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Saudi Arabia’s Energy Sector in Context

Saudi Arabia’s Energy Sector in Context

Oil revenue as per cent of GDP in four Gulf countries.
Figure 2. Oil revenue as per cent of GDP in four Gulf countries.

In 1938, Standard Oil Company of California (Socal – today’s Exxon) struck oil in Dammam, near Dahran, the headquarters of what is today Saudi Aramco, the Saudi national oil company. The Saudi subsidiary was renamed Arabian American Oil Company (Aramco) in 1944, at about the time when additional American companies joined the consortium. The relationship grew closer in the next years, with new finds (including the world’s largest oilfield, Ghawar, in 1948) and ever-growing wealth flowing to the royal court.

By 1950 threats of nationalization were advanced in tandem with nationalist trends sweeping the region, and, in response, the Aramco consortium agreed to begin giving the Saudi government 50% of the profits. However, the Saudi government gradually began to gain direct control over Aramco’s operations, acquiring 25% of the company in 1973, which was increased to 60% the following year. This was spurred in part by the Israeli-Arab conflict, with US support for the state of Israel creating the first real rift between the countries. 1973 was also the year that OPEC first showed its teeth, slashing production and causing the price of oil to increase by 70%; OPEC specifically embargoed the United States and the Netherlands for assisting Israel.

For Saudi Arabia, as OPEC’s largest oil exporter, it meant a huge increase in revenues, which changed the Kingdom forever. Its net oil-export revenues (in real 2000 US dollars) more than quadrupled from 1972 to 1978, from $19.3 billion to $85.1 billion, despite the fact that the country’s output increased by only 38% in the same period.

Saudi Arabia has restricted oil output since the 1973 embargo, but this has been in the context of OPEC price management, and not, at least ostensibly, for political reasons. Thus, while differing in opinion about the formation of OPEC and the state of Israel, Saudi Arabia remained close to US policy through the cold war years. Aramco was fully nationalized in 1980. In November 1988, a royal decree changed its name formally from Arabian American Oil Company (Aramco) to Saudi Arabian Oil Company (Saudi Aramco) and took over the management and operations of Saudi Arabia’s oil and gas fields from Aramco and its partners.

Today, Saudi Aramco’s activities span the entire oil and gas supply chain, including exploration, production, refining, chemicals, distribution and marketing, and it is by far the leading oil producer in OPEC. The company’s activities are monitored by the Ministry of Petroleum and Mineral Resources and the Supreme Council for Petroleum and Minerals.

The upstream oil sector is closed to foreign investment (except for contractors that Aramco hires on a fee-for-service basis), but the government allowed four foreign consortia (in joint ventures with Aramco) to explore for non-associated natural gas in the Empty Quarter region early in 2000. Saudi Aramco’s value has been estimated by the Financial Times at up to $10 trillion, making it the world’s most valuable company.

The period after the Second World War marked a change in the country’s history, and the latter half of the 20th century saw the Kingdom assume a central position in global energy markets.

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