Saudi Arabia & The Paradox of Plenty : The Indicator from Planet Money This week in history: Saudi Arabian oil and the creation of Aramco.

Saudi Arabia & The Paradox of Plenty

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STACEY VANEK SMITH, HOST:

This week marks an interesting anniversary. It's the anniversary of an event that changed the course of a country, and of the entire global economy.

CARDIFF GARCIA, HOST:

'Cause it was this week back in 1933 that a team of American geologists from Standard Oil Company in California arrived on the shore of a sparsely populated, pretty broke country at the time called Saudi Arabia.

VANEK SMITH: What would Saudi Arabia be without oil?

SAMANTHA GROSS: It would be, you know, a sandy, nomadic culture. (Laughter) I mean, oil - everything you see in the country has happened because of the presence of oil and the money that that has brought in. There's no way to overstate that.

GARCIA: This is THE INDICATOR from Planet Money. I'm Cardiff Garcia.

VANEK SMITH: And I'm Stacey Vanek Smith. This week in economic history, Saudi oil - what the team of geologists found, and how it changed the economy of a country and the global economy for better and for worse.

(SOUNDBITE OF FILM, "DESERT VENTURE")

DAN DONALDSON: None of them knew that this desert, barren of natural resources to the outward eye, had been blessed by nature beyond the wildest dreams of those who raided and struggled for life across its sandy wind-swept wastes.

GARCIA: Today's indicator is $2 trillion. That is the estimated value of Saudi Aramco, the Saudi state-owned oil company.

(SOUNDBITE OF FILM, "DESERT VENTURE")

DONALDSON: Oil in commercial quantities had been brought in after three long, discouraging years.

VANEK SMITH: Aramco was founded as a partnership between Saudi Arabia and the American company Standard Oil.

GROSS: Aramco used to stand for the Arabian American Oil Company.

VANEK SMITH: Samantha Gross is a fellow in energy and foreign policy at the Brookings Institution.

GARCIA: Standard Oil made this deal with the Saudi government. It said to the government, hey, give us the rights to any oil we find, and we'll pay you about $4 million. That's in today's money.

VANEK SMITH: Which is, like, what they make in 15 minutes in Saudi Arabia.

GARCIA: Yeah. It's really not that much, you know? But it said it would give them that amount of money upfront, and then we'll also give you a steady income from the oil money itself. About a decade later, it became clear that Saudi Arabia was not just your run-of-the-mill oil producer, though. Its oil resources were really something special.

VANEK SMITH: First of all, it had a ton of oil, like an ocean of oil. But also, it was really, really easy to get that oil out of the ground.

GROSS: The thing that's really special about it is how easy and inexpensive it is to produce. The actual cost of producing Saudi oil is somewhat of a state secret. But, I mean, we guess that it's under $10 a barrel to produce, maybe a lot under $10 a barrel to produce.

GARCIA: By contrast, it costs fracking operations in the United States roughly $25 to get a barrel of oil out of the ground.

VANEK SMITH: The cheapness of getting Saudi oil out of the ground has meant crazy money for Aramco. For instance, oil is about $80 a barrel right now. So if Saudi can get its oil out of the ground for less than 10 bucks a barrel, that is just a huge profit on every barrel of oil.

GARCIA: Many of those barrels come from this famous oil field in Saudi Arabia called the Ghawar Oil Field.

GROSS: It's huge. It's the largest - it's the largest conventional oil field that's been discovered.

VANEK SMITH: And it's on Earth?

GROSS: Yes.

VANEK SMITH: Two-thousand-plus square miles of oil field. That is bigger than Delaware and Rhode Island. So by 1980, the Saudi government was fully aware of this amazing oil resource it was sitting on. And it was like, why are we still partnering with these American jokers? And it took control of Aramco.

GARCIA: And Saudi Aramco is now thought to be the biggest company in the world - bigger than Apple, bigger than Google - combined.

VANEK SMITH: Combined.

GARCIA: Yeah.

VANEK SMITH: If you were to combine them.

GARCIA: Yeah. In other words, Saudi Aramco has brought quite a bit of wealth into the country.

(SOUNDBITE OF FILM, "DESERT VENTURE")

DONALDSON: Thus, American venture capital is developing new standards of life in an ancient realm.

GROSS: You go there, and you see this incredible abundance coming out of the desert. You see gleaming office towers in downtown Riyadh and, you know, armies of guest workers who are there, you know, to help run the economy, to move Saudis around and run their businesses. And just none of that would be there without oil.

(SOUNDBITE OF FILM, "DESERT VENTURE")

DONALDSON: East and West are united in pioneering a new frontier of progress.

VANEK SMITH: In economics, though, there's this thing called the resource curse, or the paradox of plenty, which I like because of the alliteration. And the idea is that you have this amazing gift, this God-given source of income and wealth, and that is amazing. But it can cause certain problems.

GARCIA: Yeah. The biggest of which is that the country can become enormously dependent on that one resource and not develop the other parts of its economy because it doesn't make sense in a given moment to invest in anything else other than that super profitable resource that's already right there.

And so as a result, often, countries with major resources end up having less economic development than countries that were not blessed in the same way.

VANEK SMITH: I mean, it's sort of like winning the lottery, I guess.

GROSS: Yeah. It's exactly like winning the lottery, particularly if you won the lottery and then, you know, at some point, you run out of money. You've spent it all, and you need a new plan.

VANEK SMITH: The oil business is by far the biggest part of Saudi Arabia's economy. The country doesn't do a whole lot else. It hasn't really developed an entrepreneurial culture because, what's the point? Everybody has enough with just the oil.

GARCIA: And economically, this plan is fine. It's OK, so long as that sweet oil money keeps coming.

VANEK SMITH: As long as that sweet oil train keeps coming down the tracks. But you know there's always...

GARCIA: An except.

VANEK SMITH: ...A denouement. Exactly. Because, I mean, first of all, oil is just not the business that it used to be. Fracking has become widespread in the U.S., and now the U.S. can produce as much oil as it wants. It is, of course, way more expensive than Saudi oil, but it also means that Saudi Arabia can't control the global oil supply like it used to.

GARCIA: Yeah. Also, technology is moving away from oil - electric cars, solar power. Other forms of energy are still pretty new. But, like, in 50 years, they won't be new. And there's a pretty good chance that the demand for oil will start declining as technology continues to evolve.

VANEK SMITH: And while all this is happening, Saudi Arabia has gotten very used to spending its crazy oil profits with abandon. Saudi Arabia has grown into something of a welfare state - power, water and gas are hugely subsidized for its population, and most of the country works for the government - these famously cushy, high-paying jobs.

And to pay for this, Saudi Arabia has borrowed tons of money against anticipated oil profits. And sometimes, it borrows too much, especially when the price of oil goes down.

GARCIA: Yeah. All of this means that the long-term money situation for Saudi Arabia is not looking too sustainable. Something has to change.

VANEK SMITH: Saudi Arabia's Crown Prince Mohammed bin Salman says he is committed to breaking the resource curse and to diversifying the Saudi economy. The country even announced plans to start selling shares in Saudi Aramco and go public.

GARCIA: People got really excited about this because this was going to be the biggest initial public offering in history.

VANEK SMITH: Like, by a lot.

GARCIA: Yeah. All of the stock exchanges around the world were competing for it. And the idea was that Saudi Arabia would sell stock to investors, raise a ton of money and then use that money to kick-start other industries in the country, like tech and manufacturing.

GROSS: Looks like that may be on ice right now.

VANEK SMITH: Why is that? Why is it on ice?

GROSS: The Saudi royal family, and particularly King Salman, has decided to put it on hold because I don't think they were crazy about the level of transparency that would have been required.

VANEK SMITH: Those pesky shareholders think they own the place.

GROSS: Yeah. And if they do, you have to tell them things.

VANEK SMITH: Right.

GROSS: You know, they need an understanding of what it is that they own.

VANEK SMITH: When a company goes public, it has to open up its books to regulators and shareholders. Saudi Aramco bankrolls the Saudi royal family - literally thousands of princes and their wives and their children. And suddenly, all of their private jets and palaces and shopping sprees would be exposed to investor scrutiny.

GARCIA: In a way, this is related to the resource curse as well because the resource curse tends to concentrate power and wealth in the hands of a few, and that can often leave those few to spend money and resources in ways that are not always in the public interest because spending with abandon is a hard habit to break.

(SOUNDBITE OF FILM, "DESERT VENTURE")

DONALDSON: Oil - one of the materials that is making a truly great contribution to our modern civilization.

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