History of Saudi Arabia oil industry

The history of Saudi Arabia oil industry

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The Kingdom of Saudi Arabia emerged as a recognized and formalized nation-state in 1932 after King Abdul Aziz Ibn Saud consolidated different tribes and people from across the Arabian Peninsula through a sheer display of tenacity, leadership, and supremacy. This consolidation initiated the transformation of Saudi from a land of nomadic dessert dwellers to a country of affluence and modernity.

Understanding the history of Saudi Arabia and appreciating its economic nonetheless success require understanding the history of its oil industry and the critical role it played in advancing the social, political, and economic landscape of the country

The early history of Saudi Arabia oil industry: Oil exploration and discovery

Prior to the discovery of oil, Saudi Arabia was largely an agricultural society. Farming was widespread and dates were the primary produce. Muslims exported and traded dates with other Muslims from neighboring countries, thus generating a steady stream of income for the kingdom. Furthermore, because Saudi Arabia is home to Mecca and Medina, pilgrimage fees also generated significant amount of revenues.

Beginning 1920s, American and British oil companies were aggressively looking for new oil fields in Africa and the Middle East. The prospect for oil in Saudi Arabia caught the attention of King Ibn Saud. He commissioned several American geologists including Karl Twitchell to survey terrains and identify specific areas where fossil fuels might be abundant. These early oil explorations marked the beginning of the history of Saudi Arabia oil industry.

The 1930s ushered in the era of oil in Saudi Arabia. Twitchell positively confirmed the presence of large oil deposits in the eastern part of the country and by 1933, King Ibn Saud granted US-based Standard Oil of California or SoCal an oil concession in exchange for cash and loans. The oil concession further paved the way for the establishment of the California Arab Standard Oil Company or CASOC—a joint subsidiary between SoCal and the Texas Company.

Drilling began in 1935 following the definite discovery of oil. It took another three years before the country reached commercial production. Before the 1930s ended, Saudi Arabia was producing 500,000 barrels of oil a year.

American-Saudi relationship: A turning point in the history of Saudi Arabia oil industry

Critical to any discussions regarding the history of Saudi Arabia oil industry is the relation of King Ibn Saud with the American government. In his book “The History of Saudi Arabia,” Wayne H. Bowen said that the relationship between Saudi Arabia and U.S. was unlikely. For several decades, Britain held a sprawling influence over the Arabian Peninsula and Persian Gulf through protectorate treaties and economic assistance. British oil companies, in addition, were already operating oil concessions in Iraq, Kuwait, and Bahrain.

King Ibn Saud initially considered partnering with Britain. As discussed by Madawi al-Rasheed in his book “A History of Saudi Arabia,” the king initially wanted an oil concession with the Anglo-Persian Oil Company in exchange for an instant loan. The company rejected this demand. Nonetheless, SoCal willingly accepted the terms and conditions of the king.

It is also worth mentioning that the emerging relationship between U.S. and Saudi Arabia stemmed from mutual necessities. According to J. H. Bamberg, the American government was aggressively looking for ways to secure its oil supply during the 1930s. After all, the looming World War II would definitely require higher demands for oil. Meanwhile, Saudi Arabia was under an economic crunch due to dwindling pilgrimage revenues and war custom duties.

Although U.S. initially refused to extend economic aid to Saudi Arabia despite an existing oil concession under SoCal, the American government shifted its resolve. In 1943, President Theodore Roosevelt extended an existing lend-lease agreement with Saudi Arabia.

The Americans concentrated in forging deep economic and political ties with Saudi Arabia. Through this responsiveness and pronounced commitment, Saudi Arabia enjoyed massive streams of revenues derived from oil production and exportation. CASOC later became the Arabian American Oil Company or Aramco in 1943. This company has become a key player in directing the history of Saudi Arabia oil industry.

From sands to gold: Oil revenues and the looming concerns of King Ibn Saud

Aramco was an American conglomerate responsible for operating the entire oil industry in Saudi Arabia. Scope of operation included drilling, pumping, refining, and exporting petroleum. On the other hand, King Ibn Said and his government still owned the oil from the underground. Oil revenues were then divided between the American conglomerate and the Saudi government.

However, revenues started to dwindle at the onset of World War II due to the lack of workforce needed to drill oil and construct or maintain facilities. This situation was temporary and the emerging Saudi Arabia oil industry eventually bounced back after the war. From 1946 to 1950, revenues swelled from $10 million to $57 million.

King Ibn Saud, however, had grown dissatisfied with the existing profit arrangement with Aramco. He initiated a negotiation and although the discussion had its fair share of difficulties, the American conglomerate eventually agreed to an equal division of profits. From 1950 to 1951, the revenues of Saudi Arabia grew from $57 million to $110 million.

As demand for oil increased due to widespread application of internal combustion engines, oil producers and exporters in the Middle East, including Saudi Arabia, grew more wary about their existing agreements with Western oil companies. King Ibn Saud specifically expressed discontent over the fact that Aramco was earning more than his country. As a response, Saudi Arabia founded OPEC or the Organization of Petroleum Exporting States in 1960 together with Iran, Iraq, Kuwait, and Venezuela.

OPEC primarily served as a vehicle for negotiating the terms and conditions, including royalty and revenue-sharing agreements of member countries with Western oil companies.

Modern history of Saudi Arabia oil industry: Controlling the industry

Saudi Arabia successfully amassed a considerably amount of wealth within a short period. King Ibn Saud lavished in the first few earnings he received; building palaces for himself and his sons and erecting different buildings and annexes that eventually constituted the royal palace complex. The capital city of Riyadh became a construction haven.

Successors to the throne, specifically King Faisal and King Khalid, had their respective leadership styles and directions. Nonetheless, during their separate reigns, Saudi Arabia became one of the richest countries in the world. The country saw extensive modernization drive and improvements in standards of living.

By 1980, after taking full control of Aramco and naming it Saudi Aramco, the economy of Saudi Arabia further progressed along with its political status in the international community. Remember that controlling Saudi Aramco also means controlling the entire Saudi Arabia oil industry.

According to Anthony H. Cordesman, specifically in his book “Saudi Arabia Enters the Twenty-First Century, The Political, Foreign Policy, Economic, and Energy Dimensions,” the success of the country does not rest alone in its oil reserves. Sociopolitical stability and strategic ties with other countries were critical to the overall strategic direction of Saudi Arabia. Take note that Iran and Iraq have significant oil reserves of their own but sociopolitical instability and strained relationship with some countries prevented them from exploiting their respective oil industries. Undeniably, the rest of the world favored Saudi Arabia.