Saudi Arabia’s Unique Investments

For the past several decades, Saudi Arabia has been dependent on oil to serve as its main source of revenue. While a barrel of oil may have been close to $156 in June 2008, over time, it has experienced how global oversupply and technological shifts away from oil usage can affect its value. This was ultimately clear when the price for one barrel of oil dropped to under $30 in January of 2016.

Since then, the oil juggernaut has promised to diversify the country’s economic investments and relax its dependency on oil as laid out in Saudi Vision 2030. Vision 2030 also contains plans to reduce unemployment and workforce inequality. While this plan is expected to be accomplished throughout the course of multiple years, Saudi Arabia hasn’t wasted any time in getting a good start, making several investment decisions in the recent months.

Following up on its promise of making the country’s Public Investment Fund (PIF) the largest Sovereign Wealth Fund in the world, Saudi Arabia made an announcement to invest $3.5 Billion into the privately held startup, Uber. The ride-sharing app is currently valued at $62.5 Billion and sits as the most valuable startup in Silicon Valley. While this investment may sound like a staggering amount, it is only a small portion of the fund’s approximately $750 Billion total United States’ Assets.

This investment by the Saudi PIF increases Uber’s leverage. Unlike many venture capitalists who seek to cash out on their investments after about 10 years, sovereign wealth funds typically have longer investment timelines that could potentially last decades. This gives Uber the flexibility and time they need to expand their footprint in the ride-sharing market, especially in the Middle East.

uber-kgqf-621x414livemint
*Uber CEO Travis Kalanick speaking at the Indian Institute of Technology

Uber plans on investing $250 Million in the Middle East as it looks to gain a competitive advantage over Dubai-based rival ride-sharing app Careem, valued at $1 Billion. Ironically, the government-controlled Saudi Telecomm Co. announced in late December of 2016, that they will invest $100 Million dollars in Careem, causing some eyebrows to raise in a potential conflict of interest.

The Saudi government does not plan on stopping here when it comes to its investment into tech companies. In October of last year, Saudi’s Sovereign Wealth Fund and SoftBank, a Japanese national telecommunication and internet company, agreed to partner to create a new tech fund that aims to manage $100 Billion. Of this $100 Billion, Saudi Arabia will commit $45 Billion over the next five years while SoftBank will contribute $25 Billion. Both partners expect that private investors and other interested parties will make up the remaining $30 Billion in investments.

Masayoshi Son, the CEO of SoftBank, said that the fund will become “the biggest investor in the technology industry over the next decade.” Previously, SoftBank Capital, the investment arm of the internet company, had made investments in the media company BuzzFeed, the gaming company Zynga, and the Chinese E-commerce company Alibaba.

Later in December of 2016, SoftBank made a pledge to invest $50 Billion of the fund into U.S. based tech firms. This is part of Son’s promise with U.S. President Donald Trump to create 50,000 new jobs in America.

trump-jpeg-f1740_c0-0-5003-2917_s885x516*United States’ President Donald Trump and SoftBank CEO Masayoshi Son

Lastly, the Saudi government has declared that they will take their state sponsored oil company, Saudi Aramco, public.  Deputy Crown Prince Mohammad bin Salman has been a huge supporter of the IPO saying that he expects evaluations to start at $2 Trillion and potentially increase as the IPO becomes more imminent. Experts predict that the Aramco IPO could be the largest in world history.

Additionally, the country announced that Morgan Stanley and JP Morgan would serve as advisors to the lead bank Moelis & Co. on the offering. While no official announcement has been made thus far, Saudi Arabia is leaning towards listing their oil company on the New York Stock Exchange, while exchanges in Singapore, Hong Kong, Toronto, and London have all been in discussions with Saudi officials.

To understand the gravity of Saudi’s decision, here are some key figures regarding their oil company:

  • Aramco says they produce 1 out of every 8 barrels of oil globally, contributing 12.5% of the global supply of oil. The company produces 10.3 million barrels of oil per day (b/d)
  • The United States, Japan, and India all import roughly 1 million b/d from Saudi Aramco, while China holds the top spot as the largest importer of Saudi oil at 1.4 million b/d.
  • The company says it has roughly 261 billion barrels of oil in reserve giving the company a vast amount of oil to utilize in the coming decades. This is more oil than all North American reserves combined.

The Arab country is expected to use any additional revenue obtained from the IPO to invest in further opportunities away from oil and gas. The country hopes to create 500,000 jobs through many of these investments in the coming years while removing its dependency on oil in the near future.

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