Oil in the Reign of King Saud bin Abdulaziz

A paper presented to the King Saud Symposium
King Abdulaziz Foundation for Research and Archives (Darah)

Prepared by:
Dr. Abdullah bin Ibrahim Al‑Askar
Ministry of Petroleum and Mineral Resources
King Saud University

5–7 Dhul‑Qi‘dah 1427 AH
26–28 November 2006

 

Sources of the Study

It is important to emphasize that the sources for this paper are numerous and widely dispersed. It is not my intention here to discuss these sources in detail, for such a discussion would be lengthy and complex. What concerns me is to identify the locations in which they are found; as for enumerating them exhaustively, that would require considerable time and effort.

I relied primarily on three major works:

1. A Study of the Most Important Sources on the Modern and Contemporary History of the Arabian Peninsula
2. King Abdulaziz: A Collective Bibliography
3. The Kingdom of Saudi Arabia and the Arabian American Oil Company (ARAMCO): A Historical Study

The authors of these works have laid down essential markers for researchers. Yet, many other significant sources remain. My mention of these repositories—whether compiled by the authors of the above works or by the researcher who produced the doctoral dissertation—illustrates the scattered nature of the materials available to anyone seeking to study the history of Saudi oil. It is hoped that a dedicated research center will one day be established for the history, literature, and documentation of Saudi oil.

What follows is an overview of the principal repositories of the sources used in this paper, classified according to their place of preservation.

 

First: Documents of the Ministry of Petroleum and Mineral Resources

The Ministry houses three major repositories, each containing a substantial body of documents:

1. The Ministry Library, which includes a special ARAMCO section containing most agreements, royal decrees, orders, and reports submitted by ARAMCO to the Government of Saudi Arabia. These documents were originally kept at the Ministry of Finance before being transferred to the Ministry of Petroleum upon its establishment.
2. The Legal Department, which holds most agreements, correspondence, decisions, and financial records related to ARAMCO. These files are among the most systematically organized, generally arranged by petroleum-related subject.
3. The Petromin Archive, containing documents, decisions, and regulations governing the relationship between the General Petroleum and Minerals Organization (Petromin), the Saudi government, and ARAMCO, in addition to Petromin’s own records.

 

Second: Central Archives of the Ministry of Finance

The Ministry of Finance—being the “mother ministry” from which several ministries later emerged—supervised most state agencies, including petroleum and mineral resources. Thus, most financial and administrative decisions are preserved in its Central Archives. Among the most important documents are royal decrees, ministerial decisions, and the principal agreements between Saudi Arabia and ARAMCO.

 

Third: ARAMCO Library

Located at the company’s headquarters in Dhahran, this library contains original agreements and correspondence between the Saudi government and ARAMCO, in both Arabic and English.

 

Fourth: Ministry of Foreign Affairs

The Ministry’s Document Department holds large quantities of national and foreign documents, including those related to agreements between Saudi Arabia and ARAMCO—from the original concession agreement to the ownership agreement.

 

Fifth: King Abdulaziz Foundation (Darah)

Darah’s Document Department contains a large number of ARAMCO-related documents, many of them exact copies of those held by ARAMCO or the Ministry of Petroleum. It also houses foreign documents copied from the U.S. National Archives in Washington, D.C. and Maryland, as well as from presidential libraries such as those of Truman, Eisenhower, Kennedy, and Johnson.

The department also contains private collections copied from various American centers—amounting to more than 95,000 documents—covering the period 1910–1970. Additionally, it holds documents copied from the British Public Record Office, the India Office Archives, the Imperial War Museum, and British universities such as Durham, Oxford, Cambridge, and London, totaling approximately 120,000 documents.

 

Sixth: Archives of the Institute of Public Administration (Riyadh)

The Institute’s Document Department contains thousands of local documents related to oil and OPEC resolutions, most of them digitized and indexed by type, agency, and date, covering the period 1350–1399 AH.

 

Seventh: The U.S. National Archives

These archives contain extensive materials related to petroleum affairs, ARAMCO, and Saudi–ARAMCO relations, covering the period 1906–1968 and beyond the declassification threshold.

 

Eighth: The British Public Record Office

British documents related to Saudi oil are preserved in the Public Record Office (P.R.O.), under the Foreign Office (F.O.) and the India Office (later the Foreign and Commonwealth Relations Office). These records cover the period 1820–1960.

 

Ninth: Arabic and Foreign Publications

Arabic and foreign publications on Saudi oil are numerous and diverse. They often contain information not found in official documents. Many authors were eyewitnesses or participants in the development of Saudi oil, holding significant political or petroleum-related positions in Saudi Arabia or ARAMCO.

 

Tenth: Academic Theses and Internet Sources

Several theses in Arabic and foreign languages address topics such as Saudi–U.S. economic relations (1933–19XX), the history of ARAMCO, and ARAMCO’s role in developing the Eastern Province. Numerous online resources also exist on oil and oil cities in the Kingdom.

 

Eleventh: Periodicals

Newspapers and magazines are of particular importance, especially Umm al‑Qura, the official weekly gazette established in 1343 AH (1924 CE). As the Kingdom’s official publication, it documented early petroleum agreements, official statements, royal decrees, and government announcements—making it invaluable to historians.

Next in importance is Qafilat al‑Zayt (The Oil Caravan), ARAMCO’s monthly magazine launched in 1373 AH (1953 CE), which published articles on exploration, drilling, refining, and export operations. Other Saudi and Arab periodicals also contain relevant material.

 

Historical Overview of King Saud bin Abdulaziz Al Saud

It may be stated with confidence that the full history of King Saud has yet to be written comprehensively. King Saud was born in Kuwait on 3 Shawwal 1319 AH (12 January 1902). He received basic education in reading and religious sciences from scholars of Najd and trained in the “school” of his father, King Abdulaziz.

On 16 Muharram 1352 AH (1933 CE), he was proclaimed Crown Prince, a position he held for twenty years, during which he participated in implementing his father’s policies and assumed significant military and political responsibilities. He led the Saudi army in the Yemen War and made repeated visits to Europe, the United States, and several Arab countries. He also attended the Ashnaas Conference in 1366 AH (1946 CE).

King Abdulaziz passed away in Taif on Monday, 2 Rabi‘ al‑Awwal 1373 AH (9 November 1953), and King Saud was proclaimed ruler on the same day. His reign witnessed numerous internal reforms and major development projects, including:

1. Establishment of the Council of Ministers, chaired by Prince Faisal; its first session was held on 2 Rajab 1373 AH (7 March 1954).
2. Establishment of the Board of Grievances.
3. Creation of several ministries, including Education, Agriculture, Commerce, and Communications.
4. Major educational expansion, including transforming the Directorate of Education into the Ministry of Education and appointing Prince Fahd as Minister.
5. Establishment of the Kingdom’s first university: King Saud University.
6. Establishment of the Islamic University in Madinah (1961).
7. Founding of King Abdulaziz Military College in Riyadh.
8. Construction of the major quarantine station in Jeddah.
9. A broad urban development movement, including the expansion of the Prophet’s Mosque (initiated under King Abdulaziz), expansion of the Grand Mosque, planning of Riyadh, and construction of Wadi Laban Dam (1956).

In 1377 AH (1958 CE), due to regional circumstances, the Kingdom faced financial and administrative challenges. King Saud granted Crown Prince Faisal broad authority over internal, external, and financial affairs, including revising the Council of Ministers’ system and amending necessary regulations.

A Royal Decree No. 42 was issued on 9 Shawwal 1381 AH / 17 March 1962, under which His Royal Highness Prince Faisal became the Deputy to His Majesty the King in all affairs of the state. In 1384 AH / 1964, the health of His Majesty King Saud deteriorated significantly, prompting him to travel abroad for medical treatment and remain there. On the second day of Ramadan 1384 AH, corresponding to 5 January 1965, he sent a message to his brother announcing his abdication of the throne in favor of Prince Faisal and pledging allegiance to him as King of the country.

In Dhul‑Hijjah 1388 AH, corresponding to 24 February 1969, King Saud bin Abdulaziz passed away in Athens, the capital of Greece. His body was transported to Mecca, where the funeral prayer was performed over him in the Sacred Mosque, after which he was immediately transferred to Riyadh and buried there.

 

Oil in the Reign of King Abdulaziz

It goes without saying that any discussion of oil during the reign of King Saud must be preceded by an examination of oil during the reign of King Abdulaziz. From an early stage in the establishment of the modern Saudi state, King Abdulaziz recognized the importance of securing a substantial economic resource to consolidate political unity, maintain internal security, and create the conditions necessary for political and social stability across the vast territories of the Kingdom. At that time, the Saudi economy relied primarily on limited traditional agriculture in fertile regions, livestock raising, and revenues from Hajj and ‘Umrah—sources that could not be heavily relied upon for two main reasons:

1. The expansion of public services, the building of the Saudi army, and the development of infrastructure.
2. The steady increase in population.

Mineral wealth thus occupied a prominent place on King Abdulaziz’s agenda as he sought a rich economic resource. Oil and its industry emerged as a promising economic—and indeed strategic—option. The first attempt to search for oil occurred in 1342 AH / 1923, when the Kingdom granted a representative of the Eastern and General Syndicate Limited a concession to explore for petroleum in the eastern regions of Saudi Arabia. The company failed to carry out and sustain its mission, yet the Kingdom did not abandon its efforts, especially after oil was successfully extracted in neighboring Bahrain.

It is noteworthy that the increase in Bahrain’s oil production in 1351 AH / 1932 encouraged foreign oil companies to approach King Abdulaziz with proposals to explore for oil in Saudi territory. This was not unknown to the Saudi leadership. However, the failure of Major Frank Holmes and his company, the Eastern and General Syndicate Limited, in the years 1923–1924 and 1925, made King Abdulaziz cautious about granting a new concession until a thorough study was conducted.

After a careful three‑month review of the competing offers submitted by petroleum companies, the Kingdom decided to grant the concession to the American company Standard Oil of California (SOCAL). The concession agreement was signed in Jeddah by the Saudi Minister of Finance, Abdullah Suleiman Al‑Hamdan, and attorney Lloyd Hamilton on behalf of the company on 5 Safar 1352 AH / 29 May 1933 at Khuzam Palace.

Several months after SOCAL began exercising its concession rights, it established a subsidiary to operate the concession: the California Arabian Standard Oil Company (CASOC). In 1364 AH / 1944, following a series of mergers, CASOC was renamed the Arabian American Oil Company (ARAMCO).

King Abdulaziz soon witnessed tangible results from his country’s oil resources with the export of the first shipment of Saudi crude oil on 11 Rabi‘ al‑Awwal 1358 AH / 1 May 1939, when he personally opened the loading valve aboard the tanker D.G. Scofield at Ras Tanura, inaugurating the Kingdom’s entry into global oil markets.

In reviewing the literature on the history of oil in Saudi Arabia, one must pause at the work of the first Western researcher to write in detail about oil during the reign of King Abdulaziz: St. John Philby (Hajj Abdullah Philby), in his book Arabian Oil Ventures. Philby clearly highlights the rapid developments in oil policy beginning in the 1930s, when global oil companies operating in the Gulf region (Bahrain, Iraq, and Iran) competed intensely to secure exploration rights in eastern Saudi Arabia—an area geologically and topographically similar to Bahrain and therefore highly promising for commercial oil discovery.

Philby attributes the granting of the concession to CASOC primarily to the financial difficulties the Kingdom faced at the time—a logical analysis given that the early 1930s were marked by a global economic depression. Yet this was not the only factor that accelerated the signing of the concession. King Abdulaziz also sought a strong, wealthy, and credible company, which he found in CASOC. Moreover, he was in the midst of building an unprecedented political unity in the modern Arab world and was determined to preserve it. He did not wish to prolong negotiations or risk internal stability due to economic strain, nor did he want to engage in unethical competition among American and European oil companies.

It must also be said that, as petroleum‑producing developing countries—including Saudi Arabia—sought to complete their economic independence after achieving political unity, the Saudi government adopted the principle of participation as a future objective and a new framework for petroleum investment. Under this policy, and after strenuous negotiations, the Kingdom secured the 50/50 profit‑sharing agreement with ARAMCO in 1370 AH / 1950.

 

Oil in the Reign of King Saud: Continuity, Not Rupture

From the moment King Saud assumed his official responsibilities following the death of his father, King Abdulaziz—may God have mercy on them both—his reign was marked by two defining characteristics across administration, politics, the economy, and especially the oil sector.

First, continuity with the policies of King Abdulaziz. The reign of King Saud was not a period of rupture but one of continuation, preserving all previous achievements.

Second, building upon that solid foundation with a new spirit and new aspirations, in response to changing times and circumstances.

The oil industry witnessed major leaps during King Saud’s reign, accompanied by challenges greater than those faced by his predecessor. These challenges required the King and his successive governments to respond to new realities, leading to the establishment of new administrative bodies serving the interests of the oil sector. The Kingdom’s efforts to revise earlier oil agreements stand as clear evidence of the determination of King Saud’s government; dozens of agreements were amended in favor of the state, the nation, and the citizen.

One may say that what was achieved—or even what was discussed but not yet realized—during King Saud’s reign in the field of oil laid the solid foundation upon which subsequent Saudi monarchs built. Ultimately, this process led to the Saudi state’s full ownership of the largest oil company in the world, without undergoing the painful nationalization experiences seen elsewhere.

In 1370 AH / 1950, the Kingdom secured the 50/50 profit‑sharing agreement with ARAMCO under the umbrella of the main concession agreement. Thus, the Kingdom’s revenue was no longer tied to the number of barrels produced but to the company’s profits. In 1393 AH / 1973, taking advantage of global developments, the Kingdom acquired a 25% share in all ARAMCO operations and assets. The following year, 1394 AH / 1974, at the beginning of the oil boom, this share rose to 60%, and continued to increase until it reached 100% in 1401 AH / 1980. ARAMCO continued to operate and manage the oil fields on behalf of the government until 1409 AH / 1988, when the Saudi Arabian Oil Company (Saudi Aramco) was established by Royal Decree to assume all operational, administrative, and marketing responsibilities previously held by the American ARAMCO.

King Saud and the ARAMCO Company

We have already touched upon aspects of the relationship between the government of King Saud and the Arabian American Oil Company (ARAMCO). In truth, researching this subject is fraught with considerable challenges. It is a long relationship that extended over ten years, and one characterized by continuity. For this reason, it is necessary to rely on the company’s history with his predecessor—and indeed with the Government of the United States of America. This reliance stems from our conviction that King Saud’s oil policy, from the very first day of his accession to the throne, was built upon continuity with the foundations laid during his father’s reign, and upon further construction atop that foundation. This approach is most clearly evident in matters related to oil. From here we arrive at a conclusion we have termed: “A Policy of Continuity, Not Rupture.”

The policy of any American oil company—and ARAMCO is no exception—does not diverge significantly from the general policy of the United States. It is therefore mistaken to assume that Saudi–American relations began with the signing of the 1933 oil concession agreement between the Kingdom and Standard Oil of California. Such a view oversimplifies a long history. The signing of the oil concession agreement came well after diplomatic contacts between the two states had already begun. These contacts trace back to the era of the Kingdom of the Hejaz and Nejd and its Dependencies, when Fuad Hamzah, Acting Director of Foreign Affairs in Mecca, sent a message to the U.S. Secretary of State through the American Commissioner in Cairo, requesting U.S. recognition of the Kingdom of the Hejaz and Nejd and its Dependencies. This occurred following King Abdulaziz’s entry into the Hejaz after King Ali bin Al‑Husayn relinquished power in Jeddah in Jumada I 1344 AH / 14 September 1925. These contacts culminated in an agreement between the two states covering diplomatic and consular representation, as well as trade and navigation.

Relations between the Kingdom and the United States strengthened further after the signing of the 1933 oil exploration agreement with Standard Oil of California. Wallace Murray, head of the Near Eastern Affairs Division at the U.S. Department of State, referred to this in a letter to Mr. Karl Twitchell. Company officials also exerted notable effort in strengthening their relationship with King Abdulaziz and Saudi officials, seeking to facilitate communication and ensure smooth company operations. They sent their representatives to meet the King or invited him to visit company facilities.

In this context, William Linhan, the company’s representative in Jeddah, visited King Abdulaziz in Riyadh on 14 Jumada II 1353 AH / 23 September 1934, informing him that drilling equipment was en route to Dhahran to begin work on Dammam Well No. 1. On 23 Shawwal 1353 AH / 8 January 1935, the company arranged a visit for Hamilton to meet King Abdulaziz, accompanied by geologist Robert Miller. The King expressed his satisfaction with the company’s work and its petroleum activities.

The company also took advantage of King Abdulaziz’s visit to the city of Al‑Hofuf. Fred Davies, Chairman of the Board, arranged a meeting with the King on 13 Shawwal 1354 AH / 7 January 1936. Davies led a delegation of company employees to Al‑Hofuf, where they met the King. King Abdulaziz focused his discussion on oil exploration and the development of the company’s operations. The following day, Davies presented a summary of the company’s activities. The King expressed his pleasure with the company’s progress and voiced his desire to visit the oil installations. Davies invited him to visit the company’s headquarters in Dhahran, and the King accepted, to be arranged during a future visit to the region.

Tracing the relationship between the Kingdom and the company from 1933 to 1993 reveals a relationship characterized by understanding and cooperation. The company fulfilled its obligations under the Saudi–Arabian concession agreement. For example, it paid the Kingdom an initial loan of £30,000 sterling, an annual rental fee of £500, and an advance of £50,000 sterling after the discovery of oil in commercial quantities on 22 Sha‘ban 1357 AH / 16 October 1938. With the announcement of the discovery, the company had fulfilled all its commitments. The strength of the relationship was further affirmed by the supplemental concession agreement signed on 12 Rabi‘ II 1358 AH / 31 May 1939, which expanded the concession area.

In line with the positive trajectory of relations, the company upheld the principle of employing Saudi nationals, recognizing the social importance of this matter to the Saudi government and its people. Although the employment of Saudis was a right stipulated in Article 23 of the concession agreement—which required the company to employ Saudi nationals whenever possible—the company embraced this policy willingly.

Statistics on Saudi employees between 1938 and 1950 show that their numbers were relatively low during World War II due to reduced company operations. However, the number increased significantly after the war as production capacity expanded. Among the company’s programs was support for local industry and development projects. The company not only employed Saudis but also trained them in petroleum-related trades and industries. It established schools for the children of Saudi employees and others, provided medical care for employees, and employed Saudi men and women in nursing and other fields.

The government of King Saud worked diligently to avoid radical or abrupt measures in dealing with a company bound to the Kingdom by clear and established agreements. From this standpoint emerged the idea of involving the company in all operations and profits. The concept of participation was first raised in 1383 AH / 1963, when the Saudi government proposed that ARAMCO accept the national petroleum entity, Petromin—established for this and other purposes—as a partner in petroleum operations. ARAMCO officials rejected the proposal outright. Nevertheless, the government of King Saud did not despair; it did not cease its efforts in any way.

The plans and ambitions of King Saud’s government bore fruit during the reign of his successor, King Faisal, who placed the issue of ARAMCO’s participation at the top of his government’s priorities, continuing what had been initiated under his predecessor. Respect for existing petroleum agreements did not prevent King Faisal’s government from demanding amendments whenever local or regional circumstances required it—a right beyond dispute.

The history of oil testifies clearly that the idea of participation in oil companies was a purely Saudi initiative. This idea was later adopted by moderate Gulf states such as Kuwait, the United Arab Emirates, Qatar, and Bahrain, and subsequently by OPEC, while other oil‑producing countries opted for nationalization.

A major question arises in this historical context: How did the government of King Saud prepare itself to implement the principle of participation?
To answer this, one must note that the reduction of the posted price of Saudi oil twice in succession in 1379 and 1380 AH / 1959 and 1960—without the consent of the Saudi government—prompted King Saud’s government to take decisive measures in favor of participation. Since participation was not limited to ARAMCO, King Saud directed that similar agreements be concluded with Getty Oil in the Neutral Zone with Kuwait, with the Japanese Limited Company in Khafji, and with TAPLINE. During this phase of negotiations with oil companies operating in the Kingdom, the government sought to preserve the political and economic gains it had achieved domestically, regionally, and internationally, drawing upon its accumulated experience. From this, one can discern the new strategy adopted by King Saud’s government regarding Saudi oil.

This strategy was built upon several objectives:

1. Achieving higher revenues, through revising accounting methods and participating in the realized price from the moment production begins until the product reaches the consumer.
2. Increasing pressure to ensure that ARAMCO becomes a partner in the philosophy of Saudi oil, a philosophy based on the principle that the interests of the producing country take precedence over those of the producing company. To activate this philosophy, the government began demanding that oil companies participate in company capital—what is known as participation in the granted petroleum concession, referred to by economists as a Partnership Agreement.
3. Pursuing the Saudization of the oil sector, including training, scholarships, and the employment of Saudi citizens.

The most significant measure adopted by King Saud’s government was a broad reconsideration of agreements concluded with international companies, renewing them in line with contemporary developments. An example is the revision of ARAMCO agreements in 1961, when a new method of tax accounting was adopted. Ultimately, ARAMCO’s acceptance of the principle of participation implied many things, including the need to revise the concession agreements signed with the Saudi government—precisely what King Saud’s government sought. This constituted the first step toward the ultimate goal: the Kingdom’s full ownership of ARAMCO.

 

King Saud and the TAPLINE Company

The reign of King Saud witnessed strenuous negotiations with ARAMCO to reach an agreement regarding the formalization of TAPLINE and the sharing of its profits. The establishment of TAPLINE had increased the Kingdom’s revenues due to higher oil production. However, once the pipeline was extended from production sites in the Eastern Province to the port of Al‑Zahrani in Lebanon, the government felt that justice was not being achieved between the two parties, given the disparity between ARAMCO’s profits and those accruing to the Saudi government. Thus, lengthy negotiations ensued concerning the profits generated by transporting oil through TAPLINE.

Negotiations between the Saudi government and ARAMCO/TAPLINE over profit‑sharing lasted seven years, from 1376 to 1383 AH / 1956 to 1963. During this period, the Kingdom submitted a written request demanding that the company pay $103 million to the state treasury—representing its share of profits from the time the pipeline was extended until 1377 AH / 1957. ARAMCO objected and requested arbitration under the terms of the original concession agreement. The Saudi government agreed, and arbitration procedures began in the final month of 1377 AH / 1957, but were later halted when the government concluded that “arbitration over the application of Saudi regulations touches upon the sovereignty of the state itself.”

Ultimately, both the Saudi government and ARAMCO agreed to resolve the issue through further negotiations, which continued until 1382 AH / 1963, when ARAMCO acknowledged the Kingdom’s right to share TAPLINE profits. Under the agreement, ARAMCO would raise its price for each barrel of crude delivered at Al‑Zahrani on the Mediterranean during the period 1373–1382 AH / 1953–1962 by a small amount above the posted price in Sidon, added to the posted price at Ras Tanura. ARAMCO would then pay a 50% income tax on the additional amounts earned during the years of dispute.

Thus, Saudi Arabia implemented the principle of profit‑sharing with TAPLINE. Despite the government’s improved negotiating power and increased control over its petroleum resources—and despite higher revenues resulting from diversified petroleum income streams such as profit‑sharing, elimination of posted‑price deductions, reduced marketing costs, and acceptance of TAPLINE profit‑sharing—the realized price remained significantly lower than the original posted price. The additional revenue earned by the government resulted from increased throughput rather than higher prices, while the company profited twice: once from production volume and again from the realized price increase.

 

King Saud and OPEC

It is noteworthy that King Saud’s government moved early toward participation with ARAMCO and other oil companies operating in the Kingdom, viewing participation as a logical prelude to full ownership of the company. Saudi Arabia adopted a gradual approach to achieving full control over its petroleum industry, following a strategy characterized by caution and deliberation, rejecting abrupt or radical measures. The Kingdom also rejected nationalization as a means of asserting control, as it did not consider it a viable or desirable option. Instead, it pursued several paths:

• Gradual assertion of national sovereignty over ARAMCO, beginning with equal profit‑sharing without intervening in operational processes—extraction, transportation, refining, and marketing—over which ARAMCO maintained full control. ARAMCO, along with other global oil companies, determined world oil prices, and Saudi Arabia did not participate in these processes until 1390 AH / 1970.
• Establishing institutions to support petroleum objectives and prepare the ground for participation. Chief among these was the Ministry of Petroleum and Mineral Resources, established in 1380 AH / 1960, tasked with supervising exploration, drilling, production, export policy, pricing, and domestic marketing—while also serving as a mechanism for preparing the Kingdom for participation.

Faced with the challenge posed by international oil companies to the economic interests of oil‑producing states, Saudi Arabia became a leading force in countering corporate dominance in the Arab region and the Middle East. It maintained close consultation with Venezuela on necessary measures. On 18 Dhu al‑Qi‘dah 1379 AH / 13 May 1960, the first joint official statement was issued following a meeting between Abdullah Al‑Tariki, the Saudi Minister of Petroleum, and Venezuelan Minister of Mines Pérez Alfonso. The statement urged oil‑producing countries to adopt a unified policy to protect their shared interests and proposed the creation of an organization to achieve this goal. This recommendation became the first building block in the establishment of OPEC. Western countries and their oil companies viewed this emerging bloc as a threat to their petroleum supplies.

It is noteworthy that the major international oil companies paid little attention to the idea of forming a bloc of oil‑producing countries. Instead, they imposed yet another reduction in Middle Eastern oil prices in Safar 1380 AH / August 1960, amounting to 6% of market value. Faced with this situation, the governments of oil‑producing and exporting countries resolved to work together to halt the manipulations of the companies operating within their territories.

Saudi Arabia grew increasingly concerned over the unilateral actions of the oil companies, which harmed the Kingdom’s economy as well as the economies of other oil‑producing nations in the developing world. Consequently, the Saudi government engaged in extensive consultations with Venezuela throughout 1380 AH / 1960. As a result of these discussions, several oil‑exporting countries—namely Iran, Iraq, Kuwait, and Venezuela—were invited to a meeting in Baghdad to explore ways of addressing the prevailing situation.

The philosophy of King Saud’s government rested on a simple and direct idea: that oil‑producing and exporting countries should cooperate to safeguard their petroleum interests by persuading the major international oil companies to accept a fundamental demand—participation. At the same time, the Kingdom believed that OPEC, if given the opportunity, could conduct collective negotiations with the global oil companies.

King Saud’s broader petroleum philosophy may be summarized as follows: respecting the growing global demand for oil products; avoiding actions that would embarrass international oil companies before their clients; and simultaneously pressing ARAMCO to accept the principle of participation. The Kingdom viewed its demands as realistic and gradual. This philosophy unsettled the major oil companies, which had recognized this Saudi approach since 1383 AH / 1963.

Thus, during the 1960s, King Saud’s government adopted a policy of supporting OPEC while working simultaneously to stabilize the international oil market. The 1960s marked a period of vigorous OPEC activity aimed at curbing the decline in posted prices that had characterized the 1950s—a decade dominated by the global oil companies, which controlled production, set prices, and benefited from abundant supply, enabling buyers to impose their terms on the oil market.

The 1970s became the “golden age” of OPEC, as member states agreed to support one another in their demands. OPEC classified its member states into three regional groups: the Gulf region, the Mediterranean region, and the Caribbean region. Each region was to negotiate collectively with the oil companies, while the other two regions supported the demands presented. Saudi Arabia’s position and demands vis‑à‑vis ARAMCO received strong backing from OPEC at its twenty‑first conference, held in Caracas from 21–29 December 1970.

ARAMCO’s reduction of oil prices twice in succession in 1379 and 1380 AH / 1959 and 1960—without prior approval from the Saudi government—prompted the Kingdom to take a series of measures aimed at achieving full control over its petroleum industry. This control was pursued through a prudent, gradual strategy that avoided abrupt or hasty steps. These measures proceeded along two parallel tracks: an internal track and an external one.

The internal track began with Saudi Arabia seeking to gradually influence the company’s behavior: first through equal profit‑sharing, then through intervention in price increases, and finally through participation in downstream and complementary operations.

The external track involved action on the international stage. The Kingdom rallied its partners in OPEC—whose membership would eventually reach thirty states—and also mobilized support from the Arab Oil Exporting Countries (OAPEC) to back its demands against ARAMCO. This international support strengthened the Kingdom’s position in the face of ARAMCO’s resistance. It is also important to note that Saudi Arabia’s signing of petroleum agreements with non‑American companies—such as Japan’s Getty Oil, the Japanese Arabian Limited Company, and France’s OXYRAP—created competitive pressure that ARAMCO viewed with concern.

In discussing OPEC, it is useful to recall its origins, early developments, and outcomes. The idea of establishing an organization uniting oil‑producing and exporting countries was a long‑standing aspiration of King Saud’s government and that of Venezuela. At the time, this initiative represented a major political, economic, and social development at local, regional, and international levels. The creation of the Organization of the Petroleum Exporting Countries (OPEC) provided oil‑producing nations with a collective entity capable of standing up to the global oil companies and contributed significantly to increasing national revenues.

The emergence of OPEC on the regional and international stage was portrayed by Arab and foreign media as a saga of struggle and arduous negotiations undertaken by oil‑producing countries against Western oil companies. In truth, King Saud’s government played a major and essential role. King Saud instructed the Minister of Petroleum and Mineral Resources, Sheikh Abdullah Al‑Tariki, to take charge of the matter. Sheikh Al‑Tariki possessed extensive expertise in petroleum affairs and in dealing with Western companies, having studied in Texas and served as Director‑General of Oil and Mineral Affairs since 1954 before becoming Minister.

The idea of establishing the organization was based on the need to defend the economic and political interests of oil‑producing countries in international markets and forums, rather than allowing the oil companies operating in these countries to control the oil, set export and marketing policies, and determine prices solely according to their own interests and those of their home states, with no regard for the producing countries.

Initially, the project aimed to ensure that producing countries participated equally with the companies in export, marketing, and sales policies, preventing companies from unilaterally determining these policies without the knowledge or oversight of the sovereign states whose oil they exploited. Such participation would enable oil‑producing countries to assume their rightful place globally as producers and co‑managers of their petroleum resources, influencing how other nations dealt with them. Another motivation was the realization that some companies were producing at maximum capacity, risking rapid depletion of oil reserves. A third concern was that companies manipulated prices to create unfair competition among producing countries.

As noted earlier, the principal reason for establishing the organization at that particular time was the stagnation in crude oil pricing that had prevailed since the early post‑World War II years. A prolonged debate had arisen between producing countries on one side and Western companies and consumer nations in Europe, the United States, and Japan on the other. This debate reflected a fundamental conflict between the interests of producers and those of companies and consumers. In 1959, prices declined sharply due to the linkage between Middle Eastern oil prices and those of the Gulf of Mexico—a linkage that was unjustified. Prices continued to fluctuate and fall in early 1960.

Consequently, the governments of oil‑producing countries agreed to convene the Baghdad Conference in September 1960, which resulted in the establishment of OPEC. Its founding members were five states: Saudi Arabia, Venezuela, Iraq, Kuwait, and Iran.

The creation of OPEC caused a major stir internationally. Initially, the major oil companies attempted to ignore the new organization, particularly since it had been established without their knowledge or consultation. However, OPEC soon imposed itself as an undeniable reality. Its most significant achievement was affirming the sovereignty and independence of producing countries in making decisions that served their interests. Over time, OPEC’s positive impact became evident, and the global oil companies were compelled to acknowledge its existence and negotiate with it, as it represented the will of the states whose oil they produced. In the years following OPEC’s establishment, Saudi Arabia played a prominent role in activating its mechanisms and advancing its objectives.

It must be emphasized that OPEC’s achievements in 1971 were among the most significant accomplishments any international organization could secure for its members. OPEC’s voice grew particularly strong at its twenty‑first conference in Caracas in December 1970, where it called for increases in crude oil prices. Only months later, the Mediterranean countries signed the Tehran and Tripoli agreements. To give credit where it is due, the foundations laid by King Saud’s government formed the basis upon which OPEC built its policies in the 1970s and 1980s.

 

King Saud and the Question of Nationalization

The rise of nationalist sentiment in the Middle East was too significant for the United States to ignore. Washington feared that ARAMCO’s rigid stance toward Saudi demands might lead to the liquidation of American—and possibly Western—interests in the region. In response, the U.S. government urged ARAMCO to meet the Saudi government’s demands.

Since the Kingdom did not believe in nationalization, nor in depriving others of their rights, this strengthened its negotiating position with ARAMCO. It is worth noting that the U.S. Congress had approved legislation imposing penalties on countries that nationalized foreign companies operating within their borders.

Against this backdrop, the Saudi government demanded that ARAMCO share half of TAPLINE’s profits. The company rejected the demand, arguing that transportation was not production, that TAPLINE was an independent company, and that it was not one of ARAMCO’s subsidiaries. The government refuted these claims, asserting that the oil transported through TAPLINE belonged to ARAMCO, that ownership did not change until the oil reached the export terminal in Sidon, Lebanon, and that transportation was an integral part of production. Moreover, the companies comprising TAPLINE were the same companies comprising ARAMCO. Therefore, TAPLINE and the oil flowing through its pipeline were subject to the profit‑sharing agreement.

After lengthy negotiations, an agreement was signed in 1382 AH / 1963 under which the company agreed to pay the Kingdom half of TAPLINE’s profits.

The profit‑sharing agreement meant, at the same time, that the Kingdom of Saudi Arabia had already traversed half the path toward full ownership of its petroleum resources. The Kingdom began working diligently to prepare national cadres capable of extracting, processing, refining, transporting, and exporting these petroleum resources. While some neighboring countries sought to nationalize their oil or assert early control over their petroleum wealth through hasty political decisions, the Saudi government quietly prepared for the day it would achieve full control over its resources while maintaining its substantial interests with the oil companies at the highest levels of productive and mutually beneficial cooperation.

It must be acknowledged that the government of King Saud had broad options before it. The 1960s were marked by a strong tide of nationalization and confrontation with the West. Saudi Arabia considered three possible courses of action:

1. Nationalizing oil, as some petroleum‑producing countries had done.
2. Leaving matters as they were while demanding a higher share of revenues from ARAMCO’s oil sales.
3. Pursuing a deliberate and gradual transition toward full ownership of all company operations and assets through participation.

The Saudi government studied these options with wisdom and deliberation. It concluded that the experience of Mossadegh in Iran in 1371 AH / 1951 was clear evidence of the failure of the first option, as Tehran was unable to market its oil and faced a global embargo. Mossadegh’s government collapsed, and the nationalization experiment failed.

The second option—maintaining the status quo while demanding higher revenues—would have left the Kingdom with incomplete control over its petroleum wealth. Thus, the government determined that the third option—participation and a gradual, conscious transition toward full ownership of all company operations and assets—was the path that would allow the Kingdom to prepare an entire generation of trained national cadres in all petroleum operations, from exploration and extraction to management and marketing. This ensured full control over its petroleum resources without risk. As the Saudi Minister of Petroleum described it: “from the well to the wheel.” This option aligned with the Kingdom’s principles and its religious and ethical commitments.

 

King Saud’s Domestic Oil Policy

When World War II ended in 1945, ARAMCO resumed the extraction and export of crude oil, which had been halted during the war. As previously noted, the relationship between ARAMCO and the Saudi government was based on the 1933 and 1935 agreements—both characterized by imbalance, as was the case with most contracts in the Middle East at the time. For example, from the beginning of Saudi oil exports until 1950, the government received only four gold shillings per ton—equivalent to 22 cents per barrel—while the price of crude oil from the Arabian Gulf was about two dollars per barrel, and production costs were roughly 15 cents.

Over time, particularly during the reign of King Saud, the Saudi government succeeded in raising its share of oil income to 50% of net company profits after deducting costs, under the participation agreement signed in December 1950. During the 1950s, oil constituted 85% of the national budget and more than 90% of the Kingdom’s foreign currency needs. The availability of financial resources played a major role in supporting economic, social, health, and educational development, as well as infrastructure.

In 1960, Abdullah Al‑Tariki served as Director‑General of Petroleum and Minerals at the Ministry of Finance. He recognized the ambiguity surrounding ARAMCO’s accounting practices and believed that the situation remained unclear even after the participation agreement. He frequently complained about the lack of transparency and the deceptive practices of Western oil companies. He stated this openly in an interview with Jack Earl of World Oil, published in the October/November 1961 issue of Petroleum and Minerals News.

Al‑Tariki’s emphasis on national sovereignty over natural resources was unmistakable and reflected the spirit of King Saud’s oil policy. The main features of the domestic oil policy included: preparing citizens to work in the petroleum industry and Saudizing jobs; establishing a national joint‑stock company between the state and the public to exploit petroleum and mineral resources; introducing significant improvements to existing concession agreements to align them with national interests; maximizing the exploitation of mineral wealth to reduce dependence on a single source of national income; and contributing to the establishment of petrochemical industries that would create employment opportunities, reduce imports, and increase national income through industrialization.

At the time, these policies seemed difficult to implement—almost aspirational—and perhaps costly. Al‑Tariki himself lost his position. Yet, over time, the Saudi government under subsequent kings achieved all these aspirations and more across numerous domestic sectors. King Saud’s government expanded and developed state institutions, elevating them and their personnel to meet the demands of the era.

At the beginning of King Saud’s reign, the Kingdom—with its limited resources—entered the field of oil production and export. This was followed by entry into modern, productive agriculture through mechanized irrigation and improved agricultural methods. By the early 1950s, the Saudi economy had become an “oil economy,” and the Kingdom began to reap wealth that enabled it to develop education, culture, health, transportation, administration, and living standards, in addition to advancing agriculture.

The economic and social changes that emerged during King Saud’s reign were particularly evident. New cities such as Khobar, Abqaiq, and Ras Tanura developed, and demographic shifts occurred as these cities attracted citizens and workers from distant regions. This created numerous and diverse employment opportunities, contributing to local economic development and income diversification. New government institutions were established to meet the needs of these modern cities. Municipalities emerged, and urban planning became a recognized policy, involving housing development, road construction and paving, sanitation, and the maintenance of public facilities and parks.

King Saud encouraged ARAMCO to contribute to shaping and energizing Saudi oil policy through educational, social, health, municipal, and agricultural programs. ARAMCO played a significant role in developing industrial, economic, and educational expertise, including building schools and hospitals. The company was urged to expand exploration within its concession area, resulting in the discovery of eight new oil fields in the Eastern Province. ARAMCO also responded to government pressure to support development programs. After King Saud’s visit to the Eastern Province in 1373 AH, he approved the recommendations of the royal committee formed to examine the grievances of Saudi ARAMCO workers, and the company immediately complied.

The oil economy and ARAMCO’s presence in the Eastern Province also transformed social behavior and work values. Workers became more disciplined due to fixed working hours and the need to reside near work sites. Economic life changed as well, with new benefits such as wages, savings plans, home ownership, and the emergence of modern supermarkets offering a wide range of goods and services.

One example of participation is ARAMCO’s support for modern agriculture. The company had previously imported agricultural products from abroad at high cost, often arriving spoiled. To address this, ARAMCO established a model farm in Dammam to produce dairy, poultry, eggs, and vegetables. In 1374 AH / 1955, it created an Agricultural Assistance Department to provide guidance, support model farms, and establish agricultural research stations in Qatif and Al‑Hofuf, as well as the Faisal Model Project in Haradh (planned in 1380 AH and implemented in 1382 AH). ARAMCO encouraged modern mechanization, irrigation, fertilizers, and pest control, and conducted scientific field studies on palm and crop diseases in 1376 AH / 1957.

 

King Saud’s Foreign Oil Policy

The government of King Saud showed clear interest in international cooperation, foreign relations, and the stability of the global oil market. These themes reflect the philosophy of King Saud’s external oil policy. His attention to foreign affairs complemented his domestic focus on increasing government revenue from oil and enhancing Saudi influence in strategic petroleum decisions.

A common saying in the Ministry of Petroleum at the time was:
“The international and the domestic are two interconnected arenas, despite the borders between them.”

This was true for two reasons:

1. Oil is extracted in one country and consumed in others; its market is inherently international.
2. Most producing companies were foreign multinationals, which necessitated an international dimension in concession and production agreements between producing states and the companies exploiting their resources.

King Saud’s foreign oil policy became most clearly evident in Venezuela—the major petroleum‑producing nation in Latin America, where global oil companies operated under concessions and maintained production activities in the Middle East as well. Venezuela had begun efforts to improve its contractual terms with oil companies in the late 1940s, eventually securing the principle of equal sharing of net profits from oil sales with the companies. This principle, known as the 50–50 formula, was later transferred from Venezuela to the Middle East through the Saudi government.

The government of King Saud played a prominent role in adopting and enhancing the Venezuelan model, adapting it to local conditions and cultural differences. Saudi policy did not seek to make cheap Saudi oil a competitor to Venezuelan oil, but rather a complement to it. American companies operating in both Saudi Arabia and Venezuela reached a formula known as the marginal producer cost—that is, the cost of the highest‑cost producer—particularly when the interests of oil companies in the Middle East and Venezuela were intertwined rather than competitive. This meant keeping Middle Eastern and Venezuelan oil prices aligned, raising Middle Eastern oil prices to match Venezuelan levels. In this way, Arab oil would generate higher profits than its Venezuelan counterpart, increasing the profit share from Saudi oil sales—benefiting both the companies and the state. However, this policy, supported by the Kingdom, did not last long, as Western oil companies eventually abandoned it.

Strikingly, Middle Eastern oil‑producing governments did not respond to the Venezuelan delegations that toured the region seeking a unified stance to restrain irresponsible corporate behavior. Only in Saudi Arabia did Venezuela find a receptive ear. Abdullah Al‑Tariki of Saudi Arabia and Pérez Alfonso of Venezuela became the architects of what later became known as OPEC. The first step was the exchange of personnel between the two ministries of petroleum. Al‑Tariki sent Hisham Nazer and Mohammed Jukhdar from the Saudi Ministry of Petroleum to work in the Venezuelan Ministry of Petroleum for one year, while Venezuelan officials were sent to the Saudi ministry for the same purpose.

Among the manifestations of Saudi foreign oil policy was the encouragement of regional and international oil conferences. The First Arab Oil Conference was held in Cairo in April 1959, with Venezuela and Iran invited as observers. The Saudi government played a major and essential role in supporting the Venezuelan position, which called for cooperation among producing countries to curb the dominance of oil companies and their disregard for the economic harm caused by price reductions. The conference established an Oil Consultative Commission, with participation from Iran, Venezuela, Arab oil‑producing states, and the Arab League, to explore collective action against the companies. However, the committee failed due to political conflicts in the Middle East.

The government of King Saud understood the importance and potential impact of the “oil weapon” in foreign policy and international economic affairs. Thus, King Saud employed this tool during the Suez Crisis, ordering the suspension of oil shipments to Britain and France during the Tripartite Aggression against Egypt—regardless of the cool political relations between Saudi Arabia and Egypt at the time. The decision stemmed from the Kingdom’s clear Islamic and Arab commitments to Arab solidarity. It had significant Arab, Islamic, and international repercussions.

A key element of Saudi oil policy was avoiding harm to consumers or to the rights of shareholders in oil companies operating within the Kingdom. This was explicitly stated on many occasions, and Saudi newspapers—particularly Umm al‑Qura—published statements by Saudi officials affirming this principle. Interestingly, European and Japanese oil officials coordinated directly with the Saudi government, bypassing American intermediaries. This strengthened the Kingdom’s position in asserting its legitimate demands.