Thanks in no small part to its oil industry, Saudi Arabia has the largest economy of any Arab country. Its 268 billion barrels of proven oil reserves were the largest in the world until Venezuela updated its proven reserves in 2011. The country currently produces just over 10 million barrels a day, making it the world’s second biggest oil producer, just behind Russia.
Not only does Saudi Arabia have plenty of oil, it is also close to the surface and under pressure. This makes the extraction process easier and cheaper than in many other locations. Despite periodic efforts by the Saudi government to diversify the economy, the oil industry remains dominant and accounts for over half of the country’s GDP.
Prior to the 1930s, Saudi Arabia had a subsistence economy with a largely nomadic population. In 1932, an oil strike in Bahrain prompted further exploration of the Arabian Peninsula. The California Arabian Standard Oil Company (CASOC) was then awarded a concession to explore 930,000 kilometres of the country. After identifying a promising site named Dammam No. 7, persistent drilling was rewarded with an oil strike. More discoveries followed this, revealing the world’s largest source of crude oil.
In 1950, the Saudi government sought to increase its revenue share from oil production by introducing a 50-50 profit sharing agreement with the Arabian American Oil Company (ARAMCO), the successor to CASOC. At this time, ARAMCO was mostly owned by various US oil companies, including Mobil, the modern-day maker of Mobile DTE Oil Heavy Medium. In 1988, however, the government bought out ARAMCO, bringing oil production entirely under state control. Today, Saudi Aramco is the world’s most valuable company at an estimated $1.25 trillion (£1.02 trillion).
Saudi Arabia’s sensitivity to oil pricing led to it founding the Organisation of the Petroleum Exporting Countries (OPEC) together with Venezuela, Iraq, Iran and Kuwait. OPEC’s mission was to regulate production to ensure stable supply and fair returns to producers. OPEC intervention, combined with disruptive events like the Iran–Iraq war, led to oil reaching a record high in the 1980s. These higher prices inevitably led to more production from non-OPEC sources, and by the mid-1980s, a worldwide glut of oil sent the price tumbling from $40 to $5 a barrel. The country’s production dropped drastically during this period, while the government experienced budgetary deficits.
In a new move to diversify the economy, Saudi Arabia now plans to build six “economic cities” at an estimated cost of $60bn.