Examining the impact of Saudi Aramco’s venture of IPO

Saudi Arabia is often regarded as one of the giants in the oil industry. Having control and influence over major oil policies in the world, it has defined its international relations through its distribution and control over oil exports in the world. One of the most recognized Saudi state-owned enterprise is Saudi Aramco having a production capacity of 3.6 billion barrels annually. Aramco’s rise to become one of the most valued company in the world should be studied alongside the oil boom in Saudi Arabia which saw Saudi Arabia’s global importance rise significantly. Saudi Aramco’s investments and selling of oils to major countries such as United States of America and other European countries has helped to influence global politics in Saudi Arabia’s favour.

The importance of Saudi Arabia’s oil exporting potential can be studied through its efforts and influence in global politics. The United States continued hostility against Iran and condemning non-state actors against Saudi Arabia comes through its influence in the oil market. The recent killing of Jamal Khashoggi, despite drawing the ire of Western human rights organizations and a call for sanctioning Saudi Arabia was muted through a heavy reliance of US on Saudi oil.

Saudi Arabia’s state owned company recently ventured an IPO which would allow some of its shares to become public and to be listed in the New York Stock Exchange. While only opening at the local Saudi Arabian stock exchange the Tadawal, this comes in the context of a greater need for integration in the international financial markets and to attract more investors seeking to buy stocks of the oil giant. Financial international institutions not only allow a greater transparency and security of stocks but also generates greater capital raising opportunities and an expansion of the investor base. The need for Aramco’s public venture comes due to an increasing level of expenditure from the Saudi state which had made it difficult to manage the vast oil reserves and investments. Liquidity for investors can also be advanced as securities can then be traded through the public market. Despite having a strict control of the information on the oil reserves, Saudi Aramco has an estimated oil reserve of 270 billion barrels. This and with a market value of over 2 Trillion dollars would allow it to dominate the oil industry for approximately the next 30 years.

In order to understand Saudi Arabia’s recent announcement of an IPO, its important to understand the geo-political situation in the Middle East. Saudi Arabia primarily enjoys greater export and control of the oil markets. Its strained and contested relationship between Iran has been a continuous source of hostile diplomatic rhetoric and a military posturing. The Persian Gulf and its control has been a consistent issue amongst the Middle East Nations all of whom want to dominant the oil route. Despite having strongly aligned geo-strategic interests with the United States, cultural difference combined with different forms of governance has strained relations in the past. Saudi Arabia a monarchy, currently under Crown Prince Mohammad bin Salman has announced a “vision 2030” which aims to diversify the heavily dependent Saudi economy on oil exports. This aims to diversify the sources of income, attract business investors to create various other avenues of income which would supplement the Saudi Economy. For this, integration within the international financial markets allows greater transparency and trust amongst market investors thereby generating more opportunities for revenue. In a highly complicated global market the implications of becoming a public firm are significant. Saudi Aramco’s stock trading would help to re-direct capital and investments on other non-oil businesses helping to decrease the reliance of Saudi economy on oil. Increase in employment and a greater autonomy of companies working with the help of foreign investors.  Greater integration would help in easing tensions caused by a isolationist view of Saudi Arabia as a “Pariah state”. Mohammad bin Salman’s attempt to reform Saudi Arabia depends on the diversification of the Saudi Economy which would entail redirecting Saudi oil investments and profits to other various businesses.

State owned companies follow a rigid procedure where in the state authenticates and dominates the policy making process. The House of Saud enjoys control over almost all the policy making institutions in the state and continues to define the foreign relations of Saudi Arabia. Being a monarchy, policy is authoritarian and derives from the decisions of a select few which form the policy making elite. Greater diversification would entail a greater influence of investors in the policy making process. Aramco’s IPO and it officially trading in stocks on 4 December 2019 would allow investors to influences policies ranging from oil market policies to export of crude oil. Currently under the COVID-19 pandemic Saudi Arabia oil dependent economy has taken a significant toll as disruption of supply chains to decrease in transport due to fear of the spread of the virus has halted oil production and negatively impacted economy. This in turn furthers the need for Saudi Arabia to join and integrate themselves within the financial instructions in order to reap some of the security benefits aimed at protecting the value of stocks.

Saudi Arabia’s relationship with the United States, the most significant relationship in the Saudi Arabia Foreign Policy matrix would be influenced, should a possible greater integration of its companies occur with the New York Stock Exchange. Enhanced geo-strategic interests combined with an increased economic integration would increase the bonhomie between the two important states.

Saudi Aramco is a one of the most important companies in the world with operations expanding all across the world. To become a public trading company, the companies market value, its trading patterns and its true value of stocks and reserves of oil would come under public scrutiny. Saudi Arabia’s ambition of expanding its oil-dependent economy would continue to have wide ranging and long term effects on its domestic and international politics. It remains to be seen how this integration would shape our financial and global order.

Abdul Wasay Ajmal
Abdul Wasay Ajmal
The Author is pursuing a degree in International Relations from National Defense University Islamabad and is a associate at Institute of Strategic Studies Islamabad. He can be reached at abdulwasayajmal10[at]gmail.com