Aramco IPO: Why Saudis Turned Oil Price Hawks

♠ Posted by Emmanuel in , at 2/25/2018 11:32:00 AM

There's a neat story from the folks over at Oil Price about how the Saudis have done an about-face on the price of traded oil. For the longest time, they were considered as being among the least "activist" in the commodity cartel OPEC [Organization of Oil Producing and Exporting Countries]. That is, they did not push for boosting oil prices by crimping production of OPEC member countries. In recent years, though, that has changed as they've turned from "doves" content with a lower price of oil to "hawks" seeking to increase this price.

The proximate cause of this apparent change of heart is the imminent initial public offering [IPO] of Saudi Aramco, the state-owned energy behemoth. Many of the specifics of that listing are not yet known: where the listing is to be made and how much of the company is to be floated:
Saudi Arabia is undergoing a truly seismic shift in its economy, politics, and society, all thanks to the oil price crash of 2014. Crown Prince Mohammed bin Salman, commonly referred to as MBS, would likely not have had the opportunity to initiate the sweeping changes envisaged in Vision 2030 had it not been for the price collapse. Now, Riyadh needs oil prices to rise as high as possible for the plan to succeed — and is even ready to tip the market into a deficit to that end.

Saudi Arabia used to be OPEC’s most influential price dove, according to Bloomberg’s Grant Smith. Now, the kingdom has adopted a markedly different approach. Saudi Arabia is now focused on pushing prices as high as it can for a very simple reason: Aramco’s IPO.
The change is rather dramatic. Consider the changing stances of Saudi Arabia and its ideological arch-rival within OPEC, Iran:
When oil surged to almost $150 in 2008, attempts by Saudi Oil Minister Ali al-Naimi to cool the rally also faced opposition from other OPEC nations eager to enjoy soaring revenues. Prices slumped the following year during the Great Recession.

The dynamic is showing some signs of reversing. After Brent crude shot above $70 in late January, Oil Minister Bijan Namdar Zanganeh of Iran -- an OPEC producer that often used to agitate for higher prices -- said that $60 was sufficient.

Emboldened by the success of their strategy so far, the Saudis are now pursuing price levels that will ultimately lead to failure, said Eugen Weinberg, head of commodity market research at Commerzbank AG in Frankfurt.
If the listing of Saudi Aramco is the proximate cause, the longer-term one is rather more interesting and less obvious. Vision 2030 is mentioned and refers in no small part to the post-fossil fuel plan that Saudi Arabia has which obviously has the potential to upend its longstanding fuel-driven political economy. You see, proceeds from the IPO of Saudi Aramco are expected to fund the implementation of Vision 2030. If you are going to undertake fairly drastic economy- and society-wide changes, you would obviously be better of doing them under favorable economic conditions (read: high oil prices in the near future).

So, the inescapable implication here is that to successfully transition to a post-fossil fuel future, Saudi Arabia would benefit from higher energy revenues at the present time to fund Vision 2030. Strange but true:
Aramco’s IPO is crucial for Vision 2030, as the proceeds from the sale will be the fuel that this ambitious plan runs on. While analysts disagree strongly on exactly how much Aramco is worth, it’s clear that the higher oil prices are, the higher the valuation for this oil giant will be.
Pulling off Vision 2030's ambitious objectives is by no means guaranteed. Ironically, though, successfully weaning the kingdom off oil is more likely when oil prices are high rather than when they are low as Saudi Aramco is being listed as a "legacy" business--albeit a behemoth on the world energy stage.
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Can Trump Delay Non-White Majority America?

♠ Posted by Emmanuel in at 2/21/2018 05:56:00 PM
Few intellectually honest observers would dispute that Donald Trump's election was based in no small part on channeling white ethno-nationalist fears. More specifically, the United States is expected to become a non-white majority country mid-century. Estimates vary, but it's estimated to happen possibly in 2044 at the earliest. Trump's unapologetically racist tirades and policies against Mexicans, Muslims and other non-white and/or non-Christian people appeal to precisely this white ethno-nationalist base fearful of non-white majority America.

A recent New York Times op-ed puts it in simpler terms: Trump wants to Make America White Again, or turn back the clock to an earlier time when the colored people knew their (subordinate) place in (white-dominated) American society. You know, the good ol' days for the good ol' boys:
The White House is assertively working to make America white again, and Democrats are too afraid to speak that truth. The aggressive pace of deportations of immigrants of color, the elimination of the DACA program protecting immigrant children and the proposals propounded by the anti-immigration voices in the administration will all have the undeniable effect of slowing the rapid racial diversification of the United States population.
But how much can Trump really change demographic forces in the making for decades upon decades? The answer is the economist's "only on the margin." The Washington Post's analysis is similar to most in that it's like trying to hold back a waterfall. Or, in numerical terms, five measly years at most. Factor in the lowered annual intake if Trump and the restrictionists got their way:
The Post analyzed a low-end and high-end estimate for cuts to legal immigration under the Trump plan. The low-end estimate, provided by NumbersUSA, a group that favors limiting immigration, suggests that about 300,000 fewer immigrants will be admitted legally on an annual basis. A high-end estimate from the Cato Institute, which favors immigration, suggests that as many as 500,000 fewer immigrants would be admitted. Cato bases its number, in part, on assumptions that more family visa categories will be cut.
It doesn't sound like much of a delay, and it has more to do with domestic demographic trends (births/deaths among whites/non-white citizens) than it does with the in-migration of non-whites. 
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(Disappearing) American Mall, the Video Game

♠ Posted by Emmanuel in at 2/18/2018 01:48:00 PM

Like (I hope) the IPE Zone blog itself, there's an amusingly droll American Mall video game developed by, of all people, Bloomberg. With consumer spending constituting the lion's share of economic output in most countries, the fate of the shopping mall format is of considerable political-economic interest. The anchor department store...the food court...the originators of these retail concepts are American through and through. Having created it, the Americans are now at the cutting edge of retail evolution in moving away from the mall in a big way. What will it hold for retail in other countries?

It's hard to tell what will happen elsewhere. Among other things, there's less of a glut of retail floor space in other countries as well as the emergence of the mall as something more than a "shopping" destination. For instance, in the highly Catholic Philippines, its largest mall features regular church services.

At any rate, enjoy the video game. It's even developed something of a following online:
Average gamers are playing about 4 minutes per session, though it’s topped one hour for some. And, for now, this is the only game in town for Bloomberg.com, but it is its most ambitious storytelling to date. (The site built The Trading Game, about picking stocks, two years ago.) The highest scorers are those who keep the mall open the longest, as of this writing more than 2,000 days. 
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China's (Stock) Plunge Protection Team Rides Again

♠ Posted by Emmanuel in at 2/12/2018 02:16:00 PM
When the guy on the left is on the loose in stock markets, you need the guy on the right. Right?
Well this is rich: The People's Republic of China has been fighting the United States and the European Union at the World Trade Organization over still being designated as a "non-market economy," implying that state intervention matters a lot more in the PRC relative to allowing market forces to work things out. At the same time, Chinese officialdom appears to be doing all sorts of actions that contradict laissez-faire economic governance necessary to improve its designation.

Just as the recent US-led stock crash has laid low stock markets around the world, Chinese powers-that-be have mounted an aggressive defense of PRC-listed stocks. Demonstrating rather "non-market economy" phenomena, it's been "encouraging" [read: do it or suffer all sorts of consequences] large shareholders to buoy their stock holdings:
An affiliate of China’s securities regulator on Monday encouraged major shareholders of domestically-listed firms to increase their holdings, after Chinese stocks were mauled in a global sell-off last week.

The call represents the clearest signal yet from the Chinese government to lend support to a market rocked by recent global volatility, China’s deleveraging campaign and fears of margin calls. It also stirs memories of government intervention during China’s 2015 stock market crash, when companies were also urged to buy shares and state-backed funds were pumped into the market.

China Securities Investor Services Center, directly managed by the China Securities Regulatory Commission (CSRC), said in an emailed statement that share purchases by major shareholders could help stabilize the market and shows big shareholders stick with retail investors “through thick and thin”.
Hence, China's equivalent of the plunge protection team rides again. The ploy is designed to boost confidence among mom-and-pop investors riding through a fairly turbulent patch at the moment:
Such a practice would “bring confidence to small investors, and have a positive impact” on the market, the center said, encouraging major shareholders and senior executives of listed companies to increase shares if they have not yet done so. Chinese stocks fell nearly 10 percent last week, the worst weekly performance in two years as investors dumped shares across the board.
China's leadership is very keen on appearances, so it's no surprise that the last time their plunge protection was at it was during last year's run-up to the Communist Party Congress.

These guys run a "non-market economy." Nuff said.

UPDATE: Note that the media designation of those buoying PRC stocks in actually the "national team" as opposed to the American "plunge protection team." Regardless, the objective for either is the same. 
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Canada's Trudeau: To Save NAFTA, Avoid Trump

♠ Posted by Emmanuel in , at 2/12/2018 01:57:00 PM
Trudeau's ploy to save NAFTA consists of going around Trump.
If there ever was a misleadingly titled article, consider this one from Bloomberg on Canadian PM Justin Trudeau seeing a "clear path forward" on NAFTA. You see, the path he's taken is to largely bypass the Americans actually responsible for (re)negotiating trade deals, namely Trump and his trade representative Robert Lighthizer. Instead, Trudeau has taken his case directly to [a] representatives whose constituents will lose out from NAFTA's demise and [b] companies presumably with strong lobbying arms who would also be negatively affected:
Trudeau’s government has been attempting to win support from U.S. lawmakers and businesses to keep Trump from pulling out of the North American Free Trade Agreement, as he’s repeatedly threatened to do. Canadian efforts also come amid signs U.S. Trade Representative Robert Lighthizer is growing more frustrated with the country.

“There is a clear path forward and we’re working very hard together on that path,” Trudeau said Saturday in Los Angeles. He spoke alongside Mayor Eric Garcetti, one of many prominent Democrats he met with. Canada wants to “ensure that we can move forward in a way that is a win-win for all of us.”

Garcetti hailed Canadian investment in his city and said Trudeau’s trip was well-received. “This is deeply important work the prime minister is doing.”
Canada's NAFTA game plan was already spelled out sometime ago. If anything, this is not a "clear path forward" for a number of reasons. First, as I've mentioned, Trudeau's path appears more circuitous than direct through bypassing the formal counterparties to the NAFTA re(negotiations)--Trump, Lighthizer, and others in the executive branch. So, he's trying to raise support in a roundabout manner even if you can argue that Trudeau is actually appealing to those with a greater stake here--namely, NAFTA-participating regions and companies.

Second, despite me and many other trade commentators believing that only the US Congress can undo NAFTA having put in into effect, there is no guarantee that [i] Trump will not try to get out of the deal single-handedly if talks do not yield progress and [ii] Congress can successfully overrule Trump if he does announce the US is leaving NAFTA.

Trudeau acknowledges as much. From his Grand Tour of America:
At the University of Chicago on Feb. 7, Trudeau said he was “legitimately concerned about the future of Nafta...” Friday in Los Angeles, Trudeau warned he didn’t “think anyone can now entirely predict or understand” the impacts on the three countries if Nafta were to end.
To be fair, Trudeau's administration has just filed an unprecedented Pretty Much Everyone Else vs. USA case at the WTO that has soured trade relations between the two countries. For WTO cases, you typically argue for your own trade interests, not for everyone's against some big, bad country. If Trump's trade negotiators like inserting "poison pills" during ongoing NAFTA talks, then Canada's shoving some pretty unsavory stuff down US throats, too, at the WTO.

Ultimately, I don't think Trudeau buys that the path forward is clear, either.
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Will Trump Ramp Up Trade War Post-Stock Crash?

♠ Posted by Emmanuel in , at 2/07/2018 03:45:00 PM
Being a disordered personality of the first order, Trump has acted as a cheereleader for both rising stock valuations and trade protectionism despite the latter being anathema to the former in the opinion of most conventional businesspersons. Insofar as American businesses with operations abroad favor a relatively open and predictable environment for international trade, further moves Trump makes to antagonize the United States' trade partners may make stocks drop even further than they have in recent days.

Speaking of which, Trump's minders (babysitters for us critics) have been able to hold protectionist policies--if not necessarily rhetoric--in check by precisely making the argument that outsized stock market gains until relatively recently have been made possible by not erecting more trade barriers. The problem is that with the stock market now tanking, it is harder to make the argument that rising stock markets and trade openness go together. Axios' Jonathan Swan writes:
  • One of the strongest arguments Gary Cohn and Steven Mnuchin have been making to Trump to persuade him not to blow up NAFTA or take hardline protectionist trade actions is 'Mr. President, the economy is booming and the stock market is setting records under your leadership. Why would you risk that with these trade actions?'"
  • "My question: if they no longer have that argument, what else do they have in their quivers to persuade Trump not to follow his most hardline instincts on trade?
Also keep in mind that, in contrast to Trump's campaign promises to reduce to the US trade deficit, it's been exploding as of late, and we can only expect it to rise further due to recent tax cuts passed that will further increase the US budget deficit and put even greater upward pressure on the external deficit:
The U.S. trade deficit jumped to the highest level in nine years, according to a Department of Commerce report on Tuesday. Despite President Donald Trump’s repeated promise to shrink trade deficits, it rose 12.1% to $566 billion during his first year in office and leaped 5.1% in December alone. 

And this may be just the beginning of an upward trend following Trump’s tax cuts, according to economists. Derek Scissors, resident scholar at American Enterprise Institute calculates the tax cuts may boost the trade deficit by $200 billion. A BofA Merrill Lynch Global Research report also expects the share of the trade deficit in GDP to grow 0.2 percentage points by 2020.
So, if Trump no longer buys the argument that stock market will do well because of avoiding trade protectionism that upsets the status quo, what happens? It might set the stage for more protectionism over the coming months:
The Trump administration is working on trade measures that will make the recent tariffs on solar panels and washing machines look minor by comparison. At best, these potential measures could protect the U.S. from unfair foreign competition. At worst, they could ignite trade wars that end up harming everyone.

China in particular is in Trump’s crosshairs and might well fight back against any effort to restrict its exports. “I have been told by certain officials that yes, definitely, there will be retaliation” from China if the U.S. slaps new tariffs on Chinese-made products, William Zarit, chairman of the American Chamber of Commerce in China, said at a briefing in Beijing on Jan. 30.
Couple a falling stock market with a soaring trade deficit under Trump and, however misguided his ideas are about their causes, expect the blustering fellow to make even harder moves against trade openness through China-aimed sanctions and the like.
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