One of the oldest themes of this newsletter is that, despite the vocal arguments to the contrary, discouraging domestic fossil fuel production is not a wise policy, environmental or otherwise.

The reasoning is pretty simple: it won't be effective in helping the battle versus carbon and could have significant and unrelated downsides.

We have written numerous times along these themes but here is our first last from August 2021 and here is a second installment last winter. ​

To recap, the reasons to avoid discouraging domestic oil productions are:

1. Oil is a global market. Discouraging production in one geographic zone just encourages its production in another.

2. Decreasing supply increases prices temporarily, which might crimp demand but over time it also incentivizes production. In this paradigm, that added production will also be external.

3. If your economy is increasingly reliant on oil from foreign sources then you are both strategically vulnerable AND you are sending the profits overseas to aid other (possible very unfriendly) regimes.

Do you want to help Vladimir Putin or help your own economy?

Finally, it isn't financial but many of the biggest oil producers are not in the West and have - to put it very gently - different values and outlooks not just on climate change but also far greater issues such democracy, basic human rights and a liberal worldview.

Put differently, if you think the folks who run Exxon are bad, wait till you become acquainted leaders of national oil companies of the likes of Russia, Saudi Arabia, Angola, Kazakhstan, Venezuela.

Today we would like to expand a little on the above. The reason is, once again, pretty simple:

• We have discouraged domestic oil production and the following lack of Western supply is leading to a very tight oil market and higher prices.

• We are now seeing the profits flow to foreign oil companies, many of them formal arms of (other) states.

i.e.: we are now going to find out the consequences of our misguided policy framework.

Excited?

We would like to illustrate this point using Saudi Aramco. This company is the national oil company of Saudi Arabia and a publicly traded entity.

i.e.: you can buy shares.

The oil giant went public in 2019 by selling 3 billion shares and raising nearly $26 billion dollars. That is a lot of money but it is only a tiny sliver of the wider firm. At the time this was only 1.5% of the company's value.

• At the time of writing, the market cap of Aramco is ~2.3 trillion dollars.

• For context, Apple has ~85% of its value in publicly traded markets. It has a market cap of ~2.7 trillion.

• Meanwhile, Canada, the country, has a GDP of 1.65 trillion USD.

Fun.

Well, we were apparently just getting started:

• Saudi Aramco just announced their second quarter earnings and they apparently made $48.4 billion in income.

• That is more than double Exxon's.

• And it is also building on the $39.5 in second quarter income to make it quite a start to the year for the oil giant.

• It is important to note that these are all dollars. You, me, everyone pays for oil with cold hard greenbacks.

To put this all in perspective, the above profit is more than any other company, ever.

See here:

And you have to remember, Aramco is hardly alone in this game.

Not all national oil companies are public but we can safely assume that, all over the globe, something similar is happening: profits are pouring and the states are preparing to spend an incredible windfall. Even the most corrupt, poorly run and inefficient state firm can make plenty of profits at $90/100+ a barrel of crude.

And now we all get to find out exactly what they will do with this wave of available cash.

And the pertinent question to ask is:

• Will they use this windfall to help fund the energy transition away from carbon intensive industries and towards renewables?

Or, more generally, do they agree with the West's (or the even just the US?) approach, vision and priorities?

Now, they might!

They also might put this income in their currency reserves (and therefore recycle these US Dollars partially into US Treasury bonds) or they could plow the profits into more US weapon systems and armaments. They could also use it to buy real estate around the globe or even more luxury goods. There might be limits to how many yachts one kingdom needs but it isn't clear we have found that limit.

And they could certainly use them to help fund the transition to less carbon intensive sources of energy. They will hopefully spend at least a portion of it doing so.

But they will certainly spend some of it investing in new sources of fossil fuel supply.

But it is equally possible that many of these funds end up purchasing something we consider either unwise or even unpalatable. For instance, it is not a coincidence that the first oil crisis in the 70s and the massive windfall it brought Saudi Arabia and other Middle Eastern states saw a torrent of funds pour into proselytizing a very extreme form of Islam around the world.

1970s oil crisis windfall profits created 1980s Jihadists.....

And we are already seeing Russian energy profits from European customers pay for a war in Europe.

But regardless of what they spend it on, the problem is that their perspective of priorities will likely be very different from our own.

Fundamentally, it is the Saudi's right to do whatever they wish and it would be the height of foolishness to believe that lecturing, shaming or threatening them will bring them around.

How much control or even influence do we have?

Remember the US President himself has had to go hat in hand and ask some of these countries (starting with Saudi Arabia) to drill and produce more oil, not less. And these requests began before the Russian invasion so our lack of it isn't purely all a function of Russian aggression.

Big picture, we aren't sure what Saudi Aramco/Saudi Arabia will do with their nearly ~$100 billion in income from 2022 so far but it will be difficult to expect that we will have much sway. Our dollars will be paying for something though.

Ultimately, this responsibility is on us. We created this mess and we are most certainly paying for it already - the dollars are, after all, not staying in our economy - but the big question is: will we pay further?

Hopefully it serves as a clear and present reminder for the next time.

There is only one climate and so emission reductions on one continent do not help if they only lead to higher emissions elsewhere. And as the next story demonstrates, this isn't a theoretical worry. This is a present problem.

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