Seven red flags for oil investors
- January 1, 2020: Vol. 7, Number 1

Seven red flags for oil investors

by Mike Consol

If you want to better understand the potential hazards facing oil investing, let’s spend a little time reviewing the years-delayed IPO planned by Aramco, the Saudi state-owned oil giant. Though the Aramco IPO is finally appearing imminent and is expected to be the largest-ever initial public offering, it has been riddled with problems tied to the oil business’s vulnerability.

Granted, few if any high-net-worth investors will get access to Aramco shares, and yet the whole oily mess is rich with lessons for energy investors of all scale.

Consider that despite being by far the world’s largest oil producer and exporter, as well as the most profitable company on the planet, Aramco’s command over its financial fate has been shaky. The Saudi government expects $2 trillion in IPO proceeds in return for a 1.5 percent sliver of the company, but analysts are on record predicting Aramco will be lucky to raise capital at a $1.5 trillion valuation. Understandably, analysts and investors have their concerns — and those same concerns — let’s call them red flags — can be extended to the oil industry writ large.

Red flag #1: Take into account why the kingdom is raising money in the first place. Oil accounts for a whopping 70 percent of Saudi government revenue, and almost 80 percent of exports. IPO proceeds are earmarked to diversify Saudi Arabia’s lopsided economy. Why? Oil is not only an exhaustible commodity, demand for the energy source will peak in 2023, even as global economies continue to expand, forecasts Carbon Tracker, a think tank.

Red flag #2: Investors are wary of regional risks for oil disruption. The recent drone attack on Aramco oil facilities (suspected to have come from Iran) cut the company’s oil production by half and knocked about 5 percent of global oil production off the market in one fell swoop. What’s more, Iran has not only been accused of attacking oil tankers in the Persian Gulf, it has threatened to shut off shipping through the gulf by blockading the Strait of Hormuz, choking off oil supplies.

Red flag #3: At least a dozen countries have announced they will abolish the combustion engine in favor of electric vehicles, including China, France, Ireland, Israel, Sri Lanka, Sweden and the United Kingdom.

Red flag #4: The plummeting cost of solar and wind has accelerated the replacement of fossil fuels, with some utilities replacing fossil fuel plants with solar and wind power plants.

Red flag #5: More than 70 cities worldwide have pledged to become carbon neutral, as have major utilities and more than 175 corporations.

Red flag #6: Public opinion is turning toward green energy sources. The Pew Research Center’s latest survey on the topic found 65 percent of Americans give priority to developing alternative energy sources, while only 27 percent support emphasizing expanded production of fossil fuel sources.

Red flag #7: Nuclear power, another carbon-free energy technology, is coming back into vogue. About 30 countries are considering, planning or starting nuclear power programs, reports the World Nuclear Association. Bangladesh, Belarus, Turkey and the UAE are all constructing their first nuclear power plants. What’s more, nuclear power can be scaled up rapidly, supplanting fossil fuels more quickly than is possible with solar and wind power.

None of this means there aren’t lucrative investments to be made in oil and natural gas. It’s still a dominant industry with many good offerings for investing. But fossil fuels’ heyday is clearly in the rearview mirror as the industry finds itself being challenged by a plethora of competing technologies, concerns about climate change and waning public support.


Mike Consol ( is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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