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Oil majors feel the shock

On the front lines of the oil-price shocks are multinational corporations such as Exxon-Mobile or BP. Oil majors’ stock prices have been plummeting in the past years, and valuations were cut in half again in the three months of 2020. Investors have thus been hit hard. Oil and gas stocks have vastly underperformed the broader market, which, of course, has seen a downturn due to ­COVID-19 too.

The oil and gas industry has shed tens of thousands of jobs this year. Annual investments are being cut too. A report headline in the British newspaper The Guardian read: “Will the coronavirus kill the oil industry and help save the climate?”

Oil companies have a pattern of putting investment projects on hold whenever world prices fall. The reason is that lower prices mean that fewer projects will be profitable. Slashed spending then affects business along the entire value chain, including pipeline companies and refineries.

In Saudi Arabia, state-owned oil giant Aramco hopes to raise $ 25.6 billion from the sale of a 1.5 % stake in the company. Observers doubt that will be possible. Investors are aware of the sector’s growing risks. For example, central banks are increasingly working on assessing climate-related risks the financial sector runs in order to create disincentives, such as ensuring they pay higher interest rates (see Hans Dembowski in Monitor section of D+C/E+Z e-Paper 2020/03). Governments around the world have promised to reduce fossil-fuel use in the Paris Agreement on Climate Change moreover. That may not happen as fast as environmentalists hope, but it still means that investments in oil are no longer the safe bet they used to be.

As for Saudi Aramco, investors also wonder to what extent the company management is guided by political concerns. After all, the Saudi government sets Aramco’s production levels.

It is obvious, however, why the Saudis want to sell Aramco stock to private and institutional investors. They need money to invest in the diversification of their economy. The low oil price, of course, makes Aramco shares harder to sell.