While countries like Brazil and the United States are often seen as major pressures on OPEC oil production policies, Saudi Arabia’s ambitious Vision 2030 might pose an even greater challenge. This transformative economic strategy, spearheaded by Crown Prince Mohammed bin Salman, aims to shift the kingdom's reliance away from oil, potentially destabilizing OPEC's delicate balance.
Transformations are pricey. And Saudi Arabia’s Crown Prince Mohammed bin Salman’s grand plan to diversify its economy away from oil by embracing lavish projects like Neon is no exception. But when an oil-dependent economy such as Saudi Arabia wants to spend trillions on non-oil related projects and it feels pressured to cut oil production—their economy’s very lifeblood—to keep the bottom from falling out of the oil markets—something has to give. The question isn’t whether something has change; it’s whether the spending spree must continue to be reined in or whether production needs to be cut more to lift prices to bring the Prince’s plans to fruition.
Since the announcement of Vision 2030, Saudi Arabia has faced substantial fiscal challenges. With oil prices no longer at their 2022 highs, the kingdom's reliance on petrodollars is more precarious. The IMF estimates that Saudi Arabia's fiscal breakeven oil price is near $100 per barrel, but current market prices fall short, complicating the funding of its large-scale diversification projects.
Being Top Dog Comes At A Cost
Saudi Arabia has long been perceived as the heavyweight of the OPEC group. Even when OPEC created OPEC+ with additional members, bringing on another oil heavyweight in Russia, Saudi Arabia’s power to rally the other members and reach consensus on matters of oil production was clear.
Of course, Saudi Arabia’s role as a stabilizer within OPEC comes at a cost. When other members shirk their duties and overproduce, members like Saudi Arabia must pick up the slack. While Saudi Arabia seems to have control of OPEC and OPEC+ when it comes to reaching production cut deals, and while there is no question of Saudi leadership’s keen understanding of the oil markets and how they operate, smaller members have continued to overproduce beyond their quota. As the member producing the most oil, Saudi Arabia always seems to be cutting additional production to make up for the laggards—and at great cost.
At best, the cost could be Saudi Arabia having to delay even more its ambitious plans that require more oil revenues than what it has. At worst, cancelling the plans, or making adjustments to its oil production levels.
Since the OPEC+ group started to slash production last year, export revenues have failed to rise significantly. Reduced production means that while the kingdom attempts to sustain oil prices, it also sacrifices potential revenue, exacerbating the budget deficit and placing additional strain on public finances.
Neom
Neom is a huge undertaking, and it’s already been scaled back. At an estimated $1.5 trillion, the 2017 launch of this futuristic environmental utopian city—juxtaposed (and ironically only made possible by) with its well-to-do oil industry—includes The Line. The latter of which is looking like failing to live up to what many were saying was unrealistic expectations. Bloomberg estimated earlier this year that The Line will likely only be 1.5 miles long by 2030 and capable of housing 300,000 people, less than what was hoped for. The reason for the slower pace and downgraded capacity, aside from perhaps its grandiose scale that some said was unachievable anyway, is likely budget constraints.
The government's strategy includes leveraging the state oil company, Aramco, to finance these mega-projects. This dual role of Aramco as both a national oil producer and a financial vehicle for diversification initiatives puts immense pressure on its operations and profitability.
International Debt and Foreign Investment
In response to falling oil revenues, Saudi Arabia has turned to international debt, becoming the largest issuer among emerging markets. This reliance on debt, coupled with low foreign direct investment outside the oil sector, underscores the kingdom’s economic vulnerabilities. Saudi Arabia is now the largest issuer of international debt among emerging markets, and its creditworthiness and financial stability have come under scrutiny. Unfortunately for Saudi Arabia, this combined with its low levels of foreign direct investment outside the oil and gas sector, which it had hoped would be a cornerstone of its new diversified economy.
But foreign investors remain cautious due to the political climate and high fiscal breakeven oil price, which is above current market prices. Saudi Arabia is targeting $100 billion annually in FDI, but it has work to do to woo investors.
Future Prospects and Strategic Adjustments
Despite the fiscal challenges, Saudi Arabia appears steadfast in its commitment to Vision 2030. The creation of an efficiency department within the Directorate General of Hydrocarbons aims to enhance oil recovery and integrate carbon capture technologies, crucial for sustaining production levels and environmental goals.
Moreover, the government is working to streamline approval processes and reduce bureaucratic hurdles, which should help accelerate project timelines and improve investor confidence.
Saudi Arabia's balancing act between maintaining OPEC stability, sustaining oil revenues, and investing in non-oil sectors is a complex endeavor. As it shoulders the burden of OPEC production cuts, the kingdom's economic transformation under Vision 2030 poses a unique challenge, potentially reshaping global oil dynamics and OPEC's future.
What Saudi Arabia won’t be able to do is forever carry the entire load of the OPEC production laggards. This may mean Saudi Arabia putting its foot down and pressuring OPEC members to keep their production in check, being careful not to upset the delicate harmony of the group, which has in recent years had a few scares with members already dissatisfied with their quotas.
By Julianne Geiger for Oilprice.com