the fact that Aramco is the holder of the world’s largest spare production capacity of over 1 million bpd and working to boost that, might be an appealing fact for investors at a time when Big Oil is being hounded by shareholders and, in the case of Shell, courts, to commit to a reduction in their oil production going forward.
The fact that the Saudi company’s price rose in tune with its performance in a higher-oil price environment is quite a clear indication that not all investors are averse to the risks inherent in investing in a predominantly state-owned company. In fact, it is yet another indication that investing in oil is once again very much in fashion—despite the ESG push, despite banks turning their backs on the oil industry, and despite the climate change narrative that has made the oil and gas industry its biggest target.
By Irina Slav for Oilprice.com
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The first is that oil and gas will continue to drive the global economy throughout the 21st century and probably far beyond.
The second is that the surge in oil prices could be expected to continue for the next ten years underpinned by a global oil market in its most bullish states since 2014 and a global oil demand that is now in a super-cycle phase of accelerated demand growth that could take Brent crude oil price to $120 in the next few years. High oil prices were the main reason Saudi Aramco has become the most valuable company in the world.
The third fact is that the global oil industry is the most profitable industry in the world. That is why investors looking for a high return on their investments will always flock to the global oil industry despite incessant pressure on it to divest its oil and gas assets.
The fourth fact is that the power structure of global oil markets is already undergoing a major transformation exemplified by the rising power of the National Oil Companies (NOCs) such as Saudi Aramco and the declining influence and power of IOCs. A major reason for that transformation is resurgent resource nationalism. Whilst top IOCs such as Total, BP, Shell, Chevron, ENI, ConocoPhillips, ExxonMobil, Equinore and Repsol have reserve estimated to last from 8.0-10.5 years, the NOCs of countries like Saudi Arabia, Iraq, UAE, Venezuela, Russia and Kuwait to name but a few have access to proven reserves which could last from 66-91 years at the current oil production levels. Shell for instance expects to have produced 75% of its current proven oil and gas reserves by 2030, and only around 3% after 2040.
The fifth fact is that the cost of production of a barrel of oil for an NOC like Aramco is a fraction of the production costs of IOCs operating in Alaska, the Gulf of Mexico or North Sea.
The sixth fact is that the last three barrels of oil produced in the world will most probably come from three regions of the world: the Arab Gulf, Venezuela’s Orinoco Belt and Russia’s Arctic.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London