What was the first company in the world to
reach a valuation of $2 trillion? The most common guess would probably be Apple
or Microsoft. But the first company to reach a $2 trillion
valuation isn’t a tech company nor is it American. Saudi Aramco which is Saudi Arabia’s oil
company was actually the first company to reach a $2 trillion valuation in December
of 2019. And given that Saudi Aramco was making more
money than Apple and Google combined before the pandemic, it’s no wonder why they’re
worth so much. What is surprising though is the fact that
Saudi Arabia didn’t actually found Aramco, they actually bought it. So, here’s how Saudi Arabia acquired one
of the most valuable companies in the world. It all started in the early 1900s when Henry
Ford introduced the Model T, the world’s first mass-produced vehicle. The Model T was quite popular from the very
beginning, but as more competition entered the scene, automobiles went from being a luxury
to being a valuable consumer good in the 1920s and 30s. This sudden increase in automobile ownership
created a strong demand for cheap oil, so companies like Standard Oil and Shell started
scouring the earth for the richest oil reserves they could find. In the meantime, modern Saudi Arabia was just
starting to take shape. The Abdulaziz family had ruled central Arabia
for 130 years, but in 1891, a rivaling group would conquer the region and push out the
former ruling family. For over a decade, the Abdulaziz family stood
back and relinquished their control until one of their descendants Ibn Saud decided
to take back control. In 1902, Ibn Saud led a revolt with 40 people
into Riyadh, and the group would successfully take back Riyadh making Ibn the ruler of the
area. Ibn spent the next 30 years conquering most
of Arabia, and it wasn’t until 1932 that he would unite the regions of Arabia and create
modern-day Saudi Arabia. Having successfully conquered the entire region,
king Ibn turned his focus onto advancing the kingdom’s economic state. Just a couple of months before Saudi Arabia
was formed, the SoCal oil company, or now Chevron, struck oil in Bahrain in May of 1932. This discovery piqued interest in the middle
eastern oil search, and King Ibn would quickly leverage this opportunity the following year. In November of 1933, King Ibn signed a concession
agreement with the SoCal. This agreement created a subsidiary company
called the California Arabia Standard Oil Company or CASOC which was fully owned by
SoCal. Casoc immediately began work in Saudi Arabia
starting by surveying the area over the next year. Casoc started drilling in 1935, but despite
a year of planning, Casoc didn’t find any oil. Discouraged by the lack of progress, SoCal
would sell 50% of the company to Texaco, and this kept the effort alive for a few more
years. By 1937 though, Casoc was still yet to find
any oil, so SoCal considered giving up on the endeavor altogether. SoCal consulted with their chief geologist
Max Steineke who recommended that they should keep drilling. So, the executives kept the operation alive,
but they weren’t particularly optimistic. Just a year later though, Casoc struck commercial
quantities of oil at Dammam Well No. 7. This well would later be named the prosperity
well. Anyway, Saudi Arabia would export their first
tanker of oil in 1939, and with that Saudi Arabia had entered the oil industry. Saudi Arabia was only making a small royalty
on all of the oil being exported, but at this point, King Ibn was simply happy to have this
opportunity, so he wouldn’t make a fuss about it. A few years later, in 1941, Casoc discovered
oil in Abqaiq, and Casoc would rapidly expand across Saudi Arabia throughout the 1940s. In 1944, the company’s name was changed
from California Arabian Standard Oil to Arabian American Oil or Aramco. Soon enough, more American oil companies wanted
a part of the pie, and they would end up investing quite heavily in 1948. Standard Oil of New Jersey which would later
become Exxon purchased a 30% stake in Aramco. And Socony Vacuum which would later become
Mobil purchased a 10% stake in the company. In the meantime, though Saudia Arabia wasn’t
making too much money from the operation every year, the operation had been going on for
a decade and Saudi Arabia had saved up a good amount of money over the years. And given all of this interest in Aramco,
King Ibn realized that he finally had the upper hand. In 1949, Aramco would accidentally drill into
the emirate of Abu Dhabi. This created a border dispute between Saudi
Arabia and Abu Dhabi and gave King Ibn the perfect opportunity to squeeze Aramco. King Ibn threatened that since Aramco couldn’t
respect the countries’ borders, Saudi Arabia was going to nationalize their oil production
and kick out the Americans. In response, the Americans would bend over
and agree to share 50% of Aramco’s profits with Saudi Arabia. Aramco also agreed to move its headquarters
from New York to the Saudi Arabian city of Dhahran. Saudi Arabia still had no stake in the company,
but 50% profit sharing was way better than the small royalty they were previously receiving. Moving into the 1950s, Aramco transitioned
from being a large oil producer to being an oil giant. In 1950, they completed the 1200 kilometer
Trans-Arabia Pipeline which connected eastern Saudi Arabia with the Mediterranean sea. They also discovered the Safaniyah oil field
in 1951 which became the world’s largest offshore oil field at the time. By 1958, Aramco was producing over 1 million
barrels of oil per day. And while that’s quite a milestone, that’s
not even 10% of how much they produce today. So, there was still a lot of growth left,
and the next pivotal point in Saudi Arabia’s oil journey was the foundation of OPEC. In 1960, 5 of the top oil-producing countries
came together in Baghdad to form a sort of collaboration. While these countries produced a significant
proportion of the world’s oil, they were still very much dependent on America and the
Soviet Union. They figured that they could reduce this dependency
by coming together and creating a sort of monopoly on Middle Eastern oil. The first time OPEC leveraged this power was
in 1973 and this would become known as the oil crisis of 1973. At the time, the Yom Kippur War was taking
place between Israel and a coalition of Arab states led by Egypt and Syria. The US and several western countries were
passively supporting Israel during the war, and Saudi Arabia wasn’t a big fan of this. In retaliation, Saudia Arabia would get OPEC
to enforce an oil embargo on all of these western countries. To make things even worse, the US was already
facing an oil shortage due to strong economic growth in the 1960s which skyrocketed automobile
ownership. So, when OPEC announced the embargo, global
oil prices surged from $3 per barrel to $12 per barrel. This caused massive panic within western countries
as people raced to gas stations to fill up their vehicles. Gas stations across the country quickly dried
up and gas stations started to impose limits on how much gas an individual could buy. President Nixon even limited all highways
to a speed limit of 55 mph as this was thought to be the most fuel-efficient speed. Despite the internal crisis that the oil embargo
caused, the US didn’t actually change its stance on Israel and Israeli forces didn’t
retreat to the 1949 Armistice line. So, the oil embargo was technically a failure. But what this did do was aggravate Saudi Arabia. Saudi Arabia had worked with the Americans
for 41 years, and they had shared 50% of the profit for 24 years. So, they had plenty of money by this point,
and they decided that it was time to kick out the Americans. In 1973, the Saudi Arabian government bought
a 25% stake in the company. In 1974, they would increase this stake to
60%. And, in 1980, the Saudi government would increase
their stake to 100%, taking full control of the company. Al Naimi would become the company’s first
Saudi president in 1984 and eventually CEO in 1988. The name of the company would also be changed
from just Aramco to Saudi Aramco in 1988. And with that, Saudi Aramco began its transition
from being a leading oil exporter to being a global petroleum enterprise. In 1991, Saudi Aramco purchased a 35% stake
in Ssangyong Oil Refining Company located in Korea. In 1994, they purchased a 40% stake in Petron
Corporation located in the Philippines. In 1996, they acquired a 50% stake in Corinth
Refineries located in Europe. Around the same time, Saudi Aramco also played
with simulation software. This probably sounds like one of the most
boring things in the world, but Saudi Aramco developed an oil reservoir simulator called
POWERS in 1997. Though that sounds super monotonous, POWERS
helped them significantly reduce storage and transportation costs. They followed up POWERS with GigaPOWERS in
2010 and eventually TeraPOWERS in 2016. All of these acquisitions and technological
developments have allowed Saudi Aramco to become the biggest oil company in the world
by far; however, Saudi Arabia still had a massive problem on their hands which was that
their country was basically entirely dependent on oil. And this was made painfully evident in 2014
when oil prices plummeted over 50%. Saudi Arabia quickly fell into a massive government
deficit and their national debt has skyrocketed ever since. In 2014, Saudi Arabia had almost no debt with
a debt to GDP ratio of 1.6%. By 2020, that number was 32.5%. I gotta say though, that’s still nowhere
near America’s debt to GDP ratio of 140%. Anyway, unlike the US, the Saudis decided
that they had to do something about their debt. So, the prince of Saudi Arabia, Mohammed Bin
Salman launched a plan called Vision 2030. The plan entails diversifying the country’s
dependence on oil by investing in tourism, infrastructure, and recreation. This is why Saudi Arabia spent $3.8 billion
on expanding their airport and why the country finally started giving out tourist visas. One of the ways Mohammed bin Salman funded
this diversification effort was by taking Saudi Aramco public. And with $111 billion in net profit, investors
didn’t have a hard time justifying a $2 trillion valuation for Saudi Aramco. Saudi Arabia only sold a few percent of Saudi
Aramco, but that itself added up to tens of billions. So, at the end of the day, how did Saudi Arabia
buy a $2 trillion company? Well, the first step was being blessed with
the world’s second-largest oil reserve. The second step was partnering with the Americans
and living off of dividends and profit-sharing for 40 years. The third step was using saving up this money
and eventually buying out Aramco. The fourth step was continuing monumental
growth and making international investments. Finally, the last step was going public as
the most profitable company in the world. And that’s how Saudi Arabia bought the world’s
first $2 trillion company. Do you guys think Saudi Aramco is worth $2
trillion given the trend towards renewable energy? Comment that down below. Also, drop a like if you’re excited to move
away from our dependence on oil. And of course, consider subscribing to see
more questions logically answered.
