Saudi Arabia, the world’s largest crude oil exporter, is facing economic challenges due to its production cuts and the lack of significant oil price increases in the second half of the year.
Analysts suggest that Saudi Arabia’s efforts to support oil prices through substantial production cuts will slow down its economy, potentially leading to a contraction and making it one of the worst-performing economies among the G20 countries this year.
During this month and the next, Saudi Arabia plans to produce around 9 million barrels per day (bpd) of crude oil, which represents one of the lowest production levels in the past decade. In early June, the Kingdom announced a voluntary production reduction of 1 million bpd for July, extending it to August as well. This level of production is significantly lower than the 10.5 million bpd maintained throughout 2022, a year when the Saudi economy experienced a nearly 9% growth and recorded the first budget surplus in a decade.
However, with oil prices failing to reach $80 per barrel, the estimated price necessary to balance Saudi Arabia’s budget, the country’s oil-dependent economy will face challenges that will impact its finances. While non-oil economic growth is expected to remain robust, the heavy reliance on oil in export revenues will weigh on the overall economy and budget revenues.
Estimates from industry analysts suggest that if Saudi Arabia reverses the voluntary production cut in September, the economy could shrink by 0.1% in 2023. However, if the production cuts continue until the end of the year as an effort to tighten the market, the economy could contract by 1%.
In 2022, Saudi Arabia was the fastest-growing economy among the G20, driven by strong oil production and robust non-oil GDP growth. The surplus generated from high oil production and prices allowed the Kingdom to make significant investments in diversifying the economy away from oil, including projects such as NEOM.
The OPEC+ cuts announced in April are expected to reduce Saudi Arabia’s economic growth to 2.1% this year, down from the IMF’s initial projection of 3.1% for Middle Eastern economies. The breakeven oil price for Saudi Arabia, considering current production levels and spending on projects, is estimated to be $95 per barrel, highlighting the country’s dependence on oil revenues.
Lower oil revenues and production have already resulted in slower economic growth in Saudi Arabia. In the first quarter of 2023, the country’s economy experienced a year-over-year growth of 3.8%, slightly lower than the preliminary estimate of 3.9%, primarily due to declining crude oil and natural gas production.
Maintaining the current production cuts throughout the year is expected to contract the economy. While the non-oil sectors are projected to exhibit robust growth of 4.8%, the overall GDP growth could decline by -0.5%.
The drag on the economy caused by the production cuts underscores Saudi Arabia’s high dependence on oil. While the country has a strong fiscal position and substantial foreign reserves, as highlighted by Fitch’s rating upgrade in April, its economy remains vulnerable due to this reliance, weak World Bank governance indicators, and exposure to geopolitical shocks.
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