The famous line attributed to Sheikh Rashid bin Saeed Al Maktoum: “My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel”, is a stark warning from the late ruler of Dubai, highlighting the need to develop the economy beyond oil.
It looks like Saudi Arabia, the world's biggest oil exporter, is following the advice on diversification and has its sights set on driving the US electric car maker Tesla into a new future.
News emerged last week of talks to take Tesla private. Saudi Arabia’s Public Investment Fund (PIF) already holds about 5 per cent stake in the auto maker. According to Tesla founder Elon Musk, the Saudi sovereign wealth fund had approached him “multiple times” over the past two years about a buyout. Yet, the certainty and form of such a transaction remains unclear.
The $420 per share mooted price values Tesla at about $70 billion. Mr Musk himself holds 20 per cent of the shares, and is exploring structures, allowing existing shareholders to retain ownership. Nevertheless, becoming an anchor private investor would be a major step for the PIF, which has about $250bn of assets, mostly illiquid.
The possible deal, it seems, is not too big for PIF as the proposal to sell its 70 per cent holding in Saudi Basic Industries Corporation to state oil giant Aramco, worth about $70bn at the current market value, neatly matches the Tesla bill.
What might Saudi Arabia be trying to achieve through such an investment?
It has two aspects: diversifying the kingdom’s financial holdings as a hedge against a declining future for oil, and opening new avenues of growth for its domestic economy.
If electric, self-driving vehicles take off as the primary form of ground transport, as Mr Musk’s vision has it, oil demand is set for a significant hit. BP’s energy outlook suggests petroleum demand could peak between 2025 and 2035, depending on how fast battery cars improve and how aggressively the world moves to tackle climate change.
The PIF’s other ventures in a possible post-oil future includes stakes, such as $3.5bn investment in ride-hailing company Uber, $1bn in space with Virgin Group, and a speculative 200 gigawatt solar power venture with Japan’s Softbank. These, and others, which will no doubt be made, would cushion some of the blow of eventual falling oil demand and prices. If it eventually funds such investments through the long-planned public offering of Aramco, the diversification effect would be greater.
PIF would not be the first wealth fund to consider diversifying its sovereign’s oil exposure. In November, Norway’s government pension fund, worth more than $1 trillion, proposed selling its petroleum company stocks, arguing that the country’s oil and gas reserves and ownership of state firm Equinor (previously Statoil) meant it was already over-exposed to the sector.
But other oil-producing countries have taken a different view. Part of their portfolio continues to be invested in what they know well, and where they presumably have a competitive advantage.
The Kuwait Investment Authority owns about 2 per cent of BP and invests directly in overseas oil via the Kuwait Foreign Petroleum Exploration Company, while the Qatar Investment Authority has bought sizeable stakes in Total, Shell and, more recently, Russia’s Rosneft, in which it holds 19 percent.
Abu Dhabi’s strategic firm Mubadala Investment Company is perhaps the most active follower of this approach, particularly since last year’s merger with the International Petroleum Investment Corporation (IPIC). The holdings inherited from IPIC are less exposed to a future of electrified transport, since demand for petrochemicals is expected to continue growing. Of course, this does not exclude diversification elsewhere; the UAE, via Masdar, the Dubai Electricity and Water Authority and other entities, also has one of the region’s most ambitious solar and electric vehicle programmes.
This is an interesting debate for the relatively small, very wealthy states. For Saudi Arabia, with a much larger population and proportionately smaller sovereign wealth holdings, development of the domestic economy matters much more than its international financial portfolio.
The numbers are challenging. In 2017, Saudi Arabia’s GDP was $640bn, of which almost 56 per cent, or $362bn, was accounted for by the non-oil sector -- of course, a substantial part of that is funded, for now, by government spending backed by oil revenues. The Vision 2030 target is to double total GDP, and most of this growth must come from the non-oil sector.
Whether electric vehicles dominate the world by 2030 or 2050 -- both dates are virtually tomorrow in the multi-generational task of transforming a large national economy -- a holding in Tesla might be a good investment in itself. The company, however, has some major challenges to overcome, including improving its build quality, scaling up production, and beating off competition from incumbent car makers, belatedly waking up to electric vehicles manufacturing.
But to make the most of such a large investment, Saudi Arabia would have to realise some synergies. Insights into the evolution of autonomous battery vehicles would be very useful for planning future oil strategy, but could be better-realised by a spread of smaller investments in several makers of cars, batteries, hardware and software.
In-kingdom manufacturing is a key part of Vision 2030. This need not be of vehicles themselves, but could include batteries or petrochemical-derived components including plastics and tyers. Growing this sector requires not just strategic stakes in big companies, but a supportive environment for foreign investment and the private sector.
The idea of taking Tesla private, and the PIF’s possible involvement, have made headlines because of its giant size, and also because Mr Musk always attracts media interest. The apparent paradox of a leading oil producer investing in electric cars is far more logical when examined carefully. But even if the deal goes ahead, it is going to be just one step in Saudi Arabia's much longer journey to a post-oil economy.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis