The next business revolution

American business schools are reinventing the MBA

About time 

ON A VISIT to New York in October Marc Benioff, boss of Salesforce, compared Facebook to cigarettes and backed a corporate tax hike to deal with homelessness in San Francisco. If badmouthing a fellow technology giant and cheering the taxman were not heterodox enough for a billionaire entrepreneur, Mr Benioff laid into American management education. It “programmes” students to favour profit over the public good. This, he noted, is out of step with “the new capitalism”.

Many deans concur. “We need our students to be thoughtful about the role of business in society, particularly at a moment in time when capitalism is coming under attack,” says William Boulding of Duke’s Fuqua School of Business. Nitin Nohria of Harvard Business School (HBS) reports how younger alumni and incoming classes want “the place of work to reflect purpose and values”. Jonathan Levin of Stanford’s Graduate School of Business (GSB) talks of business schools’ responsibility to recognise the societal consequences of corporate actions. “Corporations, their leaders and owners need to act to restore trust,” he intones.

America’s business schools still dominate our annual ranking of the world’s top MBAs (see table). But the industry is being shaken up. According to the Graduate Management Admission Council (GMAC), an industry association, American MBA programmes received 7% fewer applicants this year than last. Nearly three-quarters of full-time, two-year MBA programmes reported declines from coast to coast. Not even the most illustrious ones were spared: HBS (located in Boston) and Stanford’s GSB (in Palo Alto) both saw applications dip by 6% or so.

Schools face growing competition from overseas and online programmes—and, as Mr Benioff’s critique implies, questions over hidebound curriculums. “We’re being disrupted left, right and centre,” confesses Susan Fournier, dean of Boston University’s Questrom School of Business.

When management education boomed in the 1960s, American schools taught mostly American students. As the world economy globalised in the 1980s and 1990s, so too did American curriculums and student bodies. Sangeet Chowfla, who heads GMAC, now discerns a “third wave”: improved schools outside America are letting foreign students study closer to home (and future employers).

Many offer cheaper one-year MBAs, popular in Europe but uncommon across the pond.

Whereas three in four two-year MBA programmes in America saw declines in overseas applicants in the latest application cycle, numbers applying to Asian business schools rose by 9% from 2017 to 2018. A recent uptick in America’s anti-immigrant sentiment is accelerating the trend.

Americans, too, are cooling on MBAs. More than half of American schools report fewer domestic applicants. Soaring tuition costs, which have far outpaced inflation, put them off as much as they do foreigners. A top-notch MBA will set you back more than $200,000 (including living costs). Even with financial aid, many students are saddled with $100,000 debts at graduation.

The opportunity cost of forgoing two years’ worth of paycheques is higher when the economy is booming and labour markets are tight. Weak demand has caused the number of full-time MBA programmes in America to fall by nearly a tenth between 2014 and 2018, according to the Association to Advance Collegiate Schools of Business, another industry body.

Geoffrey Garrett, dean of the Wharton School, at the University of Pennsylvania, believes that a flight to quality is benefiting top institutions like his—and their graduates. Add non-wage compensation and alumni often recoup their investments in a few years. Not counting signing bonuses, the average base salary for graduates of the five American schools with the highest earning potential was $139,000.

Consultancies and investment banks, historically the keenest MBA recruiters, claim their appetite for holders of elite degrees has not diminished. A prestigious MBA “puts a floor on your career”, explains Kostya Simonenko, a 28-year-old consultant on leave from Oliver Wyman (which is paying for his course at Columbia Business School). Silicon Valley, which used to dismiss MBAs as overpaid know-nothings, has become less hostile.

As startups grow into large corporations, they need managers to help run things, not just software engineers to run code. A survey of recruiters by GMAC this year found that 80% of technology companies planned to hire MBAs, on a par with consultancies (82%) and financial firms (77%).

Even the finest schools, though, are not sheltered from the forces buffeting business education. Global competition and new technology platforms enable a lower cost structure for the delivery of high-quality courses. This forces “a reckoning of the MBA value proposition”, says Ms Fournier.

As part of that reckoning, Questrom has teamed up with edX, a big online-education firm, to offer a full MBA degree online for just $24,000, less than a third of the cost of its on-campus equivalent. Better to cannibalise yourself than let others do it, as Ms Fournier puts it. MIT’s Sloan School of Management provides similarly affordable bundles of online courses, dubbed MicroMasters, in areas like supply-chain management and finance.

These grant certificates but the credits will be honoured if a student one day decides to pursue a full degree. 2U, an online-education platform, is introducing deferred-tuition schemes for some hybrid MBA degrees. It will share the upfront costs with its business-school partners; students will pay only when they get a job.

It is not just how MBA courses are taught that is changing. So, too, is what they teach. Many budding woke capitalists agree with Mr Benioff—and demand to be taught business beyond the primacy of shareholder value. At Stanford Luisa Gerstner, a millennial MBA student from Germany, notes that sustainable capitalism plays a more central role in European schools. Julia Osterman, her American classmate, laments how, despite some social, environmental and ethical topics in its curriculum, core classes are still “too Finance 101”.

Some of their professors are not so sure. One greybeard at HBS estimates that a third of its faculty (and many older alumni) view the embrace of cuddly “stakeholder capitalism” as an unrigorous sop to political correctness. It certainly introduces lots of grey areas, Mr Boulding concedes. But, he says, schools can at least provide students with “frameworks for making choices”.

A new course at Duke is entitled “Capitalism and Common Purpose in a World of Differences”.

HBS has made “Leadership and Corporate Accountability” (which delves into “the responsibilities of business to the broader system in which it is embedded”) a required first-year course, with case studies weighing up things like the morality of looking beyond financial metrics at Japan’s Government Pension Investment Fund.

Recoding academies

Curriculums are being transformed in less lofty ways, too. Employers, who partly or wholly bankroll half of all executive education, which earns elite schools between $100m and $150m a year, want it to impart technical skills. In response, deans such as Costis Maglaras, the newish head of Columbia Business School (and an engineer by training), are bolting courses on data, analytics and programming onto the timetable.

As their popularity rises, they may displace stodgier subjects. Columbia used to offer several courses on debt markets but now offers perhaps one each academic year. Meanwhile, students have flocked to coding classes. The idea is not to turn business types into boffins but to prepare them to work with and manage technical staff, says Mr Maglaras. A recruiter for a big consultancy affirms that tech-savvy MBAs are “very attractive”.

Richard Lyons, former dean of the Haas Business School at the University of California, Berkeley, sees the future in providing lifelong professional education as a service: “Give alumni know-how on demand, searchable online.” Scott DeRue, dean of the University of Michigan’s Ross School of Business, is giving alumni tuition-free access to executive education.

“The new stuff will come from insurgents, not the big MBA schools,” thinks John Kao, a management guru who formerly taught at HBS. He wants training benchmarks and standardised transcripts to make skills portable and universally recognised.

At HBS, home to perhaps the most hallowed MBA, Mr Nohria accepts that the market for its traditional offering is shrinking. In a sign of the times, his school has frozen tuition fees. He sees a dramatic expansion for “unbundlers” of online education, who “separate knowing, doing and being”.

In time, he says, they will converge with “bundlers” like HBS. Far from collapsing, he reckons, management education will the richer for it.

The Politics of Frustration in Latin America

The rapidly escalating protests across the region reflect people's dashed economic expectations, and thus differ from the demonstrations in Beirut and Hong Kong against undemocratic regimes. The risk, of course, is that Latin American governments resort to Chinese-style tactics and turn economic malaise into a struggle over the future of democracy.

Jeremy Adelman , Pablo Pryluka

adelman3_MARTIN BERNETTIAFP via Getty Images_chileprotestburningbus

PRINCETON – All over Latin America, public patience is wearing thin, with violence in Chile and the return to power of Peronists in Argentina. For almost 40 years, leaders and voters have struggled to realign economies with global markets, leavening the adjustment with social policies to protect the worst-off. Center-right and center-left coalitions agreed on broad strokes. While they argued over taxes and other issues, Latin Americans accepted the need for foreign markets and foreign investment.

For the past ten years, however, world trade has slowed. The World Trade Organization predicts anemic growth of 3% at best. Trade wars, stalled treaties, and the return of economic nationalism pose a real threat to Latin Americans and others who depend on foreign markets.

To make matters worse, income inequality has widened. Already the world’s most unfair region in this regard, Latin America had made some progress before 2015. But slower GDP growth and stumbling social policies have reversed the trend since then.

Latin American leaders across the political spectrum find themselves in a bind. As the world turned its back on globalization and open borders in favor of national and regional blocs, pro-globalization governments faced the yearnings of voters who took seriously the promise of economic rights and social wellbeing.

At the same time, appeals to tradition, family, and property have proved to be seductive for a growing part of the population, fueling support for Brazil’s Jair Bolsonaro, Peru’s Keiko Fujimori, or even Chile’s José Antonio Kast.

People are impatient and indignant.

Argentina has been in an economic tailspin since 2017. Real wages have fallen. Poverty is up. Two years earlier, in 2015, Mauricio Macri won the presidency on his promise that fiscal adjustment and opening Argentina to the world would spur economic revival. Instead, they paved the way for his defeat. In a few short years, the package of pro-market reforms and economic opening seemed out of step with the rest of the world. Deglobalization, nativism, and protectionism set a new tone for politics, with frustration and uncertainty about the future overshadowing hope.

Frustration is even afflicting the region’s paragon of open-market politics, Chile. On October 18, a wave of protests led President Sebastián Piñera’s government to rely on gendarmes, rubber bullets, and tear gas to repress rioting and looting. During the ensuing week, the world watched images that seemed to contradict the stability of the “Chilean model.”

The riots and the bloody response of the army and the carabineros were followed by videos of Piñera, surrounded by men in fatigues, declaring that the country was “at war,” rhetoric that triggered memories of Augusto Pinochet’s 17-year military dictatorship. Despite Chile’s impressive economic growth and poverty reduction since the dictatorship’s end in 1990, inequality loomed large, and those who have yet to see the benefits have run out of patience.

Even progressive governments seem to have run out of time. A few weeks earlier, when Ecuador’s government announced a reduction in fuel subsidies, a wave of popular unrest forced the government of President Lenin Moreno to flee the capital, Quito. Heir to the center-left government of Rafael Correa, Moreno had turned to the International Monetary Fund and subscribed to a program of fiscal cuts. As in Chile, massive street demonstrations were met by severe repression. In the end, Moreno had to mothball the controversial policies to restore peace.

In some cases, malaise has led to paralysis. In Peru, the resignation of President Pedro Pablo Kuczynski in March 2018 only emboldened the populist forces of fujimorismo in Congress and prompted demonstrations denouncing the illegitimacy of Peruvian politicians. The shutdown of the Congress last month by the current president, Martín Vizcarra, casts doubt on the country’s future.

Then there are the shockwaves from Bolsonaro’s victory in Brazil’s presidential election last year, which brought an end to the country’s long-standing center-left consensus and ushered in a new regime of cronyism and incivility. With the IMF predicting economic growth this year of 0.8%, it’s hard to say how long Bolsonaro’s incendiary rhetoric will keep his supporters happy. Time might be running out for him, too.

Each country is going through its own drama. But what is clear across the region is that as the fabric of global integration comes undone, Latin American governments face spiking popular dissatisfaction and a sharp downturn in public confidence in governments and institutions. The result is an escalation of protest and repressive responses, turning modest demonstrations into massive conflicts.

So far, the outlier is Argentina, where the social unrest is being channeled through elections. It is worth recalling, however, that many who voted for the Peronists once voted for Macri’s free-market reforms. How long they will wait for Alberto Fernández’s promises to bear fruit is unclear. While the new president is a wily pragmatist, even he knows that voters’ loyalties, especially when pressed to the limit of subsistence, are unstable.

Something fundamental has changed. Latin America cannot hitch its fortunes to the fading promises of globalization. Nor cannot it return to old-style populism. The only certainty is that the public’s fuse is short; many years of promises have dashed expectations at a time when the future looks especially bleak.

This is not the same kind of unrest seen in Beirut or Hong Kong, where people are taking to the streets to fight undemocratic regimes. This is about economic frustration, amplified by the seeming absence of alternatives to failed globalization.

The risk, of course, is that governments resort to Chinese-style tactics and turn economic malaise into a struggle over the future of democracy. Piñera’s ominous talk of an internal war, while surrounded by uniformed military officers, does not bode well.

Jeremy Adelman is Professor of History at Princeton University.

Pablo Pryluka is a doctoral candidate in history at Princeton University.

Saudi Aramco’s IPO

Aramco is both the oil sector’s Goliath and a firm vexed by problems

Is it worth a prince’s ransom?

IN THE HEADQUARTERS of the world’s most profitable company, past its heavily guarded perimeter, down a road, through another security gate, out of the blazing sun and into a cool office building sit box after box of rocks. They are samples of anhydrite, shale, dolomite and grainstone, retrieved from kilometres below ground.

A block of grainstone looks perfectly ordinary, its dark surface dotted with pores. But nestled in this rock were the remains of the tiny marine animals and plants which blanketed the Arabian peninsula before there was such a thing, over 100m years ago, and which still give the rock a faint, familiar scent: oil. “Smells like money,” says one executive—$111bn, to be precise.

That was the net income earned last year by Saudi Aramco, the kingdom’s state-owned oil company. It is nearly twice that of Apple, the world’s most profitable listed firm, and more than the combined earnings of the five biggest international oil companies—ExxonMobil, Royal Dutch Shell, BP, Chevron and Total. For decades, the riches from Saudi Arabia’s vast reserves have been the exclusive property of Saudi Arabia. Muhammad bin Salman, the kingdom’s crown prince, wants that to change.

In 2016 Prince Muhammad told this newspaper he was keen to list a portion of Aramco’s shares, in an effort to raise money to diversify the kingdom’s economy. After much delay, those plans seem to be proceeding. In September the government appointed Yasir al-Rumayyan, the head of the kingdom’s sovereign-wealth fund, to be the new chairman of Aramco and charged him with taking the listing forward.

Eleven banks and financial advisers have been working feverishly to that end. If all goes according to schedule, in early November the kingdom will announce its intention to list 2-3% of Aramco’s shares on the Tadawul, the Saudi stock exchange. It would probably be the biggest initial public offering (IPO) in history, raising $30bn or more and eclipsing Alibaba’s $25bn listing in 2014. A second listing may follow on a foreign exchange sometime in 2020.

Yet almost four years after Prince Muhammad announced the desire for an IPO, there remains a chance it is postponed. Disagreement over the company’s value has already delayed the listing—Aramco was expected to announce its intention to float in late October. It is unclear what price will satisfy the crown prince, who said in 2016 he hoped for a valuation of $2trn. Independent analysts think he would be lucky to get $1.5trn.

The uncertainty points to a contradiction at the heart of Aramco, at once the oil industry’s undisputed titan and a company plagued by problems. In September drones struck two Aramco facilities in eastern Saudi Arabia, knocking out more than half of its production.

Further attacks are possible—America says Iran was responsible. In October Fitch downgraded Aramco’s credit rating, owing to risks posed by geopolitics and its economically shaky sovereign. Saudi Arabia’s ability to use its heft to support global oil prices is in doubt. The oil price has sunk to about $60 a barrel, from $75 in April, amid fears of a recession.

What is more, investors have soured on the oil industry. Energy’s weighting in the S&P 500 index dipped below 5% in June, less than a third of its level in 2008. Oil markets are notoriously volatile; they may become more so as efforts to mitigate climate change hit oil consumption. “If this IPO was 15 years ago, it would be a compelling investment opportunity,” says Oswald Clint of Bernstein, a financial firm. “But the outlook for oil demand and the energy sector is opaque.”

Aramco maintains that, regardless of the oil market’s broader troubles, it will outcompete its rivals. Recently the company has used deals and new business units to secure customers, diversify its revenue and maximise the value of its oil. Its boosters like to say that the world’s last barrel of oil will come from Saudi Arabia.

But it is unclear what value investors will ascribe to such a distant possibility. As international energy giants and petrostates jostle to find their footing in an uncertain era, no company will loom larger than Aramco.

The company’s history is in some ways similar to that of other national oil giants. Americans drilled their first successful well in Saudi Arabia in 1938; the Arabian American Oil Company once had its headquarters in New York. The nationalisation of Aramco from 1973 to 1981 was part of a wave of requisitions that swept oilfields from Venezuela to Malaysia.

However Aramco is no ordinary national oil company. It is widely regarded by those within the industry as being well run, with professional managers and a distinct culture. The Aramco compound in Dhahran, in Saudi Arabia’s Eastern Province, is a world unto itself, home to 15,000 people. It has schools, gyms, food shops and streets lined with quaint houses—the campus resembles an Arizona suburb, with more mosques. About 90% of Aramco’s employees are Saudi, but women are as likely to wear trousers as an abaya.

Nor is Saudi Arabia an ordinary petrostate. Much of its treasure resides in the Eastern Province, including oilfields such as the celebrated 48.3bn-barrel Ghawar, shaped like a dancer’s leg en pointe. Oil is also tucked beneath the rolling dunes of the Empty Quarter and the seabed of the Gulf. In all Aramco has nearly 500 reservoirs, with 260bn barrels of proved reserves. That is more than triple the combined proved reserves of the five supermajors. Last year Aramco pumped one in eight of the world’s barrels of crude.

Such astonishing scale has ensured that Saudi Arabia remains the de facto leader of the Organisation of the Petroleum Exporting Countries (OPEC). American frackers may collectively produce more oil, but they operate independently. Saudi Arabia alone can ramp production up and down quickly in the attempt to tame volatile oil markets.

Oil has brought the kingdom prosperity. Saudi Arabia sustains its absolute monarchy by offering citizens a safety-net, including free education and health care, as well as a guaranteed-income programme. The kingdom’s natural resources benefit some Saudis more than others. In posh parts of Riyadh and Dammam, lush greenery peeks above the concrete walls separating residential compounds from the dusty streets beyond. As a whole, however, Saudi Arabia is dangerously dependent on crude.

Oil accounts for nearly 70% of the government’s revenue and almost 80% of exports. Non-oil activity is often the result of government spending, which is itself dependent on oil. It is hard to find a person or service in the kingdom that does not somehow rely on oil or gas. The arid climate requires the use of energy-intensive desalination plants—in Saudi Arabia, even water depends on fossil fuel.

Swing consumer

The country has long been vulnerable to shifts in the oil price. However the kingdom faces three new, big problems. First, shale has transformed America into the world’s largest oil producer, vexing OPEC’s efforts to maintain high, stable prices. Second, Saudi Arabia has a burgeoning, youthful population. The oil industry, which requires capital but not much labour, cannot employ enough of them. The IMF reckons that up to 1m jobs could be needed in Saudi Arabia in the next five years.


The third risk is the largest and most uncertain: global oil demand may subside. Economic growth and demand, which have risen in sync, could be decoupled as the threat of climate change grows. However no one knows whether this might happen, or when. America’s Energy Information Administration, within President Donald Trump’s energy department, expects the world to remain thirsty for oil, with demand rising up until 2050.

ExxonMobil also takes a bullish view. Mohammed al-Qahtani, Aramco’s head of upstream, expects that “demand will be robust for the next two decades plus”—the company models its reservoirs to 2200. Some oil companies tactfully present a variety of scenarios, as does the International Energy Agency (IEA), a forecaster. Any tidy prediction belies a tangle of assumptions and debate, according to an independent expert who has reviewed the IEA’s drafts.

Little wonder, then, that Prince Muhammad wants to diversify. His Vision 2030 aspires to transform the economy through strategic investment—for instance in manufacturing and “special economic zones”, such as a planned robotic city called NEOM near the Red Sea. Raising cash for that depends on the Aramco IPO.

There have been many reasons to delay, including concern over legal exposure that might come from listing in New York, the desire to acquire Sabic, the kingdom’s giant petrochemical company, as well as the valuation question. This time last year, plans for an offering seemed postponed indefinitely amid uproar over the murder of Jamal Khashoggi, a dissident journalist, at the Saudi consulate in Istanbul.

Since then, however, Aramco has announced a $69bn deal to buy Sabic. To raise money for the transaction, in April Aramco issued $12bn in bonds, which investors lapped up. The publication of a 469-page bond prospectus eased anxiety about letting the world pore over Aramco’s books. Meanwhile, the rationale for pursuing a listing—to raise money to diversify the economy—remains as urgent as ever.

Preparations for an IPO accelerated after the bond offering. Aramco held its first earnings call with investors in August (analysts, perhaps eager to establish good will, have rarely been so polite). To co-ordinate the listing the government has hired six global banks, JPMorgan, Goldman Sachs, Credit Suisse, Citi, HSBC, and Bank of America Merrill Lynch, as well as Saudi Arabia’s Samba and National Commercial Bank. Michael Klein, Moelis and Lazard are serving as advisers, say insiders. Investors, at last, are on the threshold of owning a sliver of Aramco’s shares.

The trouble with letting the market loose on Aramco, however, is that it tends to make up its own mind about valuations. This seems to make the crown prince uneasy. Bloomberg has reported that the government is exploring ways to limit volatility in trading after the Tadawul listing. The government expects local business leaders to buy shares enthusiastically to support Aramco’s valuation. “It is seen as part of being loyal,” says one seasoned businessman in Riyadh. “It’s not an explicit quid pro quo,” says another. “However you cannot do business in Saudi without being seen favourably by the power corridors.” Saudi banks have asked local investors if they would increase their stakes if offered new lines of credit.

If an IPO does proceed, however, Aramco’s valuation will eventually reflect the business itself: a company of staggering scale, aggressive strategy and unique complications. In recent years Aramco has moved to strengthen its traditional business and expand to new areas—Mr Qahtani describes this as “opportunistic”, not defensive. Changes include establishing a trading operation and investing more in natural-gas projects.

Its most important strategic shift is to move downstream, into petrochemicals. Its purchase of a 70% stake in Sabic, announced in March, serves the twin goals of raising cash for Saudi Arabia’s sovereign- wealth fund and diversifying Aramco’s revenue. The IEA expects petrochemicals to account for almost half of the growth in oil demand up to 2050. Sabic is already the world’s fourth-largest chemical company, generating $14bn of gross operating profit last year. Its businesses span fertilisers in India to plastics used in Range Rovers.

Aramco has also used its deep pockets to bolster its standing in Asia. In August Reliance, an Indian conglomerate, said that Aramco had taken a 20% stake in its refining unit, for roughly $15bn. Aramco has announced other investments in Asia, including projects in South Korea, Malaysia and China.

Joint ventures in refineries and petrochemical plants help Aramco hedge against low oil prices.

They also include agreements to be the projects’ long-term supplier of crude. Deal by deal, Aramco is securing customers for its oil in Asia, where demand is most likely to rise. Asia buys 71% of the company’s crude exports.

Some national oil companies are trying to pursue a similar strategy. ADNOC, of the United Arab Emirates, is joining up with Aramco on a big refining complex in India. What makes Aramco most distinct, however, is how cheaply it can pump oil. Its centralised resources, slick infrastructure and decades spent honing its drilling mean that extracting oil costs just $2.80 a barrel, one-third the average level of international oil companies. That helps Aramco achieve margins more than twice that of Rosneft, a Russian giant, and nearly four times that of Shell (see chart 1).

Cheaper and cleaner

The Economist worked with Rystad Energy, a research firm, to examine how the value of Saudi Arabia’s reserves might stack up if demand wanes—because of, say, the strengthening of American climate regulations after an election. The oil price at which a company could make a 10% return, the breakeven price, is one way of showing which countries’ reserves are most vulnerable.

Another way is to look at how much energy is used to extract oil, thereby increasing emissions, which would add a further layer of costs if carbon were to be taxed. On both measures, Saudi Arabia stands out.

Aramco’s breakeven costs for new projects, even after tax, are $31, according to Rystad Energy’s data, slightly higher than Iran, Iraq or Kuwait but less than half the level of Russia and two-thirds the level in America. Its carbon-dioxide emissions from extraction and flaring are less than half the global average.

A separate analysis, published last year by researchers at Stanford University and Aramco, found similar results (see chart 2). Indeed, Aramco exposes its peers’ weakness. Canada and Venezuela are particularly vulnerable, owing to production that is both dear and dirty. Compared with those of many rivals, Aramco’s reserves therefore seem well situated, no matter what happens to demand.

Yet even with its relative bounty it faces several big risks. The trove of oil assets under Saudi soil remain vulnerable to attack. Aramco executives, who usually refer to the September strikes as “the incident”, point out that repairs were done quickly.

However it was no one-off. The attacks in September followed strikes on a large pipeline, airports and an oilfield. Further incidents could complicate Aramco’s efforts to secure more long-term customers.

The kingdom’s claim on Aramco also makes investors nervous. Saudi Arabia has tried to ease their concern. Reforms announced in 2017 included reducing Aramco’s tax rate from 85% to 50%. In September Aramco unveiled a new dividend policy, which envisions a total payout of $75bn in 2020 and beyond.

Non-state shareholders will receive a proportionate share of this, and their absolute payout will be protected, even if the total value of Aramco’s dividend drops. Further, it said that dividend would probably rise.

However Aramco’s dividend yield, at a valuation of $1.5trn, remains lower than those of the European supermajors. Some investors remain squeamish about what might happen if oil prices were depressed for a long period. Aramco could still be profitable, but its profits might not be high enough to sustain the kingdom’s budget.

Prince Muhammad’s Vision 2030 might not go as planned—one of the Saudi sovereign-wealth fund’s big early investments was in SoftBank’s Vision Fund, which made a disastrous bet on WeWork. “If oil prices are lower, you could expect that the state would potentially increase taxes,” says Dmitry Marinchenko of Fitch. The promise to maintain high dividends to non-state shareholders, he points out, would not be legally sacrosanct.

There remains the question of what a listed Aramco would mean for OPEC, and therefore for oil markets. Historically Saudi Arabia has curbed its own output, often beyond the levels required by OPEC, in the effort to support oil prices. Khalid al-Falih long served as both oil minister and Aramco’s chairman.

In September the government sacked him from both posts, ensuring that one person now oversees Aramco and another the oil ministry. Yet the rational goals of a listed Aramco—boosting production to lower prices and squeeze rivals, for instance—may diverge wildly from the historic goals of OPEC.

Such uncertainties will weigh on Aramco, before and after any listing. Rivals are watching with interest. Saudi Arabia’s transition to oil’s new era is tortured. For the many countries with higher costs and less cash, it may be even more so.

China's Secret Weapon That Could Swing the Trade War 
by Nick Giambruno

"We’re going to war in the South China Sea… There’s no doubt about that."

Steve Bannon – previously one of President Trump’s closest political advisers – said these words shortly after Trump became president. He was referring to military conflict between China and the US… one that would likely be the biggest war since WWII.

While these words might seem like hyperbole to many, they touch on something important… arguably the biggest story for the next generation.

Watching the mainstream media circus covering Trump and China gives the impression that once the two sides reach a trade agreement, it will be back to business as usual. But that view completely misses the Big Picture…

The trade war between the US and China was always just a sideshow of a much bigger issue: Who will be the world’s dominant power?

It will be China, or it will be the US.

It can’t be both.

Could the US ever accept being No. 2? We won’t have to wait long to find out.

That’s because China is on the path to having double the US’ GDP by 2030.

The situation will soon reach a tipping point.

The US finds itself in the same position that previous established powers did as they were challenged by rising powers. Many of these countries found it preferable to strike while the rising power was still relatively weak, as they had a greater chance of prevailing than if they waited.

This dynamic is called "Thucydides’ Trap." It’s named after the Athenian historian Thucydides, who observed this dynamic in Ancient Greece.

Graham Allison, a professor at Harvard, has studied 16 cases of Thucydides’ Trap throughout history. In 12 of them – 75% of the time – the result was war.

War between the US and China is not inevitable. But if history is any guide, there’s an excellent chance – say, 75% – that Steve Bannon will be proven correct soon.

One thing I’m sure of is that the mainstream financial media are wrong about the trade war.

Even if some sort of deal is worked out, it will do nothing to resolve the larger problem of Thucydides’ Trap.

China’s rise is a Big Idea… arguably the Biggest Idea of our time.

Lee Kuan Yew, the former leader of Singapore, put it like this:

The size of China’s displacement of the world balance is such that the world must find a new balance.

It is not possible to pretend that this is just another big player. This is the biggest player in the history of the world.

Rising tension between the US and China is a trend you can bet on, regardless of what happens in the trade war. I think it’s a near-certainty. And it presents an opportunity for savvy investors.

You see, China has an ace up its sleeve… and as tensions between the US and China escalate, it will be forced to play this card. That will send this one industry soaring, potentially 10-to-1 overnight.

And it all has to do with a special group of metals no one’s talking about…

Rare Earth Elements

A consequence of the China-US rivalry is the near-certainty rare earth elements (REEs) will come into play.

REEs are 17 elements mostly clumped together at the end of the periodic table with atomic numbers 21, 39, and 57 to 71.

For example, erbium amplifies light and is used in fiber optic cables.

Gadolinium is used in X-rays and MRI machines.

Neodymium is used in cell phones and laptops.

Europium is used in lasers and fluorescent lights.

Most people have never heard of these obscure elements, but they are absolutely essential to modern life.

They’re used to make crucial components for advanced electronics like iPhones, electric cars, flat-screen TVs, computers, and sophisticated military equipment – like guidance systems, drones, anti-missile systems, radars, and fighter jets.

The screen you are reading this on relies on REEs.

There is no substitute for REEs in advanced electronics. The US military and US consumers are wholly dependent on them.

And China has a virtual monopoly in the space. It produces around 90% of global REE supplies. It also produces nearly all of the world’s more valuable heavy rare earths.

Separating REEs from ore is toxic, expensive, and dangerous to the workers. China has fewer environmental regulations and therefore disregards environmental and labor safety concerns in a way that other countries cannot. This lets it produce REEs at a much lower cost than its competitors.

Further, Beijing subsidizes the industry. It’s unknown exactly how much China subsidizes its REE industry (as it’s notoriously opaque), but it’s clear the Chinese government considers the industry a national priority… and will pour as much money into it as needed.

In short, lack of environmental and employee regulations… along with a big subsidy… are how China achieved dominance in the REE business. As Chinese leader Deng Xiaoping once said, "The Middle East has oil. China has rare earths.

"That’s why, as we can see in the graphic below, there is only one operable dedicated REE mine in the entire world outside of China. Other non-Chinese mines are years away from production. In other words, there is no alternative to China in the short term.

How to Profit From "Thucydides' Trap"

Even a whiff of the possibility that China could restrict REE supplies would send prices soaring.

We know this because it’s happened before… and it triggered one of the most spectacular booms in recent memory.

Back in 2010, a Chinese fishing vessel was sailing in disputed waters when it collided with Japanese coast guard patrol boats. The collision happened in waters claimed by both Japan and China.

The Japanese arrested the Chinese captain. China demanded his release, but Japan refused.

This sparked a major diplomatic dispute between the two countries. In retaliation, China abruptly cut off all REE exports to Japan. It also cut global exports by 40%.

The average price of REEs skyrocketed by over 20 times.

Over the next couple of months, companies in the industry went up many times higher.

This one incident caused a veritable mania in REE stocks that lasted for nearly a year.

That scuffle between China and Japan showed that China is ready to use its REE monopoly as a weapon to get what it wants…

And we know what happens when China uses it.

Fast-forward to today…

As tensions between the US and China escalate, it’s only a matter of time before the REE card gets played again. And this time, I expect it to be even more dramatic than the previous boom.

Recent events suggest it could be imminent.

If you’ve been anywhere near a radio… computer… or television since the summer of 2016, when then-presidential candidate Donald Trump first laid out his plans to battle China’s "unfair" trade policies, you know the basics of the trade war.

It’s the most urgent aspect of the US-China confrontation right now.

As you may have seen in the news, the trade war is spiraling out of control as each side escalates the conflict.

With the context of the trade war and Thucydides’ Trap in mind, China has stated loud and clear that it won’t hesitate to play the REE card.

Threats to restrict REE supplies have been plastered across Chinese media recently.

Further underlining the message, in May President Xi made an unusual visit to a state-supported complex in Ganzhou, which is known as the "Kingdom of Rare Earth" for its rich REE deposits.

It’s not every day that China’s No. 1 shows up at a dirty mine in the middle of nowhere. The timing of the trip was no accident. It was meant to send a message to the US.

As tensions rise, China will inevitably play the REE card and act to restrict supplies, just as it has done in the past. That will send REE prices – and the shares of REE companies – to the moon.

Given recent and unprecedented developments, that could happen imminently. The time to get positioned for big profits is now.

The best way to get exposure to rising REE prices is to invest in shares of REE-related companies.
Bottom line, China-US tensions are destined to get worse as the trade war and Thucydides’ Trap play out.

REEs are going to come into play during this confrontation, and that is going to be bullish for REE prices… and the companies involved.