Essay Example on Egypt's Changing Role in MENA: The Rise of Saudi Arabia

Introduction

Egypt was a primary referent in the Arab world in the international arena until two decades ago. However, when the Cold War ended, and a changing prominence from geopolitics to geoeconomics occurred, Egypt's part in the Middle East and North Africa (MENA) region, as a leader drastically reduced. On the other hand, the economic strength of Saudi and its influence in the world market has significantly developed during the past few years. This growth is attributed to energy production in the region. Saudi Arabia's energy includes the production of petroleum and natural gas and electricity production. Hence making Saudi to be the leading oil producer and exporter country in the world. Therefore, the economy of Saudi Arabia is petroleum-based, while oil accounting for 90% of Saudi Arabia's exports and around 75% of the government revenue (Chauvin, p.44). According to the "Doing Business" annual report, the economy of Saudi Arabia is most prominent in the Middle East, and it was rated the 13th greatest economically-competitive nation in the world by International Finance Corporation (Chauvin, p.44). Currently, Saudi Arabia is the single country in the Middle East, the single Arab kingdom, and the single OPEC member among constituents of the G20. Thus, indicating a recognition in the increasing significance of Saudi Arabia in both the MENA region and in the international economy.

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The economic expansion of Saudi is narrowly associated with the formation and enhancement of the Saudi state in the course of the last sixty years. The increase of the Saudi bureaucracy has been financed by oil revenues, which worked towards the unification of the country's diverse economy. The development of the oil sector is essential to domestic policy steadiness and assurance of foreign protection during many conflicts in the region (Yergin, p.30). Between 1962 and 1979, the country became a compelling state made legitimate by the provisions of the state of benefits straight to the country's populace and by vast social and economic expansion financed by a sharp rise in oil prices. However, after the collapse of the oil prices in 1982, Saudi Arabia developed a more marketable method to oil exports, and healthier OPEC discipline enhanced oil revenues from 1986. Nevertheless, Iraq's attack on Kuwait costed the government of Saudi $60 billion, which depleted the last reserves that were accrued during the oil-boom period (Chauvin, p.47). It is worth mentioning that the formidable rise in the oil price, which began in 2003, offered the House of Saud a new prospect of pushing for more economic transformations. The revenues from oil facilitated the regime in buying off and shore control over Wahhabi clerics and reducing the level of discount among the poor segment of the society (Yergin, p.26)

Saudi Arabia is a member of the Organization of Petroleum Exporting Countries or OPEC. OPEC has proved to be effective in influencing oil prices. For instance, Saudi Arabia does not have market power on its own; however, OPEC's market power is considered to be a useful fiction that primarily flourishes in the generation of benefits for its members (Chauvin, p.45). Egypt, the Gulf States such as Qatar, Kuwait, and Bahrain, Turkey, China, and the United States are considered allies to Saudi Arabia. In contrast, Iran, Russia, Syria, and Lebanon are regarded as rivals to Saudi Arabia. Saudi Arabia suspicions Iran due to the aspirations of Iran wanting to control the Middle East and is also divergent to the growth of powers of Shia, involvement, and influence in the area.

The history, background, and importance of the Saudi Aramco company

Saudi Aramco Company, also known as the Saudi Arabian Oil Company that was initially called Arabian American Oil Company, was founded by the Standard Oil Co. of California (Chevron) in 1933 when it was granted a concession by the Saudi Arabian government. After the discovery of oil in 1938 near Dhahran, other United States companies were able to join (Delventhal, n.p). A pipeline was opened by Aramco in 1950 by Saudi Arabia to the Mediterranean Sea port of Sidon in Lebanon. The pipeline underwent closure in 1983, apart from supplying a refinery in Jordan. In 1981, a prosperous pipeline with Persian Gulf terminus was finished. In 1951, the first offshore oil field was founded by Aramco in the Middle East. In 1973, 25% in the interest of Aramco was purchased by the Saudi Arabian government, which slowly enlarged its stake to 100% in the late 1970s. The government finally took over Aramco, and it was renamed Saudi Aramco in 1988 (Delventhal, n.p). Saudi Aramco formed a joint venture with Texaco in the U.S in 1988, transforming the company from oil producer and Exporter Company to a joined petroleum company.

In its plans to attract foreign investment in Saudi Arabian industries, which was fronted by Mohammed bin Salman, Deputy Crown Prince, Saudi Aramco was scheduled to open up an initial public offering (IPO) in 2017. This move experienced delays and was delayed frequently. Two of the oil-producing facilities of Saudi Aramco in September 2019 were attacked, which included Abqaiq, one of the largest hence resulting in considerable damage and disrupting the company's production capacity temporarily (Delventhal, n.p). After the restoration of the company's output, it publicized its intention of moving forward with the IPO. Although the company fell short of the country's original goals, the company opened with the biggest IPO.

The involvement of Saudi Arabia in Saudi Aramco is enormous. Aramco is majorly owned by the state, whereby the Saudi Arabian government derives a substantial portion of its wealth. Aramco pays a considerable tax rate of 50% to the government of Saudi Arabia. Notably, before 2017 the tax rate paid to the government by Saudi Aramco was 85% (Delventhal, n.p). Aramco's ties to the government of Saudi Arabia has led to a lower rating than it would be expected of a company of its stature. While a vibrant track record of Aramco's having run as a commercially sovereign firm, the budget of the government enormously relies upon Aramco's contributions in the form of dividends, royalties, and taxes (Delventhal, n.p). Aramco is a unique company that does not run an ordinary country. Saudi Arabia plays a crucial role in moving global oil prices. Thus, everyone on earth is affected by oil prices directly and indirectly. Therefore, the company's decision to go public is a significant deal, especially for Saudi Arabia, which is run by a monarchy. The country's affairs are unable to be evaluated and scrutinized in a public arena. Hence, Aramco is majorly viewed as a basis of politics in Saudi Arabia. Each individual in Saudi Arabia is a beneficiary of the Aramco in one way or another. In 2019, Saudi Aramco, for the first time, disclosed its financial performance that was kept for over seven decades, whereby the company revealed it had made more profits in 2018 than any other company in the world. According to Financial Times, the company showed that it had generated $111.1 billion in net income in 2018, which almost doubled that of Apple and five times that of Royal Dutch Shell, which is its rival oil producer (Delventhal, n.p).

The events of the Saudi Aramco Initial Public Offering (IPO)

The idea of selling shares in a state-owned Aramco, the most profitable company in the world for an extended period, was considered an engine to the economy of Saudi Arabia, It was founded on the Vision 2030 plan of Prince Mohammed of modernizing the Saudi Arabian economy. Therefore, the main objective of the Saudi Initial Public Offering (IPO) was selling Aramco's shares because the country was trying to reduce its reliance on oil. Hence, giving room for Crown Prince Mohammed bin Salman to diversity Saudi's economy in the next decade. The proposed sale of part of Saudi Aramco is key to the economic development of Saudi Arabia. Bestowing to the Crown Prince, Saudi Arabia faces an unambiguous choice whereby if Aramco is not put for IPO, it implies that Saudi Arabia will take 40 to 50 years to develop its mining sector and the same period to establish the local product (Ramady, p. 167). Therefore, the plan was aimed at reinvigorating the economy of Saudi Arabia, which generated an annual gross domestic (GDP) growth of only 0.8% between 2003 and 2013, less than a large number of the economies that are emerging. The design is seeking to minimize bureaucracy and the public's role while at the same time endowing the private sector to becoming the principal employer and an economical vehicle for development and growth. Hence, the strategy calls for creating a substantial sovereign wealth fund to be funded by a unique initial public offering (IPO) of a 5 percent stake in Aramco (Khashan, n.p).

The investment of Saudi Aramco in the United States and IPO shows that it a critical oil company that wants to become a global energy company. Most Aramco's expansion focuses on developing Asian countries where the demand for oil is likely to expand in the feasible years; however, this is an essential opportunity for Aramco in the United States markets (Khashan, n.p). The United States is a significant target for its investments and expansion, particularly when it comes to liquid natural gas, refining, and petrochemicals. To get the best prices for Aramco's shares, the company is required to stop the prices from weakening. However, this move renders the company at the mercy of OPEC members and a group of countries that have not been doing their fair share of cutting crude oil production to shore up prices such as Russia and Iraq. In 2018, Russia, through the Russian Direct Investment Fund (RDIF), pledged up a vital pool of investors for the potential $100 billion initial offerings (IPO) of Aramco (Ramady, p. 169). Russia and Saudi Arabia relations have been flourishing as the two are considered the world's largest oil producers.

The aftermath of Saudi Aramco's Initial Public Offering (IPO)

The push for the progress of Aramco's IPO was derailed in mid-October 2019 when the bankers informed Saudi officials and management of Aramco that the company was expected to be valued between $1.1and $1.7 trillion by the international investors, which fall below the $2 trillion got that was set by Crown Prince bin Salman (Piotrowski, n.p). Therefore, the Saudi government decided to take a scaled-back IPO path on the Saudi stock exchange in its place. Saudi Aramco IPO affected the oil prices by lowering the price of oil as the barrel prices were valued just above $50. This was mainly attributed to the diminishing in the U.S. dependence on Eastern oil hence leading to the creation of a glut of supply on the global market. The Saudi Aramco IPO is expected to introduce a corporate governance structure that is tight. Thus, bringing transparency and additional controls to prevent or detect potential corrupt acts in the company (Piotrowski, n.p). The IPO is expected to have beneficial effects on the region's economy as a whole, aside from the financial impact it had on the capital market of Saudi Arabia. The transparency of Saudi Aramco regarding reserves and production members may pressurize other companies in the region to be equally open, specifically in Qatar and Iran.

The Saudi Arabia-Russia oil price war has escalated as Aramco announced a 25% output hike. The increase in output puts Aramco supply above the company's maximum sustainable capacity, which indicates that Saudi Arabia is tapping its strategic inventories to dump more crude on the market as quickly as possible. In February 2020, 9.7 million barrels were produced by Saudi Arabia in a day (Ambrose, n.p).