The price of oil in Saudi Arabia at fiscal breakeven is rapidly increasing. How will the kingdom respond to that?
There is a superpower in Saudi Arabia. In addition to being the world's biggest producer of crude oil, it also has the lowest production costs—roughly $10 per barrel—for oil projects worldwide. It is significant when almost 75% of your fiscal revenue is derived from oil. Its fiscal breakeven oil price, or the price at which a barrel of petroleum was required to balance the government's budget, was also rather comfortable for a while.
This is about to change, though, as the monarchy launches massive expenditure initiatives as part of Vision 2030, a plan to modernize the economy and wean itself off of oil. The estimated cost of oil to reach fiscal breakeven increases year, and the kingdom's deficit rises accordingly.
The monarchy had its first surplus in almost ten years until the International Monetary Fund predicted in May 2023 that the price of oil will break even at $80.90 per barrel. This led to the kingdom returning to a fiscal deficit. To be clear, the average oil price required by Saudi Arabia to balance its accounts is not the same as the price at which it profits from crude. According to the IMF's most recent estimate from April, that breakeven point would be $96.20 for 2024; that would be nearly 19% more than the previous year and approximately 32 percent higher than the price of a barrel of Brent crude, which as of Wednesday afternoon traded close to $73.
According to Li-Chen Sim, an outsider academic at the Middle East Institute in Washington, "from now until 2030, Saudi will have enormous financial requires due to the need to indicate an important outcome in key Vision 2030 initiatives and to get ready for and host large sporting and socioeconomic events" like the 2030 Expo and the 2034 World Cup. The Kingdom's fiscal break even price is predicted to rise, possibly to $100, given the anticipated growth in oil production from the United States, Guyana, Brazil, Canada, and even the UAE, as well as the possibility of weak growth in China, the country that purchases the most oil from the Kingdom.
She goes on to say that none of it takes into account the internal expenditure needs of the Fund for Public Investment, the kingdom's enormous sovereign wealth fund that finances multi-trillion dollar megaprojects like NEOM. This year's breakeven price, including PIF spending, is estimated by Bloomberg and provided by Nomura Asset Management as $112 per barrel. According to a Nomura analysis on Arabian markets released on September 2, "Saudi Arabia is rich and government spending has increased fast over the past year but it has fiscal limits within which it must function just like every other country."
It continued, stating that significant economic indicators "like oil extraction and costs, are now flashing warning signs." "The outlook for hydrocarbon economies may be hampered by a global slowdown amid supply uncertainties." Saudi Arabia's economy experienced a sharp decline from a $27.68 billion a surplus in the in 2022 to a $21.6 billion deficit in 2023 as a result of increased public spending and lower oil production as a result of the country's commitment to reduce supplies from OPEC+. In 2024, the government projects $312.5 billion in revenue and $333.5 billion in expenditures, resulting in a $21.1 billion deficit (i.e., a greater amount spent than collected).
Does the price of oil at breakeven really have any significance?
But hold on—some economists and market analysts contend that fiscal breakeven prices are not always as significant as people believe. In addition, Saudi Arabia has a number of solutions for handling deficits and subpar oil prices. One economic analyst who concentrates on Saudi Arabia told media, "The notion that Saudi Arabia requires $112 oil, or whatever that figure is, to me cannot be an accurate picture of what's going on. The truth is that countries run deficits all the time."
"If Saudi Arabia wants to, they can easily take on more debt; they don't have a problem with running a small deficit," the expert, who wished to remain anonymous because of ethical constraints on speaking to the media, stated.
Along with having strong foreign exchange reserves—which reached a 20-month high of $452.8 billion in July—the kingdom has also been selling bonds with achievement, entering the debt markets to raise $12 billion so far this year. Energy professionals predict that when the OPEC+ production curbs, most of which were imposed by Saudi Arabia, expire in 2025, oil revenue will rise. According to the insider, "they're also starting from an somewhat powerful position from that perspective." According to Sim, Saudi Arabia's national debt has increased significantly, rising from about 3% of GDP in the 2010s to 24% currently. Yet it's still modest by global standards. For example, the average public debt in EU member states is 82%. In the US, that percentage was 123% in 2023.
Saudi Arabia finds it easier to take on additional debt when necessary because of its strong credit rating and comparatively modest debt load. In an effort to increase foreign investment, reduce risk, and diversify sources of income, the kingdom has also implemented a number of reforms. Non-oil economic activity increased 4.4% year over year in the second quarter, up 3.4% from the previous quarter, despite the nation's GDP contracting for the last four quarters. In addition to creating a great deal of jobs, the economy is expanding along its diversification path and has already absorbed significant reductions in subsidies and higher VAT, according to the Nomura analysis.
The kingdom "still lacks the quantum of foreign direct investments wanted," but the recently enacted investment law could help it get closer to its objective of creating a significantly larger non-oil industry, the report stated. However, risks still exist, particularly if major oil-consuming nations' oil demand remains weak and the quantity of crude oil in non-OPEC+ nations keeps expanding, according to Sim. And Saudi Arabia has no control over those dangers at all. According to Sim, "the biggest danger with regard to the first point is a potential tit-for-tat tariff war between China and the US or Europe." This "may lead to slower growth in the world economy and consequently lower demand for oil."
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