Rise of Commercial Oil Industry in Saudi Arabia Summary

  • Last updated on November 10, 2022

In the early 1900’s, oil was increasingly demanded for fuel. With the support of their governments, oil companies aggressively sought new sources of commercial oil, especially in the Middle East, where large sources of commercial oil were discovered in the Arabian Peninsula. The large oil fields of Saudi Arabia changed the country from a remote desert kingdom to an important player in world affairs.

Summary of Event

The growing need for oil to fuel navies and new motorized vehicles in the early 1900’s catalyzed the search for new commercial sources of oil. First discovered in Persia (modern-day Iran) in 1908, oil had also been found in 1927 near Kirkuk in modern-day Iraq, and exploration continued on the Arabian Peninsula. Calouste Sarkis Gulbenkian, Gulbenkian, Calouste Sarkis an Armenian knowledgeable about the Russian Baku oil field, played an important role in the 1912 creation of the Turkish Petroleum Company Turkish Petroleum Company (TPC), which sought to develop oil in the Ottoman Empire. [kw]Rise of Commercial Oil Industry in Saudi Arabia (Mar. 3, 1938) [kw]Oil Industry in Saudi Arabia, Rise of Commercial (Mar. 3, 1938) [kw]Saudi Arabia, Rise of Commercial Oil Industry in (Mar. 3, 1938) [kw]Arabia, Rise of Commercial Oil Industry in Saudi (Mar. 3, 1938) Oil industry;Saudi Arabia Saudi Arabian Oil Company Saudi Aramco Aramco [g]Saudi Arabia;Mar. 3, 1938: Rise of Commercial Oil Industry in Saudi Arabia[09710] [c]Energy;Mar. 3, 1938: Rise of Commercial Oil Industry in Saudi Arabia[09710] [c]Natural resources;Mar. 3, 1938: Rise of Commercial Oil Industry in Saudi Arabia[09710] [c]Trade and commerce;Mar. 3, 1938: Rise of Commercial Oil Industry in Saudi Arabia[09710] Ibn Saՙūd Philby, H. St. John B. Twitchell, Karl Saben Crane, Charles R.

After World War I, the oil rights of the former Ottoman Empire were divided between the French and the British. Political pressure forced the inclusion of American oil companies, too, and the issue became more important when a large commercial oil field was found near Kirkuk in 1927. Under an agreement signed in 1928, the TPC (later renamed the Iraq Petroleum Company) Iraq Petroleum Company was to be owned by British Petroleum, Royal Dutch/Shell, the Compagnie Française des Petroles, the Near East Development Corporation (a group of five American oil companies), and Gulbenkian. All the companies involved signed the Red Line Agreement, Red Line Agreement (1928) which prevented them from seeking individual oil concessions in the former Ottoman Empire region (including all of the Arabian Peninsula except Kuwait).

After World War I, Major Frank Holmes of New Zealand became an agent for the Eastern and General Syndicate, which wanted to find business opportunities in the Middle East. During the 1920’s, he obtained oil rights in eastern Saudi Arabia, the neutral zone between Saudi Arabia and Kuwait, and the island of Bahrain. The syndicate became short of money, however, and it decided to try to sell the oil concessions. Gulf Oil was interested in the oil concessions and bought them, but because the company had signed the Red Line Agreement—it was a member of the Near East Development Corporation—it was required to relinquish its purchase. Gulf Oil sold its concession in Bahrain to Standard Oil of California Standard Oil of California (called Socal and later Chevron), and the other concessions lapsed. Socal discovered a modest oil field in Bahrain on May 31, 1932.

Ibn Saՙūd was a formidable political and military leader who consolidated much of the Arabian Peninsula into a sovereign state under his rule. The British government formally recognized his kingdom—which was renamed Saudi Arabia in 1932—in the Treaty of Jiddah Jiddah, Treaty of (1927) in 1927. The treaty had the important effect of replacing a previous treaty agreement with Ibn Saՙūd that had restricted his ability to negotiate commercial agreements with anyone but the British. The new treaty did not have this restriction.

H. St. John B. Philby was a British official and explorer who became deeply involved in the affairs of Ibn Saՙūd and his kingdom. He even converted to Islam in 1930 so that he could be a senior adviser to the king. King Ibn Saՙūd was in great need of money, and Philby believed that oil concessions were one possible solution. He was also concerned about the strong British influence in the region. Philby, who had a favorable opinion of the United States, decided to see if any American oil companies would be willing to pay for oil concessions in Saudi Arabia. A chance arose when King Ibn Saՙūd was hosting a visit by Charles R. Crane, an American philanthropist with a strong interest in the Middle East. In response to the need for more irrigation in the kingdom, Crane offered the assistance of a mining engineer named Karl Saben Twitchell, who was under contract to Crane in Yemen. Twitchell began his work in 1932. His explorations in the country convinced him that there were commercial sources of gold and oil in the country, and he left to see if financing could be found in the United States.

Socal geologist Fred A. Davies believed that there might be a great deal of oil near Bahrain, and Socal immediately contracted Twitchell to help arrange an oil concession from King Ibn Saՙūd. Negotiations began in Jiddah in 1933. Socal was represented by Twitchell and lawyer Lloyd Hamilton with support from Philby. Saudi finance minister Abdullah Suleiman negotiated for the Saudi government, and Iraq Petroleum Company (IPC) also sent a negotiator, Stephen Longrigg, to Jiddah. However, IPC’s reluctance to pay cash up front and Philby’s hostility prevented IPC from being a serious competitor, and on May 29, 1933, an agreement was signed. Socal received the oil concession to eastern Saudi Arabia and preferential rights (which meant that it would be allowed to match any offer) to the rest of the kingdom for sixty years. Saudi Arabia received a loan (to be paid back from future royalties) in gold, a yearly fee, another loan if oil was found, and a royalty per ton of oil. Exploration and drilling began immediately.

The focus on exploration in eastern Saudi Arabia was at the Dammam Dome formation. Socal chose California Arabian Standard Oil Company California Arabian Standard Oil Company (Casco), a subsidiary, to do the work, and drilling began in 1935. The Texas Company (Texaco) became a half owner in Casco in 1937 after it provided needed facilities and capital. The initial wells were not successful, and Socal began to consider closing its operations. On March 3, 1938, Dammam’s well number seven hit significant oil at 4,727 feet. Other companies quickly showed interest in Saudi Arabia’s oil, but the king was pleased with Casco and granted additional valuable oil concessions to the company. Casco and the later Arabian American Oil Company (Aramco) remained the chief producers of oil from Saudi Arabia, which gave American oil companies a strong position in Middle East oil production.

Significance

Dammam’s well number seven would operate until 1982 and produce 32.5 million barrels of oil. This well was just the start of oil production: By 1949, Saudi Arabian oil production was 500,000 barrels per day. In 2005, Saudi Arabia was producing more than 10 million barrels per day (8-9 percent of the world’s use) and had one-fourth of the world’s proven reserves. Iraq, which had only half as much in proven oil reserves, was second in the world. As the importance of the oil production in Saudi Arabia grew, its management changed. Casco became the Arabian American Oil Company (Aramco) in 1944, and Standard Oil of New Jersey (Exxon) and Socony-Vacuum Oil (Mobil) became partners in Aramco in 1948. The Saudi government gained 25 percent ownership of Aramco in 1973, 60 percent in 1974, and full ownership in 1980. The name was changed to the Saudi Arabian Oil Company (Saudi Aramco) in 1988. Oil accounted for approximately 75 percent of the Saudi Arabian government’s revenue and 40 percent of its gross domestic product in 2005, and oil paid for the kingdom’s economic development and modernization. The importance of the exported oil from Saudi Arabia and its neighbors in the Middle East made the political events of this part of the world of vital interest and concern to the world’s most powerful nations. Oil industry;Saudi Arabia Saudi Arabian Oil Company Saudi Aramco Aramco

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Brown, Anthony Cave. Oil, God, and Gold. New York: Houghton Mifflin, 1999. A very readable book about the details of the discovery and development of oil in Saudi Arabia.
  • citation-type="booksimple"

    xlink:type="simple">Hamilton, Charles W. Americans and Oil in the Middle East. Houston: Gulf, 1962. An insider’s view of U.S. involvement in the development of oil in the Middle East. Chapter 5 specifically deals with Saudi Arabia.
  • citation-type="booksimple"

    xlink:type="simple">Lacey, Robert. The Kingdom: Arabia and the House of Saud. New York: Avon Books, 1981. A best-selling history of modern Saudi Arabia. Parts 4 and 5 deal with oil and petropower.
  • citation-type="booksimple"

    xlink:type="simple">Mansfield, Peter, and Nicholas Pelham. A History of the Middle East. Rev. ed. New York: Penguin Books, 2004. Chapter 9 deals with the discovery of oil.
  • citation-type="booksimple"

    xlink:type="simple">Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Made. New York: Viking Press, 1975. A best-selling history of the development of the international oil industry. The role of the Middle East is well covered.
  • citation-type="booksimple"

    xlink:type="simple">Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1992. A well-researched, best-selling history of the oil industry. Parts 2 and 3 cover the discovery and development of oil in the Middle East.

Discovery of Oil at Spindletop

Oil Is Discovered in Persia

Great Britain and France Sign the San Remo Agreement

Oil Is Discovered in Venezuela

Treaty of Ankara

Oil Companies Cooperate in a Cartel Covering the Middle East

Categories: History Content