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Saudi Arabia has long prided itself on being the lowest-cost oil producer in the world—and has taken maximum advantage of this fact. Now, with ambitious spending plans for a diversified economy, that lowest cost is becoming less relevant. It’s the breakeven cost of oil that matters. And that’s going up.
Earlier this year, the International Monetary Fund warned 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 reduce daily oil production in a bid to prop up prices.
The Saudis did not heed the unspoken advice to restore production to over 10 million barrels daily, so their breakeven price remains high – and so does spending. Last year, the kingdom’s Public Investment Fund, or PIF, for short, became the world’s biggest spender among sovereign wealth funds with a total bill of $124 billion.
Those investments were made both at home—in the Neom smart city megaproject and a new airline, Riyadh Air, for instance—and abroad, where Saudi money is being spent on a variety of investments, including electric cars, energy efficiency projects, and more.
As a result of this spending spree, however, PIF’s assets shrank considerably, from over $105 billion in 2022 to $37 billion as of September 2023. Since then, these assets have rebounded, with the cash portion of those up from $15 billion in September 2023 to $65 billion this July, per Bloomberg. What’s more, in 2023, the PIF swung into a profit after a loss-making 2022. Still, the budget breakeven oil price remains too high for comfort—at least according to some observers.
“At least until 2030, Saudi will have massive budgetary needs due to the need to demonstrate some significant outcome in key Vision 2030 projects and to prepare for and host big sporting and cultural events,” Middle East Institute scholar Li-Chen Sim told CNBC.
“All this amidst expected growth in oil supply from the U.S., Guyana, Brazil, Canada, and even the UAE and possible anemic oil consumption growth in China, the Kingdom’s largest oil customer, means that the Kingdom’s fiscal breakeven price is likely to rise perhaps to around $100,” the analyst added.
Growth in non-OPEC oil production has become a popular refrain among bearish oil price forecasters who also like to point to weakening demand growth from China—the world’s biggest importer of crude. The argument goes that oil prices are going to be weaker for longer due to this weaker oil demand growth in China and the constantly rising supply from the non-OPEC camp.
Yet neither the weakness in China’s oil demand nor the size of production growth are something guaranteed. In the U.S., for instance, the Energy Information Administration expects a slowdown in production growth this year after a surprising 1 million bpd increase in 2023. It is quite likely that the federal agency, which has been wrong before, is right this time. The industry is in the process of consolidation, with production decision-making getting concentrated in fewer hands.
In Guyana, production will likely continue to rise in leaps and bounds as Exxon puts more wells into operation and as Brazil aspires to achieve major output growth, but those would very likely depend on international prices—just like U.S. output growth. Those three could certainly complicate Saudi Arabia’s life, but these potential complications may not be as dramatic as they may seem—because low oil prices are bad for everyone.
This means that the argument about rising non-OPEC production has a drawback that rarely gets mentioned. For all its breakeven problems, Saudi Arabia is still the lowest-cost producer of crude in the world. It could delay some of its spending plans, if necessary, but it could withstand a sustained oil price rout better than U.S. shale drillers and Brazilian presalt field operators, theoretically.
Besides, the breakeven oil price might not really provide a realistic look into an economy’s health, as suggested in an article by Tim Callen, a visiting fellow at the Arab Gulf States Institute in Washington. “For Saudi Arabia, oil production and expenditure often change substantially and quickly,” Callen wrote.
“With considerable spare oil production capacity and a demonstrated policy of actively adjusting production depending on demand and supply conditions in the global market, oil production is more variable for a country that always produces at full capacity. Historically, government spending has also tended to increase as oil prices rise, meaning that the market and breakeven oil price often move together,” he noted.
In other words, the suggestion that Saudi Arabia is in trouble because it cannot make the ends of its planned budget meet is accurate—up to a point. The megaprojects can be delayed, as they have been before when the price environment was sub-optimal. Money can also be drawn from international debt markets where Saudi bonds appear to enjoy substantial popularity, not unlike Aramco shares. Oil-dependent economies, it seems, still draw investors in, transition and non-OPEC output growth notwithstanding.
