Why Higher Oil Prices Aren't Solving Saudi Aramco's Biggest Problems

The world’s largest listed oil company, Saudi Aramco, is again in the spotlight. The company’s results, released on 3 November, clearly offer an uncomfortable lesson in wartime economics. Yes, an oil company can post higher profits even as its physical operating position deteriorates. Higher prices can counter lost production; exceptional accounting gains can lift headline earnings. Still, none of these proves the underlying business is secure.Aramco reported third-quarter net income of $36.25 billion, up 34.5% year-on-year. However, adjusted net income rose about 9% to $31.20 billion, while declining 6.6% from Q2. While the headline suggests acceleration, adjusted figures only show a business benefiting from expensive oil while confronting substantial constraints.The question is not whether Aramco is profitable, but whether those profits can sustainably finance shareholder distributions, domestic investment, international market access, and a more resilient export system. These facts matter as Saudi Arabia’s fiscal demands continue rising.Earnings deserve scrutiny at present. Aramco’s September exit from the Malaysian PRefChem joint ventures has generated a $6.91 billion gain. Its interim report explains that this included derecognition of net liabilities and recognition of additional receivables associated with crude supplied. Total PRefChem trade receivables at closing were $7.33 billion. Around $1.55 billion has been received, with the remainder to be settled over six years. Clearly not a $6.91 billion cash windfall.The above explains how to read all. Accounting gains are legitimate but should not be read as having the same recurring value as cash earned from producing and selling oil. It also does not show that international integration invariably delivers attractive returns. The only outcome is that portfolio discipline sometimes requires retreat.Cash flow also raises another warning. Q3 free cash flow exceeded quarterly base distributions. However, over the last nine months, free cash flow of $59.10 billion remained below base dividends paid of $65.66 billion. Free cash flow has increased by only 2% despite a much stronger realized oil price.There is no liquidity crisis, but internally generated cash after capital expenditures did not fully fund base shareholder distributions over that period. Other demands have come from acquisitions and other cash commitments. Yes, low gearing provides flexibility, but it does not eliminate the need to choose between competing uses of capital.Aramco faces political choices because it is linked to the Kingdom’s public finances. Saudi’s revised government projection puts the 2026 fiscal deficit at SAR245 billion ($65 billion), or 4.9% of GDP. Originally, it was expected to be SAR165 billion. Government spending currently exceeds the original budget by 9.3%, outpacing the upward revision to revenue. For 2027, expenditure is projected at SAR1.392 trillion, while revenues are expected to be SAR1.202 trillion. This comes as the Saudi economy is expected to contract in 2026 by 3.6%. Overall oil activities are expected to fall 21.8%, despite continued growth in non-oil activities. These are government forecasts, which clearly undermine any suggestion that higher oil prices automatically translate into national economic strength.The oil giant is currently operating under two financial tests. First, the corporate test, which assesses investment returns, operating costs, and cash generation. Second, a sovereign test that concerns the funds required to sustain government spending and economic transformation. It needs to be clear that the Kingdom’s fiscal needs cannot be reduced to Aramco’s production cost per barrel. Even a very profitable producer can still face pressure if its controlling shareholder (the Kingdom/PIF) requires more cash than the business can comfortably distribute over the cycle.Even if not all Aramco dividends flow directly into the central budget, the coming period's wider Saudi public-sector dependence on oil-generated cash will make dividend restraint politically consequential.Operational figures show that liquids output fell sharply year on year. At the same time, the NOC said supply reliability fell to 97.8%, down from 99.9% a year earlier. Between the lines, this means a high delivery rate under difficult conditions. However, global customers assess reliability through actual cargo availability, replacement costs, and refinery scheduling. Aramco’s profitability is not their concern.Geography is also playing an increasingly pivotal role, as the East-West Pipeline remains strategically indispensable. However, the pipeline is no longer an invulnerable escape route. Another geographical distinction is at play. Yanbu exports heading north toward Suez do not need to transit Bab el-Mandeb. Cargoes heading south toward Asian markets generally do. Red Sea exports are now constrained by destination, vessel availability, and the threat environment. Amin Nasser’s statement, “we continue to explore additional overseas storage capacity and alternative export routes,” is a strong and important strategic signal. Aramco will put oil closer to customers while expanding delivery options beyond the current system. This will be more than extra tank capacity; it will also require dependable terminal access, loading and unloading slots, suitable vessel draft, blending facilities, onward pipelines, and contractual rights that remain usable during disruptions. A terminal, tank, or port without a secure supply is not an asset.Still, keep in mind that overseas storage volumes only buy time. Storage can bridge a disruption only until stocks are depleted. Filling tanks will tie up working capital. Reserve capacity is also costly. Realistic options for all will be European Mediterranean and ARA facilities, or Asian storage.At the same time, there will be a “Day-After” Hormuz moment, where Aramco will face competing supply. New non-Gulf supply is being developed worldwide. The EIA’s October outlook forecasts US crude production averaging 13.9 million barrels per day in 2026 and 14.3 million in 2027. Other volumes will come from new offshore capacity in Brazil and Guyana, with Guyana increasingly selling into Asian markets. All these grades will be influencing refinery purchasing and bargaining power in Asia.In the coming years, competition will play a major role, as it is linked to delivered value: crude quality, price, freight, insurance, financing, and dependable arrival. Aramco’s upstream cost advantage remains important, but customers buy delivered cargoes. Persistent uncertainty can encourage diversification even when Saudi production itself remains highly competitive.At the same time, renewed focus is needed on capital allocation, which is becoming more complex precisely now. Aramco’s 49% HUMAIN investment involves asset transfers and approximately $2.6 billion in cash contributions. At the same time, a mining joint venture adds another adjacent activity. While the media is buzzing about AI, including at ADIPEC 2026, many expect Industrial AI to improve operating performance. At present, these investments still need to demonstrate returns amid competing demands for gas development, export resilience, and shareholder cash.The coming months or years will be interesting as the outlook contains an awkward paradox. If regional conditions improve, the Saudi giant should recover operational flexibility and potentially volumes. It will also lose some scarcity pricing and exceptional downstream margins. At the same time, if instability persists, prices may remain elevated, but pressure from delivery costs, investment requirements, and customer diversification will increase.For the Kingdom’s NOC, the next test will be sustainable cash generation after dividends, investment, and resilience spending under less favorable prices. Current financials show financial strength, but that strength also depends on market conditions the company cannot control.The Kingdom can require more cash from Aramco but cannot require international customers to accept higher delivered costs. It also cannot stop competitors from expanding. As shown here, it has no leverage over the security of shipping routes. Aramco's strategic priority at present should be to convert low-cost reserves into dependable, competitively delivered cash flow. As long as this has not been put in place, especially during a normal market cycle, rising quarterly profit is only evidence of earnings power. It is no proof that the underlying Saudi oil dilemma has been resolved.By Cyril Widdershoven for Oilprice.comMore Top Reads From Oilprice.comShell Sells North West Shelf LNG Stake to Abu Dhabi's XRG for $1.45 BillionADNOC Gas to Supply LNG to TotalEnergies Under Five-Year DealIndian Refiner BPCL Buys U.S. WTI Crude Oil Cargo