Saudi Arabia's dream of securing a US$100 billion ($136b) windfall from the IPO of Aramco may be clouding its judgment. The kingdom needs higher oil prices to entice international investors to buy a stake in the state-owned company, which supplies almost all its crude.
Using its clout to restrict global supplies and pump up the cost of its barrels makes the mega-offering look more appealing, but the move has also revived the kingdom's biggest enemy in the form of US shale oil.
Oil prices have climbed 33 per cent to trade at about US$70 per barrel since the Organisation of the Petroleum Exporting Countries (Opec), with the help of Russia, agreed in late 2016 to shave 1.8 million barrels per day (bpd) of crude from world supplies. That deal has now been extended for another year. The new timeline is conveniently synced with the scheme to offload up to 5 per cent of Aramco by the end of 2018.
The IPO is the pet project of Crown Prince Mohammed bin Salman (MBS). The heir to the Saudi throne seized control of all economic power levers in the kingdom last year when he ousted his cousin to become first in line to succeed his ageing father, King Salman.
Described by Western diplomats as headstrong and demanding, the royal has embarked on a radical shake-up. His reforms have included ordering the detention of hundreds of Al-Saud family members in an anti-corruption inquiry and reining in the powers of the ultra-conservative religious police.
Of course, there is more at play than just Aramco. The International Monetary Fund argues that Saudi Arabia needs oil prices at their current levels to function efficiently without having to burn any more of its foreign reserves, which have dropped by about a third from their peak of US$737b in August 2014. The oil price slump also forced Riyadh to slash state benefits and subsidies.
Selling a stake in Aramco is the centrepiece of Mohammed bin Salman's grand vision to modernise the oil-rich kingdom.
Politically, its success depends on achieving the prince's own valuation of around US$2 trillion. However, few bankers or industry experts believe such a lofty figure is attainable.
They argue that, although it controls the Middle East's largest proven reserves of crude, most of its revenues will continue to be siphoned off into the national coffers through direct taxes and royalty payments, instead of shareholder dividends.
"It's not just about Aramco," said Helima Croft, head of commodity strategy at RBC Capital Markets in an interview with S&P Global Platts. "It's about the whole vision of MBS. You can't underplay the revolution he has embarked on in the biggest Middle East country. Lower prices now could burst that bubble."
Khalid al-Falih is the man who is primarily charged with turning the crown prince's mega-IPO dream into reality. The former chief executive of Aramco was handpicked to replace Ali al-Naimi as Energy Minister in 2016.
Almost immediately, he reversed the kingdom's long-standing strategy of defending its market share. Under Al-Falih's tenure, Saudi Arabia, with the help of its new ally Russia, has focused its efforts on bumping up prices. Restrictions on supply, which limit Opec's output to 32.5 million bpd and call on Russia to restrict output by 300,000 bpd, could now even be extended into next year, despite global stockpiles nearing a level deemed to balance supply with demand.
The concern is that the judgment of Saudi policymakers is being distorted by the need to buy more time for advisers to structure Aramco to achieve the best price.
"From what I've seen, everybody is focused on staying the course in 2018," Al-Falih told the World Economic Forum in Davos. The danger with this strategy is that it emboldens US shale.
The US predicts America's drillers will increase output by 1 million bpd this year to average 10.3 million bpd, rivalling Saudi Arabia and Russia. Despite these increases and the promise that US drillers could open their taps further, Riyadh remains unfazed.
Rather than peaking any time soon, it argues that global oil demand could grow a further 20 per cent in the next 25 years, hitting 120 million bpd.