An offshore drilling platform stands in the shallow waters of the Manifa offshore oil field operated by Saudi Aramco on Wednesday, October 3, 2018, in Manifa, Saudi Arabia.
Simon Dawson | Bloomberg | Getty Images
Saudi Arabia has a superpower. Not only is it the world’s largest exporter of crude oil; The production cost of its oil projects is also the lowest in the world, only about US$10 per barrel. That’s a big deal when about 75% of fiscal revenue comes from oil.
For a while, its fiscal breakeven oil price — the cost of a barrel of crude oil needed to balance the budget — was also quite comfortable.
That is changing as Saudi Arabia embarks on huge spending projects as part of its Vision 2030, which aims to modernize the economy and diversify revenue sources away from oil. Year after year, projected breakeven oil prices get higher and Saudi Arabia’s deficit grows.
In May 2023, the International Monetary Fund forecast the country’s breakeven oil price at $80.90 per barrel, putting it back into fiscal deficit after posting its first surplus in nearly a decade. The fund’s latest forecast in April puts the figure at $96.20 in 2024; up about 19% from the previous year and about 32% above current barrel prices Brent crude oil, As of Wednesday afternoon, it was trading around $73.
Riyadh, Saudi Arabia.
Johnny Gregg | Electronic+ | Getty Images
“The Kingdom will have significant budgetary needs until at least 2030 due to the need to demonstrate some significant results in key Vision 2030 projects and to prepare and host large-scale sports and cultural events” such as the 2034 World Cup and the 2030 World Expo, Li- Said Chen Sim, non-resident scholar at the Middle East Institute in Washington.
“Amid expected growth in oil supplies from the United States, Guyana, Brazil, Canada and even the United Arab Emirates, as well as likely lackluster growth in oil consumption in China, Saudi Arabia’s largest oil customer, this all means Saudi Arabia’s fiscal breakeven price could rise to around $100.”
All of this, she added, does not include the domestic spending needs of Saudi Arabia’s massive sovereign wealth fund, the Public Investment Fund, which supports mega-trillion-dollar programs like NEOM. Nomura Asset Management cited Bloomberg’s forecast that this year’s breakeven price, including PIF expenses, would be $112 per barrel.
“Saudi Arabia is wealthy and government spending has climbed rapidly over the past decade, but it must operate within its fiscal parameters like other countries,” Nomura Securities wrote in a Sept. 2 report on Arab markets.
It added that important economic indicators “such as oil production and prices are now sending warning signals”. “A global economic slowdown caused by supply uncertainty could hamper the prospects for the hydrocarbon economy.”
Breakeven Do Oil Prices Really Matter?
But wait — some economists and market analysts argue that fiscal breakeven prices don’t always matter as much as people think. For Saudi Arabia, there are a range of options to manage the deficit and less-than-ideal oil prices.
“The reality is that countries have always run deficits, so the idea that Saudi Arabia needs $112 of oil, or whatever the number is, to me doesn’t really reflect what’s going on,” said one energy analyst who follows the issue. The teacher said.
“For Saudi Arabia, they have a lot of ability to take on more debt if they want to… Running a small deficit is not a problem for them,” the analyst said. Professional restrictions, the analyst said on condition of anonymity.
The country also has strong foreign exchange reserves, which grew to a 20-month high of $452.8 billion in July, and has successfully issued bonds. Debt markets have been used to raise $12 billion so far this year. Energy analysts say oil revenues should increase when OPEC+ production cuts, most of which are imposed by Saudi Arabia, expire in 2025.
“From that perspective, they are also starting from a relatively strong position,” the source said.
Sim said Saudi Arabia’s public debt has grown from about 3% of GDP in the 2010s to 24% today, which is a huge increase. But the number is still low by international standards. For example, the average public debt of EU countries averages 82%. In 2023, the US figure is 123%.
Its relatively low debt levels and high credit rating make it easier for Saudi Arabia to take on more debt if needed. Saudi Arabia has also introduced a series of reforms to promote and reduce foreign investment risks and diversify revenue sources. Although the country’s economy has shrunk for four consecutive seasons, non-oil economic activity increased by 4.4% annually in the second quarter and by 3.4% quarterly.
“The good news is that the economy is on track to diversify and has absorbed significant cuts in subsidies and increases in value-added tax, while creating substantial job opportunities,” the Nomura report said.
While Saudi Arabia “still lacks the required volumes of foreign direct investment,” the report reads, “the newly approved investment law should bring it closer to its goal of building a significantly expanded non-oil sector.”
However, Sim said risks remain – mainly if oil demand from major consumers continues to weaken, while crude supply from non-OPEC+ countries continues to grow. These risks are completely beyond Saudi Arabia’s control.
“Regarding the first point, the biggest danger is the possibility of a tit-for-tat tariff war between China and the United States or Europe,” Sim said. This “could lead to a slowdown in global economic growth, thereby reducing oil demand.”
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