It is much to Saudi Arabia's credit that they understand this. And it explains the giant holding company they are putting together.
Saudi Arabia is getting ready for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets. Over a five-hour conversation, Deputy Crown Prince Mohammed bin Salman laid out his vision for the Public Investment Fund, which will eventually control more than $2 trillion and help wean the kingdom off oil. As part of that strategy, the prince said Saudi will sell shares in Aramco’s parent company and transform the oil giant into an industrial conglomerate. The initial public offering could happen as soon as next year, with the country currently planning to sell less than 5 percent.I find some of this a little odd. They want to transform Aramco into a company that refines the oil and converts it into a value added product. The "twilight of the oil age" is really the twilight of their oil age.
“IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,” the prince said in an interview at the royal compound in Riyadh that ended at 4 a.m. on Thursday. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”
Almost eight decades since the first Saudi oil was discovered, King Salman’s 30-year-old son is aiming to transform the world’s biggest crude exporter into an economy fit for the next era. As his strategy takes shape, the speed of change may shock a conservative society accustomed to decades of government handouts.
But this is already being done in KSA. In fact, it's been going on for quite some time. I personally worked on a large polymer project owned by Sharq (a subsidiary of SABIC) in 2005. SABIC is, in fact, already in the holding company.
So, for quite some time the transformation process has been going on. The only thing I can take from this is that the KSA is going to speed up the process.
But here again, they are going to run into problems. The biggest problem is that they will continually find themselves a slave to markets. If there is no demand for whatever it is they produce, how the heck can the investors expect a decent return on their investments? In a world now swimming in oil and abundant natural gas, do they think they are going to be the only ones who will be building petrochemical facilities? Right now, in Lake Charles, LA a gigantic multibilion dollar polymer plant is under construction.
But why stop there? The fracking industry has opened up old north east industrial areas that were abandoned for dead. Now, in the area that was the cradle of the original American oil boom, companies are looking to construct new polymer plants. Can you imagine that?
So, once again, OPEC can not barge in and say they are going to take over and call the shots.
Mr. Market calls the shots. Plain and simple.