Saudi Arabia -The New Norway
April 11, 2016
Shocking news, the Saudis have a lot of oil. The ability of this desert country to choose when to turn the oil spigot on and off delights some, but scares most. The vast Saudi oil reserves are estimated to be worth between 10 and 30 trillion dollars on any given day. The holding company that owns all the oil in Saudi Arabia is the state owned Saudi Aramco, commonly called Aramco.
A decline in oil prices from $100 per barrel to its current level of around $40, has highlighted a major problem for the Saudi royal family, its lack of diversification. More poignantly, keeping control of their country will be tricky if oil revenues continue to decline. Unhappy citizens are typically not supportive of a well-heeled monarchy.
No doubt as a result of this concern, Aramco has recently announced plans to sell a portion of its stock to outside investors. The goal from the proposed sale is to raise $2 trillion in cash that will be used to diversify into assets other than oil. Can it work? There is one place to look for the answer – Norway.
When oil was found in the North Sea many benefitted. Perhaps the most successful in managing this oil wealth was Norway. Rather than selling the drilling rights to others, Norway decided the oil was for the benefit of all Norwegians, current and future. Accordingly Norway used the wealth to take care of many of the basic needs of the population of the country. For example, education and healthcare are provided to citizens at no direct cost. During the boom times there was so much oil wealth that the Government ran out of things to provide to its citizens, and started to save and invest the excess for future generations. These assets are held in the Norway Fund. Presently the Fund has assets worth $850 billion. The population of Norway is 5.2 million so every person in the country has the equivalent of $160,000 set aside in reserves!
The Norway Fund might provide insight into what a $2 trillion Saudi Fund might look like. The Norway Fund owns equity, bonds, and real estate all over the world, including owning stock in 9,000 different companies spread over 78 countries. A conservative growth strategy has been employed that currently shows 60% of the money is in stocks, 36% in fixed income, and 5% is in real estate. I was curious about the portfolio so I took a deep dive into their current holdings. Not surprisingly I found that when you are managing $850 billion you own something of almost every household name, including some very large positions such as $2.1 billion of GE, and $1.5 billion of Facebook.
How the Saudis direct the capital raised from the sale of Aramco stock should be closely watched for a variety of reasons. Financially the huge numbers involved have the potential to affect the pricing of assets on a global basis. Politically the ability of the Saudi royal family to keep 31 million Saudi citizens happy will have a significant bearing on the stability of the Middle East.
Carl Gambrell