OIL

History of Saudi Arabia Discovery of oil



History of Saudi Arabia Discovery of oil

Introduction

Saudi Arabia is the world's most important oil producer. Given its relatively high production levels, accounting for nearly 13 percent of world output and 35 percent of total OPEC output in 1991, and, more significantly, its small domestic needs, the kingdom's dominance of international crude oil markets is unchallenged. Although reluctant to play the role, Saudi Arabia has become the "swing producer," balancing international oil demand and supply. Therefore, within limits, Saudi oil production policies can have a profound impact on international prices. Since the early 1970s, the kingdom has occasionally used this dominance to influence oil prices, usually to further its objectives of sustaining long-term oil consumption and ensuring economic stability in the industrialized world.

Discussion

The oil sector is the key domestic production sector; oil revenues constituted 73 percent of total budgetary revenues in 1991. Precise statistics for expenditures on sector development were not available but some estimates placed the annual figure at US$5 billion to US$7 billion, or less than 10 percent of total budgetary expenditures. Export oil revenues accruing to Saudi Aramco, a large portion of which is allocated to the budget, accounted for 90 percent of total exports in 1991. Only in the number of jobs was the oil sector relatively unimportant to the economy; the capital-intensive nature of the oil industry required few workers--less than 2 percent of the labor force in the early 1990s.

Abd al Aziz ibn Abd ar Rahman Al Saud, the first king of Saudi Arabia, had not gained control of the western part of the country when he granted the first oil concession in 1923. A British investment group, the Eastern and General Syndicate, was the recipient. The syndicate gambled on the possibility that it could sell the concession, but British petroleum companies showed no interest. The concession lapsed and was declared void in 1928.

Discovery of oil in several places around the Persian Gulf suggested that the peninsula contained petroleum deposits. Several major oil companies, however, were blocked from obtaining concessions there by what was known as the Red Line Agreement, which prohibited companies with part ownership of a company operating in Iraq from acting independently in a proscribed area that covered much of the Middle East. Standard Oil Company of California (Socal), which was not affected by the Red Line Agreement, gained a concession and found oil in Bahrain in 1932. Socal then sought a concession in Saudi Arabia that became effective in July 1933. Socal assigned its concession to its wholly owned operating subsidiary, California Arabian Standard Oil Company (CASOC).

In 1936 Socal sold a part interest in CASOC to Texaco to gain marketing facilities for the crude discovered in its worldwide holdings. The name of the operating company in Saudi Arabia was changed to Arabian American Oil Company (Aramco) in January 1944. Two partners, Standard Oil Company of New Jersey (later renamed Exxon) and Socony-Vacuum (now Mobil Oil Company), were added in 1946 to gain investment capital ...