INTRO: Do you know what the most profitable company
in the world is? Most people would probably guess Apple. This makes sense given that Apple is one
of the most recognizable brands in the entire world and they’re usually the largest company
in the world as well. But, Apple doesn’t hold the title of most profitable company. This title
actually goes to a background company called Saudi Aramco. If you’re not familiar with Saudi Aramco,
they’re Saudi Arabia’s flagship oil company and they’ve been at the top of the fortune 500 for
decades. Historically, they’ve often been the most profitable company in the world, but their profits
over the past 12 months are unlike anything we’ve ever seen before. By now, I’m sure you’re well
aware of the sky high gas prices around the world. While things have cooled down from their peak a
few months ago, prices are still pretty high on a historical basis. This has been terrible news
for everyday people who are just trying to make ends meet, but for oil companies, this has been
a godsend. At the peak, Saudi Arabia was profiting over a $1 billion per day just from oil exports.
And Saudi Aramco’s most recent 12 month earnings stand at an eye watering $279 billion. For
perspective, this is well over two times Apple’s earnings of $120 billion. It’s also nearly as much
as the profits of Apple, Google, and Microsoft combined. Something else to note is that it hasn’t
even been one year since oil prices really became heated. So, as we close of 2022, Saudi Aramco’s
rolling 12 month profits should just balloon even higher, potentially to over $300 billion. With
that amount of money, Saudi Aramco could literally buy Samsung with a single check and still have $30
billion leftover. But things haven’t always been so rosy for Saudi Arabia. In fact, just a hundred
years ago, much of Saudi Arabia was just a bunch of tribes who were fighting for survival. Now,
you might say that they just got lucky with oil, and while they did get lucky with their natural
resources, that in itself is nowhere near enough to build such an empire. And if you don’t believe
me just take a look at Venezuela who not only has more oil than Saudi Arabia but discovered
their oil decades earlier. You would think that such a country would be filthy rich but
they’re unfortuantley dirt poor and riddled with hyper inflation. The same thing could be said
about Canada as well who has the world’s third largest oil reserves. Canada is of course by
no means doing bad, but given that they’ve been an advanced country for far longer than Saudi Arabia,
you would think that they would’ve been able to capitalize on their oil way more than Saudi
Arabia. Yet, that’s not the case, so how did Saudi Arabia become the winners of the oil game?
DESPERATE SEARCH: Taking a look back, Saudi Arabia was
by no means early to the oil game. In fact, they were rather late and their entry into oil wasn’t
particularly strategic either. It was more of just a desperate gamble. In the decades preceding Saudi
Arabia’s search for oil, Saudi Arabia wasn’t even a thing. Instead, the area was controlled by two
families called the house of Saud and the house of Rashid who were constantly in conflict. Sometimes,
the house of Saud would be on top and other times the house of Rashid would be on top, but there was
really no winner. It was more or less just a big power struggle that led nowhere. This, however,
would all change with the turn of the century into the 1900s. At the time, the Rashidi family was
on top and the leader of the Saudi family, Abdul Aziz Al Saud was in exile in Kuwait. Abdul hadn’t
forgotten about the house of Rashid though, and he was simply plotting his counterattack which would
take place in 1902. With his initial strike, Abdul would take back Riyadh which was just the first
of a series of conquests and before you knew it, the Sauds were back in control. The Rashids were
forced into exile just like the Sauds previously, but this was by no means the end of it. The Saudi
family knew that the Rashidi family could strike back at any time just like Sauds did. So, they set
out on advancing the area so much that the Rashidi family couldn’t form a counterattack. Ironically,
this turned out be a non issue given that the Rashidi family would dissolve in 1921. But,
the Sauds didn’t know that at the time, so they started working on creating an unbeatable
force. And the first step in this journey was to actually create an official country. This is what
would eventually lead to the birth of Saudi Arabia in September of 1932. At this point,
they officially had a country, but this didn’t mean much without an economy. And unfortunately,
being surrounded by a bunch of sand, the Sauds didn’t exactly have a bunch of economical options.
In fact, they really only had two options. Option number 1 was to leverage their access to the sea.
They could build a port or go pearl diving or fish, but this is what they had already
been doing for millennia. Pearl diving in the Arabian peninsula literally dates back
7000 years, and given their current situation, it clearly wasn’t all that profitable. Option number
2 was to leverage their religious significance. Saudi Arabia was and still is the home to Mecca
which is where millions of Muslims pilgrimage to every year. But I suspect that the Sauds
felt that leaning too much into religion would threaten their own power. After all,
they’ve been destroying the city eversince they took over. In the last 37 years itself, Saudi
Arabia has demolished 95% of Mecca’s historical buildings. So, clearly, becoming an Islamic
Vatican city wasn’t a top consideration. With the sea and religion crossed off as economic options,
Saudi Arabia had to think outside the box. And it didn’t take them long to take the oil gamble.
Just one year after the country was formed, Saudi Arabia would sign an oil concession agreement with
the Standard Oil Company of California or SOCAL. For many years, SOCAL had little to show for their
efforts in Saudi Arabia, but eventually in 1938, SOCAL would strike liquid gold.
EMPIRE BUILDERS: For many decades, the vast majority of profits
from Saudi Arabia went to American companies while Saudi Arabia was left with a small dividend. While
this might seem unfair at first glance, there was actually a lot of value for the Sauds in
this partnership. Sure, America might be the ones that were left with the short term profits,
but it was Saudi Arabia that was left with the long term investments. Scaling to millions of
barrels per day is by no means cheap and guess who fronted the cost: the Americans. Access to capital
was not the only thing that the Americans provided either. They also provided expertise that simply
wasn’t available in Saudi Arabia at the time. For example, in the 1940s, the Americans would help
Saudi Arabia build a 1200 km oil pipeline which was at the time the longest in the world. The
Americans also helped Saudi Arabia identify the Safaniyah oil field in 1951 which is the world’s
largest offshore oil field to this day. So, while America was hogging most of the profits,
they were simultaneously building an empire, an empire that Saudi Arabia could eventually
takeover. Saudi Arabia wasn’t in any rush though. While their entrance into the oil industry was
kind of an accident, they were determined to be strategic with how they played their cards moving.
A great example of this was the formation of OPEC in the 1960. If you’re not familiar with OPEC,
it’s basically an oil union for oil producing countries. Anyway, it wasn’t till the 1970s
that Saudi Arabia finally began to nationalize Aramco. Saudi Aramco’s website likes to claim
that Saudi Arabia acquired Aramco as opposed to nationalizing the company. The story goes that
the Saudi government bought a 25% stake in 1973, followed by a 35% stake in 1974, and finally a 40%
stake in 1980. I guess this is technically true, but it’s unlikely that Saudi Arabia paid anywhere
near market price for Aramco. The acquisition price was never revealed, but experts estimate
that it was likely somewhere between $1.5 to $2 billion. Even with inflation, that’s only
about 15 billion 2022 dollars. For perspective, the company is now worth over $2 trillion and
oil production hasn’t really increased since the Americans left. So, did the Americans get ripped
off with the acquisition? Probably, but you can’t feel too bad for them given that they had 40 years
to exploit Saudi oil undisturbed. And with that, Saudi Arabia had officially taken over Aramco.
WHY SAUDI ARABIA WON:
Up to this point, Saudi Arabia’s journey isn’t all that different from Venezuela’s. Saudi Arabia
essentially called in Exxon and let them exploit them for many decades before finally taking over.
This is basically identical to what Venezuela did just with Shell instead of Exxon. If anything,
Venezuela was ahead of the Saudi Arabia when it came to finding oil and nationalizing it. So,
why did these two countries end up on polar ends of the spectrum. Well, at the end of the day,
it all just comes down to management and strategy. I know most of us aren’t fans of authoritarian
regimes like Saudi Arabia, but this is one of the few cases in which being a dictatorship actually
helped the country. You see, Saudi kings and princes were always able to focus on the big
picture because they didn’t have to worry about selfish reasons. As long as the country was doing
well, their family would more than likely keep control and become extremely rich themselves. The
same, however, could not be said about Venezuelan leadership. Just because the country does well 20
to 30 years from now doesn’t mean that their families would do well. Their time in power
was more than likely limited, so they had to make the most of it while the still could.
In other words, they had to steal as much as they could while they were still in power. This is why
a $100 billion was embezzeled by country officials between 1972 and 1997 alone. And this is also why
Venezuelan gold and currency reserves stand at just $10 billion while Saudi Arabian reserves
stand at $473 billion. Aside from making long term decisions and saving up their money,
Saudi Arabia also reinvested this money far more effectively than Venezuela. Saudi Arabia used
their money to build businesses, invest into the economy, and recruit international talent. This is
why 85% of Saudi engineers and 18% of Saudi CEOs are actually expats. Vision 2030 is also a perfect
example of this. In the meantime, Venezuela was embracing socialism and spending all of their
money on social programs and subsidizing various everyday goods. So, as Saudi Arabia was becoming
less dependent on oil, Venezuela was becoming more dependent on oil. While this works out fine when
oil is strong, the same cannot be said when oil is weak. And that’s exactly what happened in 2014
when oil prices crashed and the Venezuelan economy collapsed. While this crash was not
fun for Saudi Arabia either, they were able to comfortably make it to the otherside not because
of any one decision that they made during the crash, but because of decades of right decisions.
SAUDI ARAMCO TODAY:
Today, Saudi Aramco is one of the largest companies in the world and it’s usually the
most profitable. Now of course, these insane oil prices wont last forever,
and things will eventually cool down, hopefully. This means that Saudi Aramco’s profits will also
cool down with time, but all this means for them is profiting a $100 billion per year instead of
$200 or $300 billion. Zooming out to the long term, the world is slowly moving away from oil,
but this will probably not impact Saudi Arabia all that much given that they’ve been slowly moving
away from oil themselves. And given that they’ve been playing their cards extremely strategically
eversince they found oil, I see no reason why this will change in the coming decades. Until then,
Saudi Arabia will remain as one of the few countries in which an authoritarian regime
actually worked out, atleast economically. If we’re talking socially, that’s a whole
different story, but that’s a topic for another video. Did you realize how high Saudi Aramco’s
profits were? Comment that down below. Also, drop a like if you hope oil prices come down
sooner rather than later. And of course, consider checking out our discord community to suggest
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