Originally published under the title "Trump's Carelessness with the Saudis Will Force Americans to Collude with a Cartel."
President Trump is urging Saudi Arabia to award the IPO (initial public offering) of its national oil company, Saudi Aramco, to the New York Stock Exchange (NYSE).
President Donald Trump's plea to Saudi Arabia to award the New York Stock Exchange (NYSE) with the listing of Saudi Aramco, the Kingdom's national oil company, came only a day or so before the country's de facto leader, Crown Prince Mohammed Bin Salman, locked up dozens of the country's political and business elites and froze billions of dollars of their assets.
Yet, none of this seems to have changed Trump's opinion that hosting the IPO (initial public offering) in Wall Street is, to quote his November 4 tweet, "important to the United States."
Trump's eagerness to win the biggest IPO in history stems from his view that the soaring stock market is the best reflection of what he views as the success of his economic policies. By adding Aramco to the S&P 500, Trump hopes to continue the rally deep into 2018 and beyond, even if his tax plan were to falter.
He knows that such a mammoth IPO, estimated at $100 billion, would beef up the stocks of potential underwriters like Goldman Sachs and JPMorgan as well as scores of service providers associated with the offering.
He also hopes that a New York IPO would solidify U.S.-Saudi relations even beyond the $350 billion arms deal signed between the two countries earlier this year, bringing more lucrative deals down the road.
A New York IPO of Saudi Aramco could expose U.S. investors to serious financial, legal and ethical challenges.
To win these short-term gains Trump is prepared to compromise the integrity of our economic system, exposing American investors to some serious and irreversible financial, legal and ethical challenges.
Taking public a company like Aramco entails disclosures the company was never willing to make. For example, it requires the Saudis to share with the public its detailed geological data, its well-by-well production costs, its precise financial relations with the Saudi government and its hiring and operating procedures. All of those have been closely guarded state secrets. But it is far from certain that the Saudi government, which effectively runs Aramco, will be ready to open its books, and even if it did it will only do so for the 5 percent of the company offered to the public while keeping the veil of secrecy on the other 95 percent.
This begs the question which assets or business segments will fall within the 5 percent? What will be their interaction with the other 95 percent of the company retained under state control? Will shareholders of the 5 percent be accountable to decisions made by the 95 percent? Who decides?
This issue is particularly important since while the 5 percent will supposedly be governed by free market forces, the 95 percent will be effectively steered by a price-fixing cartel — OPEC — the very same organization that Trump has been criticizing for years for cheating America through oil price manipulations.
OPEC members collectively own more than two thirds of the world's conventional crude reserves and they account for one third of global production. Over the past 40 years non-OPEC production has doubled yet the cartel's production has barely changed and is around 32 million barrels per day. It can affect oil prices at will in ways no other player in the oil market can.
Saudi Aramco is not only the largest producer within OPEC, it is also the driving force behind the cartel's decisions, including the most recent one to extend oil production cuts in order to support prices. Since oil export is the main source of income for the Saudi government, OPEC's decisions will always be subservient to the Kingdom's budgetary needs.
OPEC's decisions will always be subservient to Saudi Arabia's budgetary needs.
If floated in New York, Aramco's shares will be present in almost every portfolio of every pension fund, mutual fund and premium stock index. This means that thanks to Trump's economic carelessness in one way or another most Americans will be invested in it. Hence, by extension, most Americans will be forced to be in collusion with a cartel and at times benefit from its price fixing.
The association with OPEC will put in legal jeopardy any oil executive wishing to hold fiduciary responsibility in Aramco. Under U.S. law, officers of companies engaged in price fixing go to jail, but executives of OPEC members are doing so in broad daylight every few months in Vienna. However, bringing Aramco under American securities law will change the rules for those executives and expose them — as well as the NYSE itself — to numerous lawsuits. This will deter Western executives from assuming positions in Aramco, leading the company to be governed by a cabal of diplomatically immune Saudi royals rather than seasoned oil and investment professionals.
One would hope that a president surrounded by so many Wall Street veterans would exercise better judgment before lending his support to such a problematic IPO. Prior to becoming president, Trump often complained that his predecessor Barack Obama let OPEC nations take advantage of America. Trump is committing a far bigger sin: offering to usher the most objectionable form of market distortion into the heart of America's financial system. He, and his economic team, should know better.
Gal Luft, a writing a fellow at the Middle East Forum, is co-director of the Institute for the Analysis of Global Security and senior adviser to the United States Energy Security Council.