Whenever we get into our cars to go to work, get onto an airplane to travel abroad, and turn on our stoves to heat our food, we are assisting the Saudi economy. The modern world is powered by oil and natural gas, and as a result humanity’s reliance on these resources is enormous. The United States in particular is a major consumer of energy and energy resources. Saudi Arabia is one of the world’s foremost energy producers, controlling an enormous supply of oil and taking in enormous amounts of wealth from its export. Understanding the Saudi economy must first come with an understanding of the Kingdom’s oil.
To say that Saudi Arabia plays a key role in providing the world its energy supply could be considered an understatement. According to 2013 estimates, released by the International Energy Agency, Saudi Arabia is 2nd among the countries that produce the most oil, behind only Russia. Remarkably, the Kingdom produces 12.65 percent of the world’s share of oil. In 2012 alone, the Saudis extracted up to 9.5 million barrels of oil each day. There are currently 7 major oil refineries in Saudi Arabia, collectively capable of refining up to 4 million barrels of oil a day. The majority of Saudi oil is sold abroad, producing an enormous wealth that has made the Saudi economy one of the top 25 strongest in the world. The Kingdom is also one of the United State’s primary energy suppliers, though it additionally provides other countries with a significant portion of its resources. Indeed, over 50 percent of Saudi oil is shipped to Asia, while less than 20 percent is shipped to the United States. Still, with over 20 percent of the world’s proven oil reserves, amounting to over 260 billion possible barrels, lying beneath its territory, the Kingdom will undoubtedly be one of the major oil producers for the considerable future.
Oil is not the only energy resource fueling the Saudi economy, however. A significant industry is now developing around natural gas. In 2012, the Saudi’s extracted over 10.7 billion cubic feet of natural gas per day. Most of this natural gas is used for domestic purposes, such as for producing energy and fueling a thriving petrochemical industry. Indeed, the natural gas extracted by the Saudis is turning out to be a major boon to their economy, allowing them to expand away from a largely export-based oil economy and to begin the development of chemical and petrochemical sectors.
Most of this information was provided by representatives from Saudi Aramco, the Saudi oil and natural gas company, who talked with us about the importance of energy resources to the Saudi economy. Aramco is the sole prospector, extractor, and domestic refiner of Saudi oil and natural gas; it controls a monopoly on the Kingdom’s lucrative oil business. Indeed, because of its total control over one of the world’s largest oil supplies, the company is estimated by the Financial Times to be the world’s most valuable company.
Aramco’s history began in 1933 when a conciliation agreement between the Saudi government and Standard Oil of California, which would later become Chevron, was signed that allowed the company to prospect for Saudi oil. Oil was found in 1938 and Standard Oil shipped its first barrels abroad in 1939. Later the company brought more oil producers into the extraction process and changed its name to the California-Arabian Standard Oil. In 1944, the company was renamed the Arabian American Oil Company, or Aramco for short. The Saudi government began purchasing Aramco stock between 1973 and 1980 and, by 1980, was the sole holder of Aramco shares. As a result, the Saudi government became the company’s owner. Unlike the messy and often politically consequential nationalization of oil industries in other countries, the Saudi takeover of Aramco turned out to be a smooth transition. Aramco’s partners continued to operate and manage Saudi Arabia’s oil fields, and in 1988 a royal decree changed the company’s name again to the Saudi Arabian Oil Company, which it is known as to this day.
The Aramco representatives reinforced the importance of oil for the Saudi economy. Throughout much of the ‘oil boom,’ oil revenue was the Kingdom’s main source of wealth, and was what propelled the Saudi economy to great heights. Even to this day, Saudi oil remains a key element in the Saudi economy. When asked about possible energy competitors, such as Iran, Iraq, and Libya, the representatives expressed optimism in Saudi Arabia’s continued dominance of the world’s oil supply. They argued that political instability in those countries has prevented them from effectively exporting oil and that, even if they did manage to export oil, the world’s increasing oil demands would still increase Saudi exports. Indeed, the representatives noted that even the United States, despite becoming more energy independent and increasing its own production of oil, is still important increasingly large amounts of oil annually.
The representatives also focused attention on other ways the Saudi oil industry has helped the Saudi economy. Expanding the oil industry, they argued, would be an effective way to deal with the widespread unemployment of Saudi youth. As many Saudis leave college with engineering or technical degrees, which are suited for oil extraction and production, the Saudi oil industry is a key source of employment.
A map of Saudi Arabia’s oil and gas fields.
However, even the Aramco representatives acknowledged that times and technologies are changing. Oil will not be a key energy resource forever, and for a country which relies so heavily upon its export, change must occur. One of their key focuses was on Aramco’s research and development efforts, which have been focused on developing cleaner oil technologies and expanding into other energy sectors. They noted that, while oil was the source of over 70% of the Saudi income in the 1980s, it is now only 30%… a number they still consider too high. To combat a future of slowing oil exports and demand, Saudi Arabia, a country with money to spend, is heavily investing in renewable energy sources such as solar power. Meanwhile, Aramco is starting to develop and expand the Saudi petrochemical industry, hoping to diversify Saudi exports and production.
When probed about environmental concerns, however, the Aramco representatives pointed out that oil is still very much a necessity right now. Oil, despite being environmentally unfriendly, brings many benefits into this world. As one representative noted, “Oil makes plastics possible, which make incubators possible.” Still, as noted earlier by Aramco’s research into cleaner oil technologies, the company feels a social responsibility to make its exports more environmentally friendly. After all, as a representative pointed out, cleaner oil drives up oil demand, a win-win for all involved.
It is clear from the presentation given by the Aramco representatives that oil is still very much a key resource in the Saudi economy, and its production and export is still what drives the economy forward. As such, understanding Saudi Arabia’s involvement in oil production is key to understanding the Saudi economy and, in turn, the Saudi state. It will be very interesting to see, as time goes by, how the Saudis respond to changing energy demands, and whether their new focus on cleaner and renewable energies will be able to power their economy as successfully as oil does today.