Saudi Arabia has long been known for being the lowest-cost oil producer globally, a status it has used to its advantage. However, as the kingdom embarks on its ambitious Vision 2030 plan to diversify its economy, the cost of oil production is becoming less important. Now, the breakeven price of oil—what Saudi Arabia needs to avoid budget deficits—is rising.
According to the International Monetary Fund (IMF), Saudi Arabia needs an oil price of $96.20 per barrel to balance its budget. If prices fall below that level, the kingdom risks running another deficit. This increase in the breakeven price is largely due to the significant spending associated with Vision 2030 and Saudi Arabia’s decision to cut daily oil production in an effort to boost prices.
Despite the IMF’s warning, Saudi Arabia has chosen not to ramp up production to over 10 million barrels per day. As a result, its breakeven oil price remains high, and spending continues at elevated levels. Last year, the country’s Public Investment Fund (PIF) spent a record $124 billion, making it the world’s largest spender among sovereign wealth funds.
PIF’s investments have been both domestic and international. At home, money has been poured into projects like the futuristic Neom city and the new airline, Riyadh Air. Abroad, investments have been made in sectors like electric vehicles and energy efficiency.
However, this aggressive spending has come at a cost. The value of PIF’s assets dropped significantly from over $105 billion in 2022 to $37 billion by September 2023. Since then, the situation has improved, with PIF’s cash reserves increasing from $15 billion to $65 billion by July 2024. Despite these gains, the high breakeven price of oil remains a concern for some analysts.
“Until 2030, Saudi Arabia will face substantial budgetary pressures,” Middle East Institute scholar Li-Chen Sim told CNBC. “This is due to the need to deliver results on key Vision 2030 projects and to prepare for major sporting and cultural events.”
Sim added that rising oil production in countries like the U.S., Brazil, and Guyana, along with potentially weak demand growth from China, could push Saudi Arabia’s breakeven price even higher, possibly to around $100 per barrel.
Growth in non-OPEC oil production has fueled bearish forecasts for future oil prices, with some analysts pointing to weakening demand from China. The argument is that slower demand and increasing non-OPEC supply will keep oil prices lower for longer.
However, neither China’s weak demand nor the growth in non-OPEC production are guaranteed. In the U.S., for instance, the Energy Information Administration predicts a slowdown in oil production growth after a surprisingly large increase of 1 million barrels per day in 2023. This prediction may hold, as the U.S. oil industry consolidates, concentrating decision-making power in fewer companies.
In countries like Guyana and Brazil, oil production is expected to rise as new wells come online. But these increases will likely depend on global oil prices. While this additional supply could pose challenges for Saudi Arabia, low oil prices are harmful to all producers.
Despite the challenges, Saudi Arabia remains the world’s lowest-cost producer. This gives the kingdom some flexibility. It could delay its Vision 2030 spending plans if needed, and it would still be better positioned to handle a prolonged period of low oil prices compared to producers like U.S. shale drillers or Brazil’s offshore operators.
Moreover, some argue that focusing on Saudi Arabia’s breakeven oil price doesn’t give a full picture of the country’s economic health. Tim Callen, a visiting fellow at the Arab Gulf States Institute, points out that Saudi Arabia’s oil production and government spending can fluctuate significantly. When oil prices rise, government spending often follows suit, meaning the breakeven price and market price tend to move together.
In other words, while Saudi Arabia faces financial pressure due to its ambitious plans, it has options. The kingdom can delay megaprojects, as it has done in the past when oil prices were low. It can also turn to international debt markets, where Saudi bonds remain popular, much like shares of Aramco. Despite the challenges of the energy transition and rising non-OPEC production, oil-dependent economies like Saudi Arabia’s continue to attract investors.