An offshore drilling platform stands in shallow waters of the Saudi Aramco-operated Manifa offshore oil field in Manifa, Saudi Arabia, Wednesday, October 3, 2018.
Simon Dawson | Bloomberg |
Saudi Arabia is a superpower. Not only is it the world's largest exporter of crude oil, its production costs for oil projects are also the lowest in the world at around $10 per barrel. When around 75 percent of government revenue comes from the oil business, that's a big deal.
And for a while, the break-even oil price – that is, the price a barrel of crude oil had to cost to balance the government's budget – was quite affordable.
That is now changing as the kingdom embarks on huge spending projects as part of its Vision 2030. The goal is to modernize the economy and diversify revenue sources away from oil. With each passing year, the projected break-even oil price rises and the kingdom's deficit widens.
In May 2023, the International Monetary Fund forecast a breakeven oil price for the Kingdom of $80.90 per barrel, plunging the country back into a budget deficit after its first surplus in nearly a decade. The Fund's latest forecast in April put that figure at $96.20 for 2024; an increase of around 19 percent from the previous year and around 32 percent more than the current price of a barrel Brent crude oil which was trading at around $73 on Wednesday afternoon.
Riyadh, Saudi Arabia.
Johnnygreig | E+ | Getty Images
“At least until 2030, Saudi Arabia will have enormous budgetary needs because it will need to demonstrate significant results on key projects of Vision 2030 and prepare and host major sporting and cultural events,” says Li-Chen Sim, a nonresident fellow at the Middle East Institute in Washington.
“All this means, given the expected growth in oil supplies from the US, Guyana, Brazil, Canada and even the United Arab Emirates, and the potentially weak growth in oil consumption in China, the Kingdom's largest oil customer, that the Kingdom's break-even price is likely to rise to around $100.”
This does not even take into account the expenditure of the kingdom's huge sovereign wealth fund, the Public Investment Fund, which is behind multi-trillion dollar mega-projects like NEOM. According to a Bloomberg forecast cited by Nomura Asset Management, the break-even price this year, including the PIF's expenditure, will be $112 per barrel.
“Saudi Arabia is wealthy and government spending has risen rapidly over the past decade, but like any other country, it has a fiscal framework within which it must operate,” said Nomura in a report on Arab markets published on September 2.
Important economic indicators “such as oil production and prices” are now warning signals, it said. “A global slowdown due to supply uncertainties could affect the outlook for the oil and gas industry.”
Is the break-even oil price even important?
But wait – fiscal breakeven prices aren't always as important as people think, some economists and market analysts argue. And Saudi Arabia has a number of options for dealing with deficits and less-than-optimal oil prices.
“The reality is that countries run deficits all the time and so the idea that Saudi Arabia can buy oil at $112 or whatever the number is, to me, is not a true picture of the situation,” an energy analyst who focuses on the kingdom told CNBC.
“Saudi Arabia has a large capacity to take on more debt if it wanted to. A small deficit is not a problem for the country,” said the analyst, who spoke on condition of anonymity because he is not allowed to speak to the country due to professional restrictions on press work.
The kingdom also has solid foreign exchange reserves, which grew to a 20-month high of $452.8 billion in July. It has also successfully issued bonds, tapping $12 billion in debt markets so far this year. Oil revenues are expected to rise in 2025 when OPEC+ production cuts, largely absorbed by Saudi Arabia, expire, energy analysts say.
“From that perspective, they are also starting from a relatively strong position,” the source said.
Saudi Arabia's national debt has risen from around 3 percent of GDP in the 2010s to 24 percent today – a huge increase, said Sim. But it is still low by international standards. The average national debt in EU countries, for example, is 82 percent. In the US, this figure was 123 percent in 2023.
Saudi Arabia's relatively low debt levels and high credit rating mean it can more easily take on more debt if necessary. The kingdom has also introduced a number of reforms to encourage and de-risk foreign investment and diversify revenue sources. While the country's economy has contracted for the past four consecutive quarters, non-oil economic activity grew 4.4 percent year-on-year in the second quarter, up 3.4 percent from the previous quarter.
“The good news is that the economy is making progress on its path of diversification and has already absorbed large subsidy cuts and VAT increases while creating a large number of jobs,” the Nomura report said.
Although the kingdom still lacks the desired level of foreign direct investment, the newly passed investment law should bring it closer to its goal of building a significantly larger non-oil sector, the report says.
However, risks remain – especially if oil demand in major consumer countries remains weak and crude oil supplies in non-OPEC+ countries continue to rise, Sim said. And these risks are completely beyond Saudi Arabia's control.
“Regarding the first point, the biggest danger is a possible tariff war between China and the US or Europe,” Sim said. This “could lead to slower global economic growth and thus lower demand for oil.”
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