Three months have passed since November’s OPEC meeting sent the price of crude oil tumbling and still, nearly every day another analyst predicts that prices are about to rebound. Instead of focusing on minor factors like union strikes at U.S. refineries, or new rounds of layoffs by small U.S. shale oil producers, attention should be directed to the major players that have always led the oil industry. In particular, the behavior of Saudi Aramco, can explain the immediate and long-term future of the energy market. Aramco’s decision to maintain OPEC production rates precipitated the decline and seesawing of crude oil prices, and Aramco’s actions will most affect oil pricing in the future.
Aramco is probably the least understood energy company in the world. It is a private company, and therefore not followed diligently by equity analysts. It is state-owned, but operates atypically for an energy company run by an autocracy. The state-owned label perpetuates the misconception that Saudi Aramco exists to extract, sell, and occasionally refine the Kingdom’s subsoil oil resources, as Citgo, the National Iranian Oil Company, or Pemex do.
A brief look at Saudi Aramco’s history reveals that it functions much more like a family business that seek to diversify, expand, and continue to satisfy the needs of growing generations and a growing country. The historical records, and Aramco’s recent actions explains the real reason why Aramco caused the price of oil to drop and what the company plans to accomplish as a result. Put simply, Aramco plans to go on a buying spree to diversify and increase its holdings.
In 1938, King ibn Saud (left) welcomed Aramco, originally a wholly American entity, to develop the Arabian Peninsula’s potential petroleum resources. He was broke at the time, but royalties from Aramco’s sales kept his monarchy afloat. In 1950, when Saudi Arabia saw the Americans profiting tremendously from skyrocketing oil sales, the Kingdom sought to improve its own position. Through legal maneuvers, Abdullah Suleiman, the King’s business-savvy finance minister, improved Saudi Arabia’s profit while helping the Americans achieve a tax break at home. Both sides were satisfied. By the 1960s, members of the Saudi family began purchasing shares in the company, increasing their ownership throughout the 1970s, until, in 1980; Saudi Arabia legally purchased the entire company.
This situation is unique – an autocracy nationalized its country’s natural resources through modern business maneuvers, not though its police power. The key point is that the al-Saud family runs an absolute monarchy, but it has always operated Aramco in a restrained, business-like manner.
This extremely stable monarchy has weathered multiple transfers of power as cleanly as the one witnessed last month, when 90 year-old King Abdullah passed away and his half-brother, 75 year-old Salman took the throne. King Salman explicitly intends to maintain the policies of his predecessors. Despite misconceptions, the historical record shows that Saudi Arabia has never let foreign policy or ideology interfere with profits.