What was the first company in the world to reach a valuation of $2 trillion?
The most common guess would probably be Apple or Microsoft.
But the first company to reach a $2 trillion valuation isn’t a tech company nor is it
American.
Saudi Aramco which is Saudi Arabia’s oil company was actually the first company to
reach a $2 trillion valuation in December of 2019.
And given that Saudi Aramco was making more money than Apple and Google combined before
the pandemic, it’s no wonder why they’re worth so much.
What is surprising though is the fact that Saudi Arabia didn’t actually found Aramco,
they actually bought it.
So, here’s how Saudi Arabia acquired one of the most valuable companies in the world.
It all started in the early 1900s when Henry Ford introduced the Model T, the world’s
first mass-produced vehicle.
The Model T was quite popular from the very beginning, but as more competition entered
the scene, automobiles went from being a luxury to being a valuable consumer good in the 1920s
and 30s.
This sudden increase in automobile ownership created a strong demand for cheap oil, so
companies like Standard Oil and Shell started scouring the earth for the richest oil reserves
they could find.
In the meantime, modern Saudi Arabia was just starting to take shape.
The Abdulaziz family had ruled central Arabia for 130 years, but in 1891, a rivaling group
would conquer the region and push out the former ruling family.
For over a decade, the Abdulaziz family stood back and relinquished their control until
one of their descendants Ibn Saud decided to take back control.
In 1902, Ibn Saud led a revolt with 40 people into Riyadh, and the group would successfully
take back Riyadh making Ibn the ruler of the area.
Ibn spent the next 30 years conquering most of Arabia, and it wasn’t until 1932 that
he would unite the regions of Arabia and create modern-day Saudi Arabia.
Having successfully conquered the entire region, king Ibn turned his focus onto advancing the
kingdom’s economic state.
Just a couple of months before Saudi Arabia was formed, the SoCal oil company, or now
Chevron, struck oil in Bahrain in May of 1932.
This discovery piqued interest in the middle eastern oil search, and King Ibn would quickly
leverage this opportunity the following year.
In November of 1933, King Ibn signed a concession agreement with the SoCal.
This agreement created a subsidiary company called the California Arabia Standard Oil
Company or CASOC which was fully owned by SoCal.
Casoc immediately began work in Saudi Arabia starting by surveying the area over the next
year.
Casoc started drilling in 1935, but despite a year of planning, Casoc didn’t find any
oil.
Discouraged by the lack of progress, SoCal would sell 50% of the company to Texaco, and
this kept the effort alive for a few more years.
By 1937 though, Casoc was still yet to find any oil, so SoCal considered giving up on
the endeavor altogether.
SoCal consulted with their chief geologist Max Steineke who recommended that they should
keep drilling.
So, the executives kept the operation alive, but they weren’t particularly optimistic.
Just a year later though, Casoc struck commercial quantities of oil at Dammam Well No. 7.
This well would later be named the prosperity well.
Anyway, Saudi Arabia would export their first tanker of oil in 1939, and with that Saudi
Arabia had entered the oil industry.
Saudi Arabia was only making a small royalty on all of the oil being exported, but at this
point, King Ibn was simply happy to have this opportunity, so he wouldn’t make a fuss
about it.
A few years later, in 1941, Casoc discovered oil in Abqaiq, and Casoc would rapidly expand
across Saudi Arabia throughout the 1940s.
In 1944, the company’s name was changed from California Arabian Standard Oil to Arabian
American Oil or Aramco.
Soon enough, more American oil companies wanted a part of the pie, and they would end up investing
quite heavily in 1948.
Standard Oil of New Jersey which would later become Exxon purchased a 30% stake in Aramco.
And Socony Vacuum which would later become Mobil purchased a 10% stake in the company.
In the meantime, though Saudia Arabia wasn’t making too much money from the operation every
year, the operation had been going on for a decade and Saudi Arabia had saved up a good
amount of money over the years.
And given all of this interest in Aramco, King Ibn realized that he finally had the
upper hand.
In 1949, Aramco would accidentally drill into the emirate of Abu Dhabi.
This created a border dispute between Saudi Arabia and Abu Dhabi and gave King Ibn the
perfect opportunity to squeeze Aramco.
King Ibn threatened that since Aramco couldn’t respect the countries’ borders, Saudi Arabia
was going to nationalize their oil production and kick out the Americans.
In response, the Americans would bend over and agree to share 50% of Aramco’s profits
with Saudi Arabia.
Aramco also agreed to move its headquarters from New York to the Saudi Arabian city of
Dhahran.
Saudi Arabia still had no stake in the company, but 50% profit sharing was way better than
the small royalty they were previously receiving.
Moving into the 1950s, Aramco transitioned from being a large oil producer to being an
oil giant.
In 1950, they completed the 1200 kilometer Trans-Arabia Pipeline which connected eastern
Saudi Arabia with the Mediterranean sea.
They also discovered the Safaniyah oil field in 1951 which became the world’s largest
offshore oil field at the time.
By 1958, Aramco was producing over 1 million barrels of oil per day.
And while that’s quite a milestone, that’s not even 10% of how much they produce today.
So, there was still a lot of growth left, and the next pivotal point in Saudi Arabia’s
oil journey was the foundation of OPEC.
In 1960, 5 of the top oil-producing countries came together in Baghdad to form a sort of
collaboration.
While these countries produced a significant proportion of the world’s oil, they were
still very much dependent on America and the Soviet Union.
They figured that they could reduce this dependency by coming together and creating a sort of
monopoly on Middle Eastern oil.
The first time OPEC leveraged this power was in 1973 and this would become known as the
oil crisis of 1973.
At the time, the Yom Kippur War was taking place between Israel and a coalition of Arab
states led by Egypt and Syria.
The US and several western countries were passively supporting Israel during the war,
and Saudi Arabia wasn’t a big fan of this.
In retaliation, Saudia Arabia would get OPEC to enforce an oil embargo on all of these
western countries.
To make things even worse, the US was already facing an oil shortage due to strong economic
growth in the 1960s which skyrocketed automobile ownership.
So, when OPEC announced the embargo, global oil prices surged from $3 per barrel to $12
per barrel.
This caused massive panic within western countries as people raced to gas stations to fill up
their vehicles.
Gas stations across the country quickly dried up and gas stations started to impose limits
on how much gas an individual could buy.
President Nixon even limited all highways to a speed limit of 55 mph as this was thought
to be the most fuel-efficient speed.
Despite the internal crisis that the oil embargo caused, the US didn’t actually change its
stance on Israel and Israeli forces didn’t retreat to the 1949 Armistice line.
So, the oil embargo was technically a failure.
But what this did do was aggravate Saudi Arabia.
Saudi Arabia had worked with the Americans for 41 years, and they had shared 50% of the
profit for 24 years.
So, they had plenty of money by this point, and they decided that it was time to kick
out the Americans.
In 1973, the Saudi Arabian government bought a 25% stake in the company.
In 1974, they would increase this stake to 60%.
And, in 1980, the Saudi government would increase their stake to 100%, taking full control of
the company.
Al Naimi would become the company’s first Saudi president in 1984 and eventually CEO
in 1988.
The name of the company would also be changed from just Aramco to Saudi Aramco in 1988.
And with that, Saudi Aramco began its transition from being a leading oil exporter to being
a global petroleum enterprise.
In 1991, Saudi Aramco purchased a 35% stake in Ssangyong Oil Refining Company located
in Korea.
In 1994, they purchased a 40% stake in Petron Corporation located in the Philippines.
In 1996, they acquired a 50% stake in Corinth Refineries located in Europe.
Around the same time, Saudi Aramco also played with simulation software.
This probably sounds like one of the most boring things in the world, but Saudi Aramco
developed an oil reservoir simulator called POWERS in 1997.
Though that sounds super monotonous, POWERS helped them significantly reduce storage and
transportation costs.
They followed up POWERS with GigaPOWERS in 2010 and eventually TeraPOWERS in 2016.
All of these acquisitions and technological developments have allowed Saudi Aramco to
become the biggest oil company in the world by far; however, Saudi Arabia still had a
massive problem on their hands which was that their country was basically entirely dependent
on oil.
And this was made painfully evident in 2014 when oil prices plummeted over 50%.
Saudi Arabia quickly fell into a massive government deficit and their national debt has skyrocketed
ever since.
In 2014, Saudi Arabia had almost no debt with a debt to GDP ratio of 1.6%.
By 2020, that number was 32.5%.
I gotta say though, that’s still nowhere near America’s debt to GDP ratio of 140%.
Anyway, unlike the US, the Saudis decided that they had to do something about their
debt.
So, the prince of Saudi Arabia, Mohammed Bin Salman launched a plan called Vision 2030.
The plan entails diversifying the country’s dependence on oil by investing in tourism,
infrastructure, and recreation.
This is why Saudi Arabia spent $3.8 billion on expanding their airport and why the country
finally started giving out tourist visas.
One of the ways Mohammed bin Salman funded this diversification effort was by taking
Saudi Aramco public.
And with $111 billion in net profit, investors didn’t have a hard time justifying a $2
trillion valuation for Saudi Aramco.
Saudi Arabia only sold a few percent of Saudi Aramco, but that itself added up to tens of
billions.
So, at the end of the day, how did Saudi Arabia buy a $2 trillion company?
Well, the first step was being blessed with the world’s second-largest oil reserve.
The second step was partnering with the Americans and living off of dividends and profit-sharing
for 40 years.
The third step was using saving up this money and eventually buying out Aramco.
The fourth step was continuing monumental growth and making international investments.
Finally, the last step was going public as the most profitable company in the world.
And that’s how Saudi Arabia bought the world’s first $2 trillion company.
Do you guys think Saudi Aramco is worth $2 trillion given the trend towards renewable
energy?
Comment that down below.
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