Saudi Arabia’s High Fiscal Breakeven Oil Price: A Balancing Act Between Vision 2030 and Economic Reality
Saudi Arabia, the world’s largest exporter of crude oil, faces a challenging balancing act between its ambitious Vision 2030 modernization plan and the rising cost of achieving it. While the kingdom enjoys the lowest oil production costs globally, estimated at just $10 per barrel, its fiscal breakeven oil price – the price needed to balance the budget – has been steadily climbing, reaching an estimated $96.20 per barrel in 2024. This surpasses the current price of Brent crude at around $73, posing a significant challenge to the kingdom’s fiscal outlook.
Key Takeaways:
- Rising Fiscal Breakeven: Saudi Arabia’s fiscal breakeven oil price has been steadily rising due to increased government spending on Vision 2030 projects, large-scale sporting and cultural events like the World Cup 2034 and Expo 2030, and the Public Investment Fund’s (PIF) multi-trillion dollar megaprojects like NEOM.
- Managing the Deficit: While a high breakeven price poses a challenge, economists argue it might not be as critical as some believe. Saudi Arabia has a strong capacity to manage deficits through its massive foreign currency reserves, growing to a 20-month high of $452.8 billion in July, and its ability to access debt markets, raising $12 billion in 2023.
- Diversification Efforts: The kingdom is actively seeking to diversify its revenue streams through reforms to boost foreign investment and develop its non-oil sector. Non-oil economic activity demonstrated growth of 4.4% year-on-year in the second quarter of 2023, signaling progress in this area.
- Challenges and Risks: Despite these efforts, Saudi Arabia faces risks like a potential global economic slowdown and continued soft oil demand, which are largely outside its control. A trade war between China and the US or Europe could further hinder oil demand and complicate the kingdom’s economic outlook.
Does the Breakeven Oil Price Really Matter?
While the rising fiscal breakeven price raises concerns, some experts argue its significance should not be overstated.
"The reality is that countries run deficits all the time, and therefore the idea Saudi Arabia needs $112 oil, or whatever the number is, to me doesn’t provide a true representation of what’s going on," an energy analyst focusing on the kingdom told CNBC, speaking on condition of anonymity due to professional restrictions. "For Saudi Arabia, they have a lot of capacity to take on more debt if they wanted to … it’s not an issue for them to run a small deficit."
This viewpoint is further supported by Saudi Arabia’s robust foreign currency reserves and its ability to access debt markets. The kingdom has successfully issued bonds this year and still maintains a relatively low debt level compared to other nations.
Saudi Arabia’s Balancing Act: Vision 2030 and Economic Reality
The kingdom’s ability to successfully balance its ambitions under Vision 2030 with its fiscal realities will depend on a range of factors, including global economic conditions, oil demand, and its ability to diversify revenue streams.
"The good news is that the economy is progressing along its diversification track and has already absorbed large reductions in subsidies and higher VAT while generating a huge number of jobs," noted a Nomura report on Arabian markets.
While Saudi Arabia has made progress in developing its non-oil sector, challenges remain, particularly in attracting foreign direct investments.
Risks and Uncertainties
Saudi Arabia’s efforts to navigate these challenges are hampered by several major risks.
Global Economic Slowdown: A slowdown in major consuming countries like China, the UK and the European Union could further dampen oil demand.
Increased Non-OPEC+ Supply: Increased oil production in countries such as the US, Guyana, Brazil, and Canada, could add to supply pressures, potentially impacting prices and reducing Saudi Arabia’s market share.
Trade Wars: A trade war between major economies like China and the US could negatively impact global economic growth, leading to lower oil demand and making diversification efforts even more difficult.
China’s Role: China, Saudi Arabia’s largest oil customer, plays a crucial role in the kingdom’s economic success. However, China’s economic slowdown could reduce its reliance on Saudi oil and further complicate the kingdom’s economic outlook.
Saudi Arabia faces a challenging but crucial period. The country’s ability to successfully navigate these complexities, balance its ambitions with fiscal realities, and manage risks will determine its long-term economic success and the effectiveness of its efforts to achieve Vision 2030.
