What's Behind Those High Oil Prices, and Other Issues (page 1 of 2)

If so, you're wrong, says Sheikh Hisham Nazer, former Saudi Arabian Minister of Petroleum and Economic Planning. Nazer offered his audience a Middle Eastern perspective on energy pricing during a presentation at Wharton in January 2001.
According to Nazer, the modern history of Saudi Arabia, including his own role in it, has been a constant struggle with western companies to obtain a fair share of the income made from oil. He first recognized this, he said, when he returned to Saudi Arabia in the mid-1950s after getting a degree from UCLA and was offered a job in the petroleum ministry. He made a point then of reading up on the history of the industry, an exercise that he described as "the best thing to happen to me."

Saudi Arabia, a country three times the size of Texas, has the largest oil fields in the world, capable of producing 162 billion barrels of oil, Nazer said. "And if technology improves, we will be able to get to 600 billion more barrels we know about now."

But before oil was discovered in the 1930s, he added, "Saudi Arabia was an isolated country and had nothing." When American philanthropist/plumbing magnate Charles Crane "came there and asked the King what he needed, the King replied, 'help in finding water.' So Crane sent a geologist to the kingdom to find water and he discovered oil.

"Nobody knew then how much oil there was. An official of Iraq Petroleum was so sure there was none he offered to drink every drop that was found. When Standard Oil of California (now Chevron) offered to pay 21 cents a barrel for a concession giving it the rights to any oil it found, Saudi Arabia had to accept," he said.

After the first gusher was discovered, Nazer continued, Standard Oil of California brought in Standard Oil of New Jersey, Mobil and Texaco to form the Arab American Oil Co. (Aramco), the largest oil company in the world.

In time, Saudi Arabia wanted to negotiate a fairer agreement. "By the 1950s, when I first joined the Ministry of Petroleum, there was a 50-50 agreement in place, but that was only on the profits from production of crude, not from transporting, refining, distributing or marketing the oil," Nazer said. "And the profits from crude kept sinking. They went as low as $1.60 a barrel, making crude oil cheaper than Pepsi Cola."

Decades later, some oil-producing countries resolved their continuous disputes with western oil companies by nationalizing their oil fields. Saudi Arabia pushed instead for greater participation in the oil industry in an "integrated way" - that is, getting involved in all phases of the oil business. While he was Minister of Petroleum from 1986 to 1995, Nazer noted, Saudi Arabia bought refineries, established its own fleet of tankers and developed marketing agreements to serve end customers in the U.S., Greece, the Philippines and Korea.

In those years, Nazer also served as Minister of Planning, a post he was first appointed to in 1970. In that role, his task was to oversee the use of oil revenues to develop the Saudi Arabian economy. It was not difficult to see the kingdom's infrastructure needs: "We had hardly any schools. There were only 400,000 students in all levels of education in the whole country. No health facilities. No telephones. No power except in a few of the major cities. We built two schools every three days. We built two universities.