November 11, 2024

The man who sold the Arabian peninsula

Dear Reader,

The U.S. election has been and gone.

Given that, by my estimate, probably 75% of the emails in your inbox over the past week have been trying to get your attention by piggybacking on the biggest political moment of the year — and the next four, for that matter — The Benchmark will not be jumping on that bandwagon.

At least not right now.

Today, I want to talk war, oil and gargantuan national wealth.

The kind of that shapes regions, geopolitics and economies for decades and centuries at a time.

Let's start with the war that changed war forever.

Have oil, will win

One hundred and six years ago today, on November 11, 1918, this was the front-page news pretty much everywhere on the planet:

World War I was over. About 40 million people were dead, the world order forever changed.

While most modern history focuses on the treaties, the borders, the colossal repercussions resulting from the so-called 'Great War', there was another huge consequence — one we very much still live with to this day.

One of the reasons the Allied Powers were able to defeat the Central Powers was that they had access to more oil, courtesy of companies like the Anglo-Persian Oil Company (now BP).

This taught the victors that controlling oil was now a key factor in military might and geopolitical strength.

Add to this the fact that the Great War spurred the once-great Ottoman Empire's breakup.

The Ottomans had controlled much of the Middle East.

In their place, new states formed in the region; Iraq, Kuwait, Yemen, Lebanon, and others — most importantly for our story today, Saudi Arabia.

The Father of Oil

During World War I, a British Army quartermaster, Major Frank Holmes, was tasked with securing food and supplies for the army's forces in Mesopotamia (Iraq).

Before the war, Frank, had worked as a mining engineer in southern Africa.

(Coincidentally, he also attended the same high school as I did in New Zealand.)

So when he heard rumours of oil seeping up through the desert sands down on the Arabian peninsula, he made it his mission to return after the war to confirm what he suspected might be 'an immense oil field running from Kuwait right down the mainland coast'.

Return he did.

Frank Holmes spent the following couple of decades obtaining oil concessions and working out where the Arabian peninsula's oilfields lay — using his straight-talking manner to sell the impoverished sheikhs on the idea of the vast wealth hiding deep beneath their feet.

While most established opinion at the time was pretty negative about the prospects of finding oil there, Frank proved the doubters wrong.

While there might be a common, if ignorant, assumption that those in the Middle East resent western meddling in their resources, the reality is that Frank Holmes' self-described 'nose for oil' led to a colossal, sustained boom in both wealth and influence for these countries.

The Arabs even have an affectionate sobriquet for Frank; 'Abu Naft' or the Father of Oil.

From no country, to rich country,
to major global tech investor

Spanning an area of more than 2 million sq km, Saudi Arabia is the largest country in the Middle East, and the 12th largest state in the world.

Of all the oil states that Frank Holmes helped create, Saudi Arabia is the one to have cashed in its oil wealth to the greatest effect.

The Saudis possess the second-largest oil reserves on Earth — more than Russia and the U.S. combined, going by Opec's estimates.

They are the third-largest producer of oil. And current estimates indicate they have nearly 80 years' production in reserve.

When you talk about Saudi oil, you're really talking about Saudi Aramco — the national oil company of Saudi Arabia, formerly Arabian-American Oil Company.

Saudi Aramco is the fourth-largest company in the world. It is also the highest-producing oil company — at about 12.8 million barrels a day.
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Today, despite not currently being the biggest company in the world, Aramco turns over about half a trillion dollars a year. The Saudi government owns most of the business.

The company's origin story is stacked with intrigue, intertwined with 20th Century history, and well worth digging into.

For now though, I want to draw your attention to what Saudi Arabia has done with its vast oil wealth.

Fluctuating oil prices, and turbulent regional and international geopolitical developments, make depending solely on oil a volatile strategy.

Eggs in baskets, right?

The government created the Saudi Arabian Public Investment Fund in 1971, right around the time Norway did the same to diversify, distribute and compound its vast — but ultimately finite — oil wealth.

Based on the latest available information, here are the PIF's top 10 U.S. stock holdings as of Q2 2024:

• Uber Technologies, Inc. (UBER) — $5.29 billion, 25.62% of portfolio.
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• Lucid Group, Inc. (LCID) — $3.59 billion, 17.37% of portfolio.
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• Electronic Arts Inc. (EA) — $3.46 billion, 16.73% of portfolio.
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• Take-Two Interactive Software, Inc. (TTWO) — $1.77 billion, 8.59% of portfolio.
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• Arm Holdings plc (ARM) — $593 million, 2.87% of portfolio.
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• Linde plc (LIN) — $530 million, 2.57% of portfolio.
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• Cummins Inc. (CMI) — $454 million, 2.20% of portfolio.
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• Advanced Micro Devices, Inc. (AMD) — $374 million, 1.81% of portfolio.
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• Meta Platforms, Inc. (META) — $373 million, 1.81% of portfolio.
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• Amazon.com, Inc. (AMZN) — $296 million, 1.43% of portfolio.

That's about $17 billion invested across these 10 stocks alone — and that's just scratching the surface of what the PIF has invested Saudi Arabia's gargantuan oil wealth into.

You might be wondering how we got here.

From the armistice that ended World War I...

To one of my high school alumni (well before my time, mind you) wandering in the desert looking for army supplies...

To the birth of a group of Middle East nations out of the ashes of a vanquished empire...

To one of the most influential, powerful and wealthy states on Earth...

And the way it's taking the enormous wealth it pumps from the ground and deploys it in some of the world's most profitable and fast-growing companies.

Well, for me, it came from seeing this headline:

Aramco announced last week that its quarterly net profit had fallen to $27.56 billion — slightly higher than the $26.89 billion analysts had expected, but still, remarkably, warranting the negative tone of the headlines broadcasting the result.

While everybody spent the past quarter obsessing over polls and predictions, and now votes and results, from the U.S. election...

This one company was raking in nearly $30 billion in profit, when the state that owns it didn't even exist 100 years ago.

This got me thinking, which got me writing.

And now here we are.

Quote of the Week

— J. Paul Getty

That's it for The Benchmark this week.

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Invest in knowledge,

Thom
Editor, The Benchmark
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