Saudi Aramco - The Central Bank of Oil

Saudi Arabia matters. The world needs oil and Saudi Arabia's swimming in it.

Saudi Arabia is the second most oil rich country in the world; they have 266 billion barrels of oil, which is roughly 16% of the world's total share.

They are the largest oil exporter in the world. The second largest, Russia, exports only half of what Saudi Arabia does.

It's worth noting, while Venezuela owns the largest oil reserves, sadly, they rank 80th in oil exports. Venezuela's oil industry has effectively been destroyed; they have a hard time getting it out of the ground and there's less buyers due to sanctions. Jose Toro Hardy, a Venezuelan economist, estimated "it would take $250 billion of foreign investment and 10 years to bring them back to peak oil production levels from the 1990s." Unfortunately, there's not much interest investing in Venezuela due to bad politics.

The oil community tends to operate as one giant fraternity. The Organization for Petroleum Exporting Countries (OPEC) was created in 1960 and is made up of 13 member countries.

These countries collectively control 45% of daily oil production and roughly 80% of the world's proven oil reserves.

Given oil is a commodity subject to fluctuations in supply and demand, they effectively band together to hold oil production at levels that give them more certainty around prices. OPEC members like to think of themselves as a "force for market stabilization" while others refer to them as an anti-competitive cartel.

In-fighting, deception, and outright lies have all had their place throughout OPEC's history.

It's not uncommon for a country to say "they'll produce X amount of oil" and then produce "X + 10" amounts of oil. It's also been the case countries have signed up for OPEC, then quit OPEC. In the case of Ecuador, they've come and gone twice in the organization's history.

Saudi Arabia sits at the head of OPEC's table. And Saudi's leading company for oil production is Saudi Aramco.

Aramco produces more oil than any company on Earth, funds Saudi Arabia's government, and pays Phil Mickelson's salary all at the same time.

In May, Aramco passed Apple to become the largest company in the world by market cap. And it's not valuation mania, Aramco is also the most profitable company on Earth (if only for now).

Two weeks ago, Aramco reported net income of $48 billion in its most recent financial quarter. To put that in perspective, Apple did $19 billion in profit and Microsoft did $16.7 billion in profits in their most recent quarters.

Saudi Aramco did more profit in the most recent quarter than Microsoft and Apple combined!

The Saudi government owns 94% of Aramco and the country's sovereign wealth fund owns another 4%, so in aggregate, Saudi Arabia owns 98% of the company.

Aramco paid a quarterly dividend of $19 billion, which is bigger than the market cap of 150 companies in the S&P 500.

In short, Aramco is a juggernaut of a company. Obviously, these results are the beneficiary of oil prices skyrocketing this year and that is subject to change. And while oil prices will fluctuate and Aramco's fortunes fluctuate with them, the demand for oil is not going away.

Aramco's CEO, Amin Nasser, had this to say for the most recent quarter:

"Oil demand is likely to grow for the rest of the decade. We believe that the world will continue to need oil and gas for the foreseeable future to support a sustainable and affordable energy transition. Our concern remains that the industry is not investing enough to meet even the most conservative estimate of future demand."

This comment was supported with this slide from Aramco's earnings presentation.

Aramco is not alone in this thinking. Exxon Mobil, America's leading oil producer, had very similar slide in their earnings presentation last month.

There seems to be a consensus among the oil community that we aren't investing enough to produce what the world needs. Obviously, this is a bit like asking your barber if you need a haircut but there following up their words with actions.

Aramco is executing the largest capital investment program in company history. They forecasted capital spending between $40-50 billion for full year 2022 with the expectation it will be even higher next year and continue to rise throughout the decade. Exxon forecasted to spend $20-25 billion annually through 2027 meet demand.

Aramco's CEO concluded the recent earnings call with these sign-off remarks:

"Some might ask why we are so deeply committed to growth and reliability while others are calling for reduced investment in oil and gas. Some feel that anyone who continues to produce oil will be on the wrong side of history. To them, I say that we believe we are on the right side of reality. Just look at the challenges the energy markets have faced in recent months. If alternative energy sources could have shouldered the burden, they would have -- but ambition is still years ahead of reality. Longer term, we know the rest of the world will not transition at the same speed as the developed world. This is where most of the humanity lives, most of the roughly 2 billion new energy consumers on the planet by 2050, will be living there, too. In short, we know the world is going to need energy from hydrocarbons for many decades to come. That's why we will never back down from our responsibility to the billions of people around the world who depend on us or to our commitment to an orderly and sustainable energy transition."

In the battle between physics and politics, physics always win. The world needs oil. And it will continue to need oil for decades to come. Given Aramco's comments and commitments around capital spending, they will be in a strong position to provide oil and profit from it.

Aramco is the largest, most profitable oil producer, and they sit on top of the worlds most accessible oil reserves. And more importantly, they have the ambition to keep spending to bring it to market unencumbered by bureaucracy.

In effect, they are the Central Bank of Oil.