The Biggest Deal in History Happening Now
Most of the financial world right now is paying attention to the US Federal Reserve’s latest interest rate deliberations.
I urge you not to follow them. The far more important event taking place is the Saudi Prince’s current visit to the United States.
If tracking the movements of Mohammed bin Salman isn’t part of your normal day, you should know that he’s in for three weeks of action in America.
I’m sure he’ll be treated very well. After all, Saudi Arabia is a great customer for US companies that manufacture weapons. Indeed, the Crown Prince is going so far as to visit Lockheed Martin, one of the biggest US defence firms.
I happened to visit the Middle East last year just after Donald Trump made his first overseas stopover in Riyadh, the capital of Saudi Arabia. It was there that Trump announced a US$100 billion arms deal to the kingdom.
But there’s even better news for the US… Saudi Arabia might soon have more products to buy.
Reuters reports that President Trump is considering boosting exports of lethal drones to US allies.
The industry is lobbying him to relax the current ban because the US is losing market share to Chinese and Israeli competition.
I guess if there’s going to be killing and war in the world, it makes no sense for the US not to make some money out of it. After all, there’s that pesky trade deficit to worry about…
But that’s not all…
Is a secret oil deal likely?
Is it a coincidence that, just as the Prince visits the US, a story appears in the Wall Street Journal that Saudi Arabia may not go ahead with an international stock market listing for state-owned oil company Saudi Aramco?
We’re talking massive business here. Saudi Aramco could be valued as high as US$2 trillion. At US$100 billion, it would be the biggest float in history.
There have been three main exchanges vying for the float — in London, Hong Kong and New York. The fees alone will be worth hundreds of millions of dollars.
Donald Trump has already made it known that he wants it in the US. Perhaps the Saudis are pushing for some concessions while the Prince is there to sweeten the deal?
One of those sweeteners could be the resumption of trade sanctions on Iran, Saudi Arabia’s long term and strategic rival.
Trump needs to make a decision on upholding or cancelling US waivers on the Iran nuclear deal in May.
If a hard line is taken against Iran, it’s likely that its oil exports would suffer and that its energy industry would be further starved of foreign investment.
That probably wouldn’t be such a bad outcome for either Saudi Arabia or the US. It would weaken the Iranian economy, and also cut Iran’s market share of the oil market.
That would leave higher prices and bigger market share for US and Saudi oil. A higher oil price keeps a lot of money coming into Saudi Arabia…and keeps the valuation of Saudi Aramco high.
The more money the Saudis get for the sale, the more firepower they have in their Public Investment Fund — designed to diversify the national economy away from oil.
Not only that, but the Prince appears to be pushing for a Saudi nuclear deal…claiming the kingdom wants to use nuclear power to help diversify its energy mix.
The catch is that Saudi Arabia won’t rule out building up a nuclear arsenal either…
Peace and harmony bad for business
Still, there are no guarantees here. Nothing is ever clear-cut in international relations.
The Chinese are a major client of the Saudis now. China is the biggest importer of crude oil. And the US is likely to remain largely self-sufficient in terms of energy for a long time.
That means Hong Kong still holds a strong ace to win the Saudi Aramco business if an international listing does go ahead.
Oil futures are also beginning to trade in China and are being priced in yuan.
No doubt US strategists are watching this carefully. A lot of the prestige and power of the US dollar stems from the fact that oil is traded in US dollars.
All this means that Saudi Arabia is likely to remain a key ally of the US — and that the Trump administration will likely indulge some of Saudi Arabia’s less savoury aspects.
Amnesty International cites a United Nations report that the Saudi-led coalition in the Yemeni war is the leading cause of civilian deaths in the conflict. And that it continues to commit serious breaches of international and humanitarian law.
But that might not be polite to mention when the Crown Prince is in town. After all, it would be bad for business…
Editor, The Daily Reckoning Australia