When the price of oil crashed to $26 a barrel this past February, it eviscerated the American fracking boom and created headaches for Saudi Arabia, the largest oil producer in the world.
Saudi Arabia spends $10 to suck a barrel of oil out of the ground, but they have to sell it for $100 to support lavish spending on the military, royal families, and cradle-to-grave welfare for 30 million people.
The crash means OPEC members will face massive fiscal deficits in the coming years, which can spread civil unrest. Not surprisingly, Saudi Arabia has slashed spending and is trying to raise cash fast.
How? With a record-smashing IPO for the most valuable company in the world: Saudi Aramco, a secretive state-owned company with a monopoly on all oil reserves in the kingdom.
Aramco is planning a three-way listing on stock exchanges in London, Hong Kong, and New York as early as next year. In theory, it would be five times bigger than any IPO in history.
Prince Mohammad bin Salman, Saudi Arabia’s deputy crown prince and de facto ruler, says Aramco will sell 5% of its estimated $2.5 trillion equity — valued at about $100-150 billion USD — and use the war-chest to buy non-oil assets from around the world to complement oil revenues and stabilize investment income.
The move is part of a wider shake-up of the kingdom’s energy strategy.
Over the weekend, the kingdom replaced its veteran oil minister with Khalid al-Falih, chairman of Saudi Aramco.
His first order of business? Expand production in the Shaybah oil fields from 750,000 barrels to 1 million barrels per day in 2016.
The strategy makes sense: Flood the market, drive down oil prices, bankrupt competitors, pay the bills in the meantime with Aramco stock, and cement Saudi Arabia as the world’s dominant oil producer for generations to come.
What does this mean for Americans? Low oil prices for now, but don’t be fooled.