Can Saudi Arabia afford Vision 2030?

Saudi Arabia has long prided itself on being the world’s smallest oil producer – and has made the most of that fact. Now, with ambitious spending plans for a diversified economy, lowest cost is becoming less and less relevant. The breakeven cost of oil matters. And that’s growing.

At the beginning of this year, the International Monetary Fund ADVISED that Saudi Arabia would need an oil price of $96.20 per barrel to break even. Anything less, the IMF said, would mean another annual deficit for the Gulf economy. The IMF attributed its upward revision to Saudi Arabia’s Vision 2030 spending and its decision to cut daily oil production in a bid to support prices.

The Saudis have ignored unspoken advice to restore output to more than 10 million barrels per day, so their break-even price remains high – and so do expenses. Last year, the kingdom’s Public Investment Fund, or PIF for short, BECOME the world’s biggest spender of sovereign wealth funds, with a total bill of $124 billion.

These investments have been made both at home – in the Neom smart city megaproject and a new airline, Riyadh Air, for example – and abroad, where Saudi money is being spent on a variety of investments, including electric cars, energy efficiency projects and many others. .

However, as a result of this spending, PIF assets have shrunk considerably, from over USD 105 billion in 2022 to USD 37 billion in September 2023. Since then, these assets have rebounded, with their cash portion from $15 billion in September 2023. to $65 billion this July, per Bloomberg. Moreover, in 2023, the PIF posted a profit after a loss-making 2022. However, the budget break-even oil price remains too high for comfort – at least according to some observers.

“At least until 2030, Saudi Arabia will have massive budget needs due to the need to demonstrate significant output in key Vision 2030 projects and to prepare for and host major sporting and cultural events,” said researcher Li-Chen Sim of the Middle East Institute. said CNBC.

“All this against the backdrop of expected increases in oil supply from the US, Guyana, Brazil, Canada and even the UAE and possible anemic growth in oil consumption in China, the Kingdom’s largest oil customer, means that the price of the Kingdom’s tax return is likely to increase. to about $100,” the analyst added.

The increase in non-OPEC oil production has become a popular refrain among crude forecasters, who also like to point out the slowdown in demand growth from China, the world’s biggest crude importer. The argument goes that oil prices will be weaker for longer because of this weaker growth in oil demand from China and ever-increasing supply from the non-OPEC camp.

However, neither the weakness of China’s oil demand nor the size of the production increase is guaranteed. In the US, for example, the Energy Information Administration expects production growth to slow this year after a surprise 1 million bpd increase in 2023. It’s highly likely that the federal agency, which has been wrong before, will be right this time . The industry is consolidating, with manufacturing decision-making concentrated in fewer hands.

In Guyana, production is likely to continue to skyrocket as Exxon brings more wells on stream and as Brazil aspires to achieve a major increase in production, but these would very likely depend on international prices – as would growth US production. The three certainly could complicate Saudi Arabia’s life, but these potential complications may not be as dramatic as they seem – because low oil prices are bad for everyone.

This means that the argument for increasing non-OPEC production has a downside that is rarely mentioned. For all its profitability problems, Saudi Arabia is still the world’s smallest crude oil producer. It could delay some of its spending plans if necessary, but it could weather a sustained oil price run better than U.S. shale drillers and Brazilian oilfield operators, in theory.

Furthermore, the oil break-even may not really provide a realistic look at the health of an economy, as suggested in a article by Tim Callen, visiting fellow at the Gulf Arab States Institute in Washington. “For Saudi Arabia, oil production and spending often change substantially and rapidly,” Callen wrote.

“With considerable spare oil production capacity and a demonstrated policy of actively adjusting production to global market supply and demand conditions, oil production is more variable for a country that always produces at full capacity. Historically, government spending has also tended to rise as the price of oil rises, meaning that the market and oil yield price often move together,” he noted.

In other words, the suggestion that Saudi Arabia is in trouble because it can’t meet its planned budget is correct – up to a point. Megaprojects can be delayed, as they have been in the past, when the pricing environment was sub-optimal. Money can also be drawn from international debt markets where Saudis BONDS seem to enjoy substantial popularity, no as opposed to Aramco shares. Oil-dependent economies, it seems, are still attracting investors despite rising production in the transition and outside OPEC.

By Irina Slav for Oilprice.com

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