Saudi Aramco: Past Glory and Present Challenges

Saudi Aramco, once the most profitable company, faces challenges due to declining oil demand and internal economic issues.

### Saudi Aramco: From the World's Most Profitable Company to Crisis
* 💰 Saudi Aramco was the world's most profitable company, making over **$700 billion in profits between 2016 and 2022**, with **$159 billion in profits in 2022 alone**.
* 🛢 Founded in 1933 when Ibn Saud sold a 60-year concession to Standard Oil of California, Saudi Aramco became the **world's biggest oil company** by cautiously and consensually **nationalizing the company**.
* 🌍 The first structural problem facing Aramco is the global shift away from fossil fuels, with the International Energy Agency forecasting **global oil demand to peak in 2029**.
* 📉 The second structural issue is the decline of OPEC's influence due to the rise of non-OPEC production, making it challenging for OPEC Plus to **control oil prices**.
* 🛢 The more immediate issue is Saudi Arabia's economic diversification efforts, leading the government to redirect **Aramco's revenues towards various projects**.
* 🇺🇸 The US's counter-cyclical trading of oil from its Strategic Petroleum Reserve has also affected **OPEC Plus and Aramco**.
* 💸 As a result of these challenges, Aramco has been forced to **sell shares, reduce investments, and abandon plans to increase its maximum capacity**, indicating a **potential escalation of its woes**.

this video is brought to you by brilliant. Until recently, Saudi Aramco was undeniably the world's most profitable company, with a margin 10 times that of its competitors. Between 2016 and 2022, Aramco made over $700 billion in profits, more than any other company in the world. In 2022 alone, Aramco raked in $159 billion in profits, the single most profitable year ever reported by any company in history. However, while Aramco is still a corporate giant, a combination of international and domestic factors have put it under serious strain. So in this video, we're going to have a look at Aramco's glorious history and why the future doesn't look quite so rosy. So let's start with Saudi Aramco's origin story. Saudi Arabia, as we know it today, was founded in 1932 by Ibn Saud, the father of the King of Saudi Arabia, King Salman, and the grandfather of Crown Prince Mohammed bin Salman. Almost immediately after the Kingdom's

Inception. Western oil companies began vying for exploration licenses having discovered enormous amounts of oil in nearby countries like Iran, Iraq, and Libya. At this time, ibin saoud was seriously short of cash, largely because the Great Depression had reduced the number of Muslim pilgrims visiting Mecca, which was at the time Saudi Arabia's main source of income. Between 1927 and 1933, the number of fee-paying pilgrims fell by 80%, and the state budget fell from $1 million to barely $250,000. So in 1933, ibben so sold a 60-year concession to Standard Oil of California, known today as Chevron, for just $50,000. The agreement gave Chevron exclusive rights to seek, produce, refine, and market Saudi oil, and it turned out to be one of the best deals in corporate history. Saudi Arabia turned out to have more oil than basically any other country in the world, and Chevron made an absolute killing. The Saudi State didn't do too badly either. By 1939, a year after

the first discovery in Daran, the state budget had swelled to $2 million. And after a series of massive discoveries in the late 40s, Saudi revenues grew exponentially, going from $7 million in 1947 to $56 million in 1950, $110 million in 1951, and $25 million in 1952. However, in the '50s, the Saudis came under pressure to nationalize Chevron subsidiary, which had then been renamed the Arabian American Oil Co. or Aramco. Aramco had already agreed to split all profits 50/50 after ibin Saud threatened them with nationalization in 1950. But over the subsequent decade or so, a wave of Arab nationalism spread across the Middle East, led by Egypt's President Kamal Abdul Nasser. Nasser seized the Suez Canal from the British in 1956 and began calling on other Arab peoples to rise up against their pro-western monarchies and nationalize their domestic industries, which is exactly what happened in Iraq, Syria, Libya, Yemen, and the Sudan. However, one of

the big reasons Saudi Aramco has been so successful is that the Al Saud family saw what happened when oil industries were abruptly nationalized and did something very different. In countries like Iran, Iraq, and Mexico, nationalization was done suddenly and aggressively, and Western managers were kicked out as soon as possible. This often meant that these new National oil companies ended up being terribly mismanaged. When the Saudis nationalized Aramco, however, it was done both cautiously and consensually. The Saudi State bought out Aramco over the course of s years, and Aramco maintained technical cooperation agreements with its former American owners until as late as 2010 to make sure the Americans passed on their expertise to the new generation of Saudi managers. A smooth transition ensured that Saudi Aramco was able to properly take advantage of the country's enormous oil reserves, and today it's by far and away the world's biggest oil company. So how on Earth could the world's most profitable company be in crisis? Well, while Aramco

isn't going bankrupt anytime soon. It's facing at least two structural problems and one more immediate issue. The first structural problem is the coming shift away from fossil fuels. While the world is clearly still using more fossil fuels than environmental campaigners would like, global oil demand has proved remarkably weak since the pandemic. In their Oil 2024 report published on Wednesday, the International Energy Agency forecast that global oil demand will peak in 2029, which should mean lower prices. Simultaneously, Saudi production costs will be going up as the cheapest, most accessible oil fields deplete. This will squeeze Aramco's profit margins well before Saudi Arabia runs out of oil. As former Oil Minister Ahmed Zaki Yamani once observed, The Stone Age did not end because we ran out of stones. This predicament is made more acute by the second structural issue: the decline of OPEC. For those of you who don't know, OPEC, which expanded to become OPEC Plus in 2016, is a Saudi-led cartel of oil-exporting states. In the past, OPEC

could basically force whatever price it wanted because the OPEC countries accounted for the vast majority of global oil production. However, the rise of non-OPEC production in countries like Brazil, Guyana, Canada, and especially the US means that OPEC plus today has less control over prices. This has been made especially apparent in the past year or so. The Saudis have been trying to push oil up to $100 a barrel, cutting their own production by 2 million barrels a day, but it's been remarkably ineffective, and oil prices have barely gone above $80 a barrel. Things have been made even more difficult for the Saudis by the fact that the US has started trading oil in its Strategic Petroleum Reserve counter-cyclically. For context, the US has an oil stockpile with millions of barrels stored in underground tanks in Louisiana and Texas. In the past, they've just let it sit there for emergencies, but Biden has started selling barrels when prices are high and then replenishing the reserve when they're low. This is actually pretty clever from the Biden team. It actively stabilizes global

prices, which is good for both the American economy and Biden's electoral prospects. The US government simultaneously makes a tidy profit. This has caused immense frustration within OPEC plus. Earlier this year, Angola quit the cartel after complaining that their production cuts weren't working. But the third, more pressing issue for Aramco relates to the wider Saudi economy. We've done a whole video on this over on TLDR Global, but the TLDR is that the Saudi government has been redirecting revenues from Saudi Aramco towards a variety of projects, all intended to reduce the country's economic dependence on oil. Unfortunately, these projects haven't been entirely successful, and the Saudis have responded by squeezing as much money as they can out of Aramco, selling shares, and reducing investment. This is why in January, Aramco quietly abandoned a long-standing plan to increase their maximum capacity from 12 to 13 million barrels a day. If Saudi Arabia's economic crisis continues, and recent GDP data doesn't bode well, Aramco's woes will

only escalate now understanding exactly what has or is going to happen here can be a little tricky requiring you to evaluate lots of information from different often partial sources. It would be sensible then to begin improving your critical thinking skills so that you can keep sharp and better understand what's going on. And well our sponsor brilliant.org can help you do just that. Brilliant is the online learning platform that's designed specifically to teach you everything from maths data analysis programming and AI from the ground up. You don't need a fancy degree or to have dedicated hundreds of hours to studying any of these all you need is a device with an internet connection and a few spare minutes a day. And with your spare few minutes you'll learn by actually doing with brilliant providing Hands-On lessons that let you play around with Concepts a method that has been shown to be six times more effective than just watching lectures. What makes this even better is this content is created by an award-winning team of teachers researchers and professionals from MIT Caltech Duke.

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Saudi Aramco’s Looming Crisis Explained

TLDR Business

The Unrivaled Profitability and Struggling Future of Saudi Aramco

Saudi Aramco was the most profitable company, making over $700 billion in profits from 2016 to 2022.

However, a combination of international and domestic factors has put the company under serious strain, despite its glorious history.

In 1933, Saudi Arabia sold a 60-year concession to Standard Oil of California for just $50,000, giving Chevron exclusive rights to Saudi oil and turning out to be one of the best deals in corporate history.

The Rise of Saudi Aramco and the Nationalization of the Oil Industry

Saudi Arabia's revenue grew exponentially in the late 1940s and early 1950s, leading to pressure to nationalize the Arabian American Oil Co.

Unlike other countries in the region, Saudi Aramco's nationalization was done cautiously and consensually, allowing for a smooth transition and successful management of the country's oil reserves.

The company, despite being the world's most profitable, is currently facing a crisis.

Aramco's Challenges in the Changing Oil Market

Aramco is not facing bankruptcy, but it is dealing with structural problems and an immediate issue.

The company will likely experience lower profit margins due to weak global oil demand and increasing Saudi production costs.

Additionally, the decline of OPEC's control over oil prices, coupled with the US's counter-cyclical trading of oil, is making it difficult for Aramco to have a significant impact on the market.

Challenges Facing Aramco and the Saudi Economy

Aramco is facing three major challenges, including frustration within OPEC plus and the impact of the US government's oil policies.

Angola's departure from the OPEC cartel is also a significant issue, while Aramco is further pressured by the wider Saudi economic situation and the government's redirection of its revenues.

The company has been forced to sell shares and reduce investment, abandoning plans for capacity expansion, as the Saudi economic crisis continues to escalate.

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