History of the Oil Industry [Part 3]: Saudi Aramco, US Control & British Decline, 7 Sisters
by Yunki Jo | CEO
In our previous discussion, we delved into the dynamic shifts occurring in the Middle East, transforming it into the focal point of the global oil industry. This week, our focus shifts to the rise of Saudi Aramco, recognized today as the largest integrated oil company worldwide. Additionally, we will explore the United States’ strategic maneuvers that led to its oil dominance, unraveling the key events that unfolded throughout this pivotal period.
The Crisis of the Big Five (1929–1931)
The Achnacarry Agreement, inked by the Big Five, constituted an illicit collusion with the intention of monopolizing the oil industry and securing market dominance. Adding to these questionable practices, in 1929, Standard Oil of New Jersey orchestrated the formation of the Export Petroleum Association, which encompassed New York Standard Oil, Gulf, and various U.S. oil companies. This coalition strategically sought to stifle U.S. oil production and curb overseas exports, fortifying its monopoly in the domestic oil market. Notwithstanding these maneuvers, the U.S. government had no grounds to condone such collaborations that violated antitrust laws.
Despite intense lobbying, entrenched oil powers, such as Standard Oil of New Jersey, faced a crisis as U.S. government approval for oil production control via the Export Petroleum Association proved unattainable. The onset of the Great Depression in 1929 and significant oil discoveries in East Texas in 1930 led to a drastic increase in oil supply, soaring from 340,000 to one million barrels per day by April 1931. This surplus, combined with economic downturn, triggered a sharp decline in oil prices from $1.19 in 1930 to 65 cents in 1931, pushing the oil industry to the brink of collapse.
Crisis Turns into Opportunity (1932)
To the surprise of many, the crisis swiftly transformed into an opportune moment. The nosedive in oil prices amid the uncertainties, including the Great Depression, provided a justification for oil companies to seize control of the market. This led to the implementation of strategic measures under the guise of safeguarding the U.S. oil industry:
- Imposition of a tariff of 21 cents per barrel on imported oil (June 1932) — Establishing oil price control
- Implementation of a state-by-state production allocation system — Enforcing oil production control
- Introduction of the Texas-Plus Price, linking the export price of oil globally to the price in East Texas — Enforcing oil price control
Notably, Texas-Plus ensured that the global price of oil was tethered to East Texas, irrespective of the production region. Consequently, even if inexpensive oil was imported from the Middle East, consumers were compelled to pay the same price as for the more costly domestically produced oil.
Emergence of New Challengers in the Oil Market (1933-)
Oil cartel regulations like the Redline Agreement, Achnacarry Agreement, and Texas-Plus wielded significant market control but also constrained member companies, prohibiting market exploration. In this cartel-dominated landscape, external entities, unbound by these limitations, began to thrive. Notably, SOCAL (Standard Oil of California), later known as Chevron, serves as a prominent example.
SOCAL, free from cartel restrictions like market share maintenance and production facility expansion limits, secured development rights for Bahrain’s oil fields in 1928. It successfully discovered the fields four years later. Despite initial proposals to cartel members Standard Oil of New Jersey and Gulf, Standard Oil of New Jersey withdrew due to oversupply concerns, while Gulf abandoned the Bahrain oil field development plan due to cartel opposition, allowing SOCAL to make significant strides outside the cartel’s confines.
SOCAL did not stop in Bahrain. In 1933, it signed an agreement with the king of Saudi Arabia for oil field development and established the California Arabian Standard Oil Co. (CASOC). Facing difficulties in oil exploration, SOCAL, in 1936, sold half of its stake to The Texas Co., a member of the Redline Agreement, and together they began developing oil fields in Saudi Arabia. In 1938, they succeeded in producing marketable crude oil at the Saudi Dharan field (Dammam №7).
U.S. Government, SOCAL, and The Texas Co. Deal (1943)
Having discovered a large oil field and succeeded in oil exploration, there was still a problem to be solved. If the massive Saudi oil were to be distributed directly in the market, the sheer volume could cause a price collapse, and there was an obvious risk of a chicken game with companies in the cartel. The solution SOCAL and The Texas Co. found was to sell Saudi oil to the U.S. government through a long-term contract. Their proposal aligned with the U.S. government’s understanding of the need for strategic oil security, and they agreed to proceed with the deal under the following conditions:
- The U.S. government would purchase one-third of CASOC’s stake for $40 million.
- In peacetime, the U.S. government had the right to purchase 51% of Saudi oil, and in emergencies, 100%, first and foremost.
- The U.S. government had the right to oppose the sale of oil to a third party considered a threat to national security.
However, the agreement between the U.S. government and SOCAL & The Texas Co. fell through just before signing the contract. The U.S. companies Standard Oil of New Jersey and Socony (the two companies that signed the Redline Agreement, later merged into ExxonMobil) strongly opposed, stating that the oil industry should be left to private companies. Additionally, smaller oil companies in Texas and elsewhere opposed the government’s involvement in the oil business, fearing the influx of cheap foreign oil if the government intervened.
At that time, and possibly even today, the United States tended to prioritize the interests of private companies — especially those with substantial financial and political influence — over considerations of national security or public welfare.
U.S. Engulfs the World’s Largest Oil Company, Aramco (1944–1948)
Without the collapse of oil prices resulting from the chicken game between the cartel and non-cartel entities (SOCAL and The Texas Co.), and most importantly, without undermining the entrenched power of the oil cartel, SOCAL and The Texas Co. were incorporated into the cartel. Consequently, with SOCAL and The Texas Co. joining the cartel, the Big Five transformed into the Big Seven, marking the onset of the era known as the Seven Sisters, referring to the seven major oil companies.
Under SOCAL’s leadership, CASOC (California Arabian Standard Oil Co.), previously confined to California, underwent a transformation, adopting the name Aramco (Arabian-American Oil Company) in 1944. Through successive transitions involving SOCAL, the present-day Saudi Aramco, now fully nationalized, reported a net profit of $111.1 billion in 2018 — surpassing the combined net profit of major entities like Apple, Google, and ExxonMobil. Its estimated market value reached around $1 trillion in 2019. Although initially an American company backed by U.S. capital, the movement toward resource nationalization in the Middle East prompted Saudi Arabia to gradually nationalize Aramco’s shares. By 1980, it had evolved into a 100% state-owned entity, officially adopting the name Saudi Aramco in 1988.
Having successfully transformed a potential adversary into an ally, another challenge arose. Existing cartel members, namely Standard Oil and Socony (later ExxonMobil), were bound by the Redline Agreement, preventing them from developing Saudi oil. Consequently, in 1946, Standard Oil and Socony appealed to the British government, the leader of the Redline Agreement, for its annulment. The cost of annulment was agreed upon as Standard Oil and Socony committing to purchase 800 million and 500 million barrels of oil, respectively, from the Anglo-Iranian Oil Company (AIOC) over a 20-year span.
Following the annulment of the Redline Agreement in 1948, Aramco restructured its shares. SOCAL, The Texas Co., and Standard Oil of New Jersey each held 30%, while Socony held 10% of the shares. In essence, various U.S. oil majors collectively managed and orchestrated Saudi Arabia’s oil industry, thereby exercising control over the country’s oil market.
U.S. Gains Control, Britain Pushed Out (1944-)
Aramco is the most important and valuable overseas economic asset developed by American citizens in U.S. history.
Otto N. Miller — Retired President of Chevron (SOCAL) in 1974
Aramco became the world’s largest oil company based on massive reserves. Although it is now completely nationalized, it was under U.S. influence for a long time. As a result, the United States gained more than just money from Aramco; it gained the power to control the Middle East’s oil resources, shake them, and maintain the Pax Americana through oil.
In order to maintain its power in the oil industry, Britain, too, attempted to exert influence on the production and oil prices of oil-producing countries worldwide through the Anglo-American Petroleum Agreement (1944), which included conditions such as the UK holding Iranian oil, sharing oil from Iraq and Kuwait, and the U.S. holding Saudi oil. However, it was thwarted by opposition from the U.S. oil industry.
Another Axis of Oil Dominance, the Seven Sisters
The Seven Sisters, briefly mentioned earlier, have continuously played a significant role in the formation of the oil industry and movements in the oil market, from the Redline Agreement to the founding of Aramco.
In 1952, according to a report by the U.S. Federal Trade Commission (FTC) titled “The International Petroleum Cartel,” 99% of Middle Eastern oil, 80% of non-Middle Eastern but associated countries, and 44% of the Western Hemisphere, including the United States, were being produced by the Seven Sisters.
The Seven Sisters exerted full control over every facet of the global oil industry, from refining, transportation, to distribution, after extracting the oil. In other words, the Seven Sisters were a central axis of oil power that, at times, aligned with or confronted the U.S. (or UK) government to gain advantages. Even in its current reduced form with four companies, they still wield significant influence.
The petroleum industry, nurtured and led by the United States, was an essential tool for Pax Americana. Oil is not only crucial as a strategic resource for daily life but also serves as a vital component for various industries, including the military-industrial complex. Simultaneously, it enables the United States to dominate the world’s finance through the use of the dollar, as oil transactions are conducted exclusively in dollars. Therefore, the U.S. went to great lengths, even ignoring economic challenges faced by its citizens, to support the hands of the oil cartel and did not shy away from wars (two Iraq wars) that faced widespread opposition, all to prevent losing control over oil dominance.
