Who wants to be rich like a sheikh?

Long before the Russians blinded English society with their conspicuous wealth, it was the Arabs descending on Europe’s capitals in the 1970s who became proverbial for their prodigious wealth: “Rich like an oil sheikh,” said the gawping crowds as they watched the princes in their floating garments checking into the most luxurious hotels, showering bell boys and porters with hundred dollar bills.

Now we all, big and small, could become one of them: the Kingdom of Saudi Arabia is preparing the stock market debut of Aramco, the State oil company at the root of their riches. Selling a mere five per cent of Aramco’s shares at an estimated price of $100 billion, the State-owned oil company will be worth more than $2 trillion, making it with one stroke the most valuable company in the world. (Don’t ask me how bankers could come up with such a heady valuation as no accounting details have been made available by Saudi Arabia so far).

Bankers and lawyers plying their trade could earn fees in excess of $2 billion, so the scramble is on.

To become a shareholder of the world’s most iconic company is certainly tempting. As with all investments, there will be events directly influencing the value of share ownership over time. Like any investment in the oil industry, or any other commodity-related industrial activity for that matter, the price of the underlying commodity – oil in this instance – has a direct and immediate influence. If the price of oil goes up, profits and therefore the shares of oil producers will go up too, and vice versa.

It can be assumed that years of reduced investment in upstream activity (following the latest oil price slump of 80 per cent) will lead to a supply crunch and rising prices down the time line. Representative bodies like the International Energy Agency and some oil majors like Shell tend to assume that once the over-supplied oil market will dry up, oil prices might recover from today’s prices of $50 plus per barrel, itself a recovery from the $30 seen during the doldrums of the financial crisis. Industrial activity is up and so is consumption. Saudi Arabia, with its now perennial 25 per cent budget deficit, must be praying that such a scenario will play out some time soon.

Yet in the case of oil, quite different to food commodities, there is a case to be made that once CO2 emissions are better controlled and fossil fuels are used more sparingly, the importance of crude oil and gas will be diminished.

Following the Paris Agreement 2015, where 197 nations signed up to tackle global warming and promised to curb the consumption of fossil fuels and fossil generated energy, demand for oil might relentlessly shrink over time. Some of the oil reserves on the balance sheets of oil producing countries and the big oil companies may therefore stay under ground for ever, commercially worthless.

The assumption is that renewable energy, like wind, tidal and solar power, as well as the ever increasing efficiency gains, will leave a third of today’s known reserves, which are an integral part of the value of any oil company, unrecoverable. Aramco would then be worth considerably less, and this may be one of the reasons why the Saudis wished to sell it in the first place. The money raised on international stock exchanges for the behemoth will go into alternative investments, within and outside Saudi Arabia.

Some oil majors doubt such a scenario, referring to the expected economic growth in emerging markets and the resulting energy needs. But advances in electricity storage and electrical motion point in that direction. Peak consumption may replace the worries of ‘peak oil’.

Stock market sentiment itself has a powerful impact on stock valuations: under the assumption that economic growth will lift all boats, companies become more valuable – indiscriminately. Momentum carries valuations more than anything. President Trump, a big climate ignorant, who promised to pull out of the Paris Accord and who gave executive orders to build the controversial oil pipeline from Canada to the US to transport highly pollutant tar-sand oil, has significantly less influence on oil stock valuations than the overall economic optimism of the investor herd. Once pessimism spreads, Aramaco too could be worth less than on debut day.

The value of Aramco could also plummet with terrorist sabotage or an outright war with Iran which would stifle or cripple its activities. The Middle East is not the most peaceful region on earth after all. Another economic crisis or galloping inflation could have a damaging value effect too, but then, this holds true for any share investment.

Yet shares have the canny potential of diving through choppy waters in the long run. Eventually, when economic upheavals abate, Aramco may rise again powerfully – provided the company is run prudently, honestly, innovatively and safely.

My biggest concern would be something else. To boost the valuation of Aramco stock, the House of Saud has decided by royal degree to lower corporate taxes for the company from 85 per cent to 50 per cent – excluding 20 per cent royalties, that is. This sounds like great news. The company will see its profits soaring after all.

But caution is recommended. Saudi wealth, which is a hybrid of private, princely coffers and the official budget, looks like a convoluted, opaque affair. What the Tsar has granted he may take away at a moment’s notice. Tax relief may be cancelled at any time in the future. Or the company might be saddled with public duties, like building schools and hospitals. It is the kingly court which writes the rules after all.

I would mark as the biggest risk this legal limbo which any investor in a State-owned company has to face. You may dress up in fluttering gowns but, alas, it will never make you an oil sheikh.

Times of Malta