Saudi Arabia is seemingly renewing its efforts to sell more shares of Aramco, the globally recognized oil powerhouse. This will potentially stir the largest financial offering in capital market history with a colossal $50 billion stake, according to The Wall Street Journal. The timing of this sale is uncertain, but rumors suggest a possibility of materializing before the year wraps up. Nevertheless, this demonstrates Saudi Arabia’s commitment to not falling victim to the resource curse.
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Saudi Arabia Fighting to Overcome the ‘Resource Curse’
The resource curse is a phenomenon that occurs when countries that are rich in resources demonstrate low economic growth or outright decline. Although not universal, it has been observed to happen quite often. There are many theories as to why this is the case, ranging from corruption to a stronger currency that makes exports less competitive to simply not feeling the need to reinvest the money into other sectors. However, Saudi Arabia is fighting to overcome the resource curse.
Aramco stands as a pillar of Saudi Arabia’s economy. As a result, the government has been looking to capitalize on its hefty oil assets to diversify its industrial portfolio, a vision spearheaded by Crown Prince Mohammed bin Salman. It’s clear that the country’s leaders are looking to move away from simply relying on the oil industry, which has proven to be very volatile. In addition, with governments all over the world looking to transition towards clean energy, It makes sense to proactively reinvest the profits into other projects while the commodity is still in high demand.
However, it has been estimated that prices need to remain above $80 per barrel in order for the country to finance its diversification projects based on current spending levels. Therefore, production cuts have been used by OPEC+ in order to keep prices elevated.
Higher Oil Prices: Great for Saudi Arabia, Hard for Consumers
While higher oil prices are great for oil-producing countries and Saudi Arabia’s plans, it’s not so great for consumers. Indeed, this has led to higher gasoline prices and higher input costs for manufacturers. Unsurprisingly, these costs get passed onto consumers who have already been hit hard by inflation over the past couple of years.
This has led the central banks of the world to raise interest rates in order to combat rapidly rising prices which inevitably slow down the economy. While most economies have remained resilient so far, it remains to be seen how long this resilience will last.
What is the Future Prediction for Oil Stocks?
Wall Street appears to be bullish on oil stocks at the moment. The Energy Select Sector SPDR Fund (XLE), an ETF that invests in large oil companies, is rated as a Moderate Buy according to analysts. In addition, the average price target of $101.19 per share implies 11.52% upside potential from current levels.
