The Saudi Aramco IPO and the future of Oil

The Story

Saudi Aramco is the largest oil producer in the world and it’s on the verge of raising anywhere between $20 Billion to $40 Billion from domestic investors. In exchange, they’ll offer 1–2% of the company and if all goes well, Aramco could be valued at close to $2 Trillion dollars.

Woah!!!

Now, these numbers may look outrageous. But we are talking about the most profitable company in the world responsible for about 10% of the global oil production. So it’s not too far fetched an idea. However, that’s where the story ends. There’s honestly not a lot happening here. All we can do now is wait and see if investors respond in kind to the IPO.

So what’s the story here?

Well, instead of talking about the future of Saudi Aramco, maybe it’s worth pondering about the future of oil as a commodity. Maybe talk about the kind of existential things that make you sit back and go — “Hmmmmm???”

Where are we headed with Oil? What’s the end game? What does the future hold?

The obvious and perhaps the most honest answer here is that nobody knows for sure. As of today, there is an active campaign worldwide urging people to move away from fossil fuels. Climate Change is real. Global Warming is slowly eating away at coastlines. People can’t breathe in Delhi. So how can anyone in good conscience continue to use oil unabated? Well, they can’t and many are having second thoughts now. Also, you could bet that as time progresses these doubts will slowly morph into active principles. “Go green” will eventually become a lifestyle choice.

And oil companies aren’t waiting on the sidelines here. Many are actively trying to reduce their dependence on oil (for revenue). Some are looking to diversify operations. Maybe get into making batteries? How about alternative energy — wind, solar, that kind of stuff. Or even better, what if you could do something else entirely. Maybe get into the movie industry? No?

Anyway, there’s a lot of uncertainty here. In fact, when oil companies were asked to make projections about future global demand they had a very diverse set of opinions. Take a look at this graph and see what you can make of it.

Anyway, that’s the demand side of the equation. But what about the supply side? When will we run out of oil? After all, we don’t have an endless supply of fossil fuels, right?

Yes, we don’t… But we probably won’t run out of oil either way.

Okay, hear me out.

Back in the ’50s, there was an overwhelming consensus that the world would start running out of oil during the first decade of the 21st century. However, that did not happen. Instead, we saw the boom of new oil.

When people looked at oil reserves back in the day they were talking about convention oil — oil that’s easily accessible. However, as countries began to invest in technology and extract oil from reservoirs previously thought to be inaccessible, this narrative changed rather quickly. Granted, this was far more expensive than conventional drilling, but it did open a whole new realm of possibilities. In fact, researchers today peg that we’ve only tapped about 5% of all technically recoverable oil. Which means we are not running out of oil anytime soon.

However, one day digging for oil in these deep reservoirs will get so expensive that it won’t be worth digging at all. People will seek other low-cost alternatives. And that’s when oil will become old fashioned. So maybe we will never truly run out of oil. Maybe Oil will just price itself out of the market.

As Sheik Ahmed Zahi Yamani, the longtime Saudi oil minister and a key founder of OPEC, once said, “The stone age came to an end, not for lack of stones, and the oil age will end, but not for lack of oil.”

Also, we have relied on this excellent report from Penn State to put together this story. So if you want a more elaborate account on whether we are running out of oil, please do read the full text.

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