As Gas Prices Soar Aramco Becomes the Most Valuable Stock!
On February 14, 1945 in the Persian Gulf, President Franklin D. Roosevelt spent a day with the King of Saudi Arabia, Abdul Aziz ibn Saud, aboard the USS Quincy. President Roosevelt was returning from the Allied Conference at Yalta. Churchill and Stalin also attended this conference at which the Allies began to shape post-war security.
Roosevelt had been briefed by military planners that America would one day, in the not-too-distant future, need to source oil supplies from outside of our borders as domestic American oil production would fall in the ensuing 30 years. During the pre-war 1930’s in the Kingdom of Saudi Arabia, vast oil reserves had been discovered. These oil reserves were developed by a joint American and Arab oil corporation. The joint company included the Standard Oil of California, which is the predecessor of today’s Chevron. This joint company later incorporated with the name ARAMCO.
FDR had two key issues he wanted to discuss with the king: the future of Palestine’s Jewish settlements and oil security. In exchange for affordable energy supplies, the United States would provide the kingdom with security guarantees. The Arab and American Oil Company, or Aramco, was the energy company that partnered with the Kingdom of Saudi Arabia to discover and develop the kingdom’s oil. Two American oil companies, So Cal and Union Oil, were the majority American owners of Aramco with the King of Saudi Arabia being the third. The Kingdom of Saudi Arabia would go on to become the largest exporter of oil throughout the 1970’s energy crisis and again from 1993 through 2010.
In the current economic environment of 2022, concerns about a worsening economy have pushed investors to sell off equities in most industries including technology. The exception has been energy stocks. Oil prices have soared due to decreased American production since early 2020 and price spikes in energy since the Russian invasion of Ukraine on February 24, 2022 that caused a supply shock and disruption in global energy markets. One result is that most of the world, including our country, is dealing with record high energy costs which in turn results in more price inflation in the economy. American households are paying $5,000 a year or more in gasoline and utility charges compared to 2021. Farmers, food producers, and distributors, along with transportation companies, are also paying more in energy costs which may result in sustained high inflation into 2023 if oil prices do not fall below $70 dollars a barrel by year’s end.
In 2010, the American oil industry’s ingenuity once again came through with a technological breakthrough called horizontal hydraulic fracturing, or fracking. Fracking made domestic oil and gas reserves that were previously trapped recoverable, economically, if oil was near $55 dollars per barrel on average. From 2010 through 2020, US production “flooded” a world economy still recovering from 2008’s Great Recession. This American production served as de facto policy tool for the U.S. to keep oil prices low enough to 1.) recover from the economic damage of the Great Recession with an average 2.5% inflation rate which made way for low interest rates in public and private debt markets, 2.) keep a geopolitical check on oil exports as to slow Russia’s ability to profit from high oil prices which could slow their ability to build and expand its war making abilities, and 3.) motivating our friends in the Kingdom of Saudi to consider softening their stance against commercial interaction towards our other friend, Israel.
This policy lever gave American leaders great maneuvering room in this balance of power. During this time, oil dropped from $112 per barrel in 2014 to $27 per barrel by 2016 due to US production increase.
However, by early 2020 as the Pandemic was engulfing the world, both the Saudis and Russia cut prices on their oil to drive the price down further and faster than what the pandemic was already causing in the price of oil. This price war struck the higher cost producers in the US hard, threatening to bankrupt many smaller oil producers and even threatening the balance sheets of the giants, Exxon and Chevron. With American producers crushed financially, the way would be clear for Russia and Saudi Arabia to regain pricing power that neither had for almost 6 years.
As many American families suffer due to inflation and high gas and food prices, President Biden traveled to Saudi Arabia recently to meet with around a dozen leaders in the Middle East. One of the individuals he met with is the Saudi Crown Prince Mohammed bin Salman to discuss energy policies. All of us at LaBrunerie Financial have been following these events closely as sustained high energy prices would have negative effects on portfolios and the American economy.