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2023 brings new challenges as global oil prices decline and Saudi oil production is reduced, raising concerns about Crown Prince's projects.
This article was translated from Arabic to English
Saudi Arabia experienced a period of economic growth in 2022 marked by high growth rates and significant surpluses in its general budget, due mainly to the global increase in oil prices and the expansion of its oil production.
However, 2023 has brought forth a different set of challenges, exerting mounting pressure on the Saudi economy as global oil prices decline and Saudi oil production is reduced.
As a result, serious concerns have arisen regarding the future feasibility of Saudi Crown Prince Mohammed bin Salman’s ambitious projects, particularly in light of the Saudi government’s diminishing budget revenues compared to earlier expectations.
Excellent results in 2022
The Saudi economy achieved impressive results in 2022, experiencing a growth rate of 8.7 per cent as reported by the Saudi General Authority for Statistics. This remarkable growth was primarily driven by a 15.4 per cent increase in oil activities, while non-oil activities saw a more modest growth rate of 5.4 per cent, highlighting the Saudi economy’s strongest performance in over 11 years.
Furthermore, the Saudi government’s public finances showed a surplus of $27.68 billion in 2022, equivalent to 2.6 per cent of the country’s GDP. This surplus was attributed to a 31 per cent rise in government revenues from oil sales compared to the previous year, and helped offset a 12 per cent increase in government expenditures. Notably, this surplus marks the first time since 2013 that the country’s general budget has not faced a deficit.
It is important to note that these positive outcomes in 2022 were influenced by developments in the global oil markets. The average price of OPEC oil per barrel during that period was approximately $100.08, representing a 43 per cent increase compared to the previous year’s average of $69.89. As an oil-producing nation, Saudi Arabia naturally benefited from the rise in oil prices, which led to increased government revenues and a surge in the country’s oil sector activity on the global stage.
Favorable factors for the Saudi economy were not limited to the rise in global oil prices, but also included the increase in production rates according to the quotas agreed upon within the “OPEC +” coalition. Saudi Arabia’s average oil production increased to about 10.53 million barrels per day in 2022, the highest level of production achieved by Saudi Arabia since it began extracting oil.
The rise in oil prices in 2022 was driven by the sustained high global demand for energy sources, particularly as the world recovered from the impact of the COVID-19 pandemic. Furthermore, the eruption of the Ukrainian war and its repercussions on energy markets further exacerbated the rapid rise in oil and gas prices.
The increase in Saudi production rates in 2022 was aligned with the decisions made by the “OPEC+” coalition in August 2022 that marked the end of the record production cuts that had been implemented since the beginning of the pandemic.
At that stage, the coalition collectively decided to raise the production quotas for all member countries in order to meet the growing demand for oil. Consequently, Saudi Arabia witnessed a substantial increase in oil production, exceeding 171,000 barrels per day, and making Saudi Arabia the country that benefited the most from the bolstered production quotas within the “OPEC+” coalition.
Growing economic pressures in 2023
The economic environment underwent considerable changes by 2023. In contrast to the surplus recorded the year before, the Saudi state budget is anticipated to record a deficit of 1.1% of GDP this year, according to recent forecasts by the International Monetary Fund.
These unexpected projections diverge from the Saudi government’s initial expectations of a budget surplus of approximately $4.3 billion in 2023. Consequently, Saudi Arabia will need to expand its borrowing from financial markets to cover the budget deficit and finance the planned expenditures based on previous optimistic forecasts.
The International Monetary Fund predicts a decline in overall Saudi economic growth to a mere 2.1 per cent in 2023, which amounts to less than a quarter of the growth achieved in 2022. Additionally, the volume of foreign currency reserves in the Central Bank decreased by over $30 billion in the first four months of 2023 compared to the previous year.
The underperformance of the Saudi economy in 2023 can be attributed to various challenging transformations occurring in the global oil markets. In May 2023, the average price of a barrel of OPEC oil reached $75.82, representing a 33 per cent decline compared to the same period the previous year. As a result, the Saudi government’s revenues have naturally decreased, as oil-related economic activity, in line with the decrease in oil sales revenue.
Furthermore, Saudi Arabia’s average daily crude oil production is projected to decrease to approximately 9 million barrels per day by July 2023, marking a 15 per cent decline compared to the previous year. This decline is a result of production cuts implemented by the “OPEC+” coalition, as well decisions to voluntarily reduce production as announced by Saudi Arabia, Russia and other countries in response to the drop in global oil prices in 2023 due to supply and demand imbalances in the market.
In fact, in the first quarter of 2023, Saudi oil export revenues already saw an $11.5 billion decline compared to the same period in 2022.
International factors out pressure on oil markets
In 2023, various factors converged to exert pressure on the oil markets, resulting in a decline in oil prices and lower-than-expected demand.
The successive interest rate hikes in Western nations reflected a tight monetary policy, which in turn affected consumption rates and economic growth in those countries. The World Bank’s current projections indicate that the European Union’s growth rate will be limited to 0.4 per cent in 2023, while that of the United States is expected to reach 1.1 per cent.
Simultaneously, high inflation rates continue to hinder global consumption levels, while turmoil in the global banking sector has contributed to concerns about a potential new global financial crisis, further impacting the performance of the global economy.
Furthermore, despite China gradually lifting restrictions on economic activity following its exit from the “zero COVID” policy, the Chinese economy has experienced a slower recovery than anticipated.
Consequently, the global oil markets are anticipated to face a multitude of challenges until the end of 2023, and it is crucial that the Saudi government consider these challenges when planning its public expenditures.
Furthermore, given that a significant number of Crown Prince Mohammed bin Salman’s ambitious projects were initiated during a period of considerable financial surpluses in 2022, it is crucial for Saudi Arabia to exercise financial discipline in response to the emerging economic challenges in 2023 in order to maintain balance in its public budgets. This will necessitate a reassessment of the cost and scope of certain projects.