Oil's sale of the century flops

From The Sydney Morning Herald, hat-tip to ClimateCrocks:

The sale of the century has ended in farce. The modest sums raised from the “privatisation” of Saudi Aramco will barely cover the kingdom’s fiscal deficit for six months. The $US25 billion ($37 billion) haul will not make any impact on Prince Mohammed bin Salman’s Vision 2030, his theatrical plan to break oil addiction and diversify into everything from car plants to weapons production. Nor will it go far to launch NEOM, his robotic half-trillion dollar white elephant on the Red Sea.

At least there was doubt before about the predicament facing the House of Saud. Now there can be none. The regime resorted to tricks just to sell just 1.5 per cent of the shares on the local Tadawul exchange: a “Ritz Carlton” shake-down of princes; doubling the bank leverage limit for Saudi retail customers so that they can buy the stock; and calling in diplomatic chips from the Gulf alliance.

Other foreigners will not touch Aramco, even after the prestige valuation of $US2 trillion was trimmed to $US1.6 trillion – $US1.7 trillion. Theoretical oil reserves are not worth much these days as the climate backlash gathers force, and Aramco carries a special discount as the opaque political instrument of a headstrong master.

Riyadh needs every dollar of current revenue to pay for its cradle-to-grave welfare system, to cover the world’s fourth biggest military budget and the war in Yemen, as well as bankrolling Egypt. This is an extraordinary cost edifice for a middle-income country like Saudi Arabia, with a per capita income similar to Greece.

The regime requires a crude price of $US85 a barrel to balance the books (IMF data) even without losing the dividend stream from Aramco. It has not been that high for five years. Brent is at $US62.

Standard and Poor’s says the fiscal deficit will be 8.1 per cent of GDP this year and stay near these levels into the early 2020s. While the Saudis are no longer running down reserves to cover the shortfall, they are racking up debt instead at a brisk pace. “It’s a fact that Saudi Arabia is gradually running out of money,” said former CIA chief General David Petraeus last week.

To buy shares in a state monopoly that also serves as the regime’s fiscal lifeline is to court fate. If push came to shove, would Prince Mohammed resist siphoning off Aramco revenues through taxes and leave nothing for dividends?

Aramco’s flop is a sobering moment for Opec. The historical window may be closing on the cartel even sooner than they feared. These countries built a spending structure on assumptions of $US100 oil and an eternal Chinese boom. But five years after the 2014 crash, there is no sustained recovery in sight.

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