Oil markets have slumped in recent weeks over fears of a trade war between the US and China and a surprise decision by OPEC+ countries to increase output in May. That could spell trouble for some oil-dependent Middle Eastern economies. On April 8, oil futures slid to a four-year low as investors priced in the possibility of a recession, driven tensions between the world’s two largest economies. Although prices have risen slightly since then, a bigger recovery may not happen soon. Goldman Sachs said on April 13 that it expects oil prices to decline through 2025 and 2026, with Brent crude averaging $63 a barrel for the rest of the year, and even lower next year. The next day, JP Morgan slashed its oil price forecasts to $66 for Brent in 2025, and a target of $58 for 2026. Lower oil prices are “bad news” for oil exporters in the Middle East and North Africa (MENA), says Tim Callen, a visiting fellow at the Arab Gulf States Institute in Washington. He adds that Saudi Arabia, Oman and Bahrain will feel the most pain, with countries like the United Arab Emirates, Qatar and Kuwait less affected. Of all Middle Eastern economies, Saudi Arabia’s is the “most vulnerable” to low oil prices, James Swanston, Middle East and North Africa Senior Economist at Capital Economics, told CNN. The country is the world’s top oil exporter. The commodity accounted for 60% of government revenue in 2024, with crude oil and natural gas accounting for more than 20% of the country’s GDP over the same period. A per barrel price of above $100 is required for the country to balance its budget, Swanston said. Callen, who is the former International Monetary Fund chief to Saudi Arabia, estimates that with oil at $60 a barrel, Saudi Arabia’s fiscal deficit would be $62 billion, more than double the $27 billion estimated in its annual budget. An oil-funded transformation Across the region, governments are utilizing oil revenues to diversify their economies. In Saudi Arabia, several initiatives dubbed “giga-projects” are key to the country’s Vision 2030 plan. That includes the futuristic city of NEOM, intended to be a hub for everything from manufacturing to media. The first phase will cost hundreds of billions of dollars, according to its crown prince. Other initiatives include the development of luxury tourism destinations along the country’s Red Sea coast, and Qiddiya, an entertainment city on the outskirts of Riyadh. Since 2016, $1.3 trillion in real estate and infrastructure projects have been unveiled, according to Knight Frank’s Saudi Arabia Giga Projects Report. Experts say that some giga-projects may now face delays, if the country cuts back its capital expenditure. Saudi Arabia’s finance ministry did not respond to a request for comment. Its sovereign wealth fund, the Public Investment Fund (PIF), which is behind Neom and the Red Sea tourism plans, did not respond to a CNN email. Infrastructure needed for major international events may get priority. The country plans to host the 2029 Asian Winter Games, the 2030 World Expo, and the 2034 FIFA World Cup. Tensions within OPEC In recent years, Saudi-led OPEC has limited output to boost oil prices, holding Brent crude oil to largely $70 to $90 per barrel. But there have been tensions within the membership and wider OPEC+ group, with countries like Kazakhstan and Iraq exceeding their production quotas — and the issues don’t appear to be resolved. The organization’s April 3 output-increase announcement may have been intended to punish overproducers, experts say. In mid-April, OPEC released a plan to compensate for overproduction. But last week, Kazakhstan’s energy minister told Reuters that national interests would take priority over those of OPEC+. His comments drove a decline in prices, and he later issued a statement saying the country is committed to work with the group. The continued flouting of production quotas could keep oil prices sagging, even after US President Donald Trump signalled a potential U-turn on his trade war with China. Lower oil prices could mean that Saudi Arabia’s diversification away from oil takes longer than planned, says Swanston. Callen says that Saudi is still in an “enviably strong” fiscal position with relatively low public debt levels. The Kingdom can deal with lower oil prices by cutting back spending and borrowing more, he adds. “Not ideal for Saudi, but very manageable.” Swanston says that Saudi Arabia has some of the lowest oil production costs in the world, and that the country may be able to withstand price levels that those with higher costs cannot. “Their cost of production is minuscule,” says Swanston. “They can weather lower prices.”
Oil prices might not recover soon. Here’s what that means for Saudi Arabia’s ambitious transformation plans
TruthLens AI Suggested Headline:
"Saudi Arabia Faces Economic Challenges Amid Declining Oil Prices and Diversification Plans"
CNN
8.1
TruthLens AI Summary
In recent weeks, oil prices have experienced significant declines, primarily due to escalating tensions between the United States and China, coupled with a surprising decision by OPEC+ countries to increase oil output. On April 8, oil futures plummeted to a four-year low, as market investors began to factor in the potential for a recession. Although there has been a slight recovery in oil prices since that low point, experts predict that a substantial rebound is unlikely in the near future. Goldman Sachs forecasts a continued decline in oil prices through 2025 and 2026, estimating that Brent crude will average around $63 per barrel for the remainder of 2023, with even lower prices anticipated for the following year. JP Morgan has echoed this sentiment by reducing its price forecasts to $66 for Brent in 2025 and $58 in 2026. These lower prices pose considerable challenges for oil-exporting nations in the Middle East and North Africa (MENA), particularly for Saudi Arabia, which is heavily reliant on oil revenue for its economic stability and development plans.
Saudi Arabia's economy is particularly vulnerable to these low oil prices, as oil exports accounted for approximately 60% of government revenues in 2024 and over 20% of the country's GDP. Analysts estimate that the Kingdom requires oil prices to be above $100 per barrel to balance its budget. With current forecasts suggesting prices around $60 per barrel, Saudi Arabia could face a staggering fiscal deficit of $62 billion, significantly exceeding its projected $27 billion deficit. As the nation embarks on ambitious diversification projects under its Vision 2030 initiative, including the development of NEOM and luxury tourism along the Red Sea, the potential for delays in these projects looms large. The finance ministry and the Public Investment Fund have not commented on how these financial pressures might affect ongoing projects. Furthermore, internal tensions within OPEC regarding production quotas may exacerbate the situation, potentially prolonging Saudi Arabia’s transition away from an oil-dependent economy. However, experts note that the Kingdom still maintains a relatively strong fiscal position, with low public debt levels, allowing it to navigate these challenging circumstances through spending cuts and increased borrowing as necessary.
TruthLens AI Analysis
The article provides an insightful overview of the current state of oil prices and their implications, particularly focusing on Saudi Arabia's economic landscape. It highlights the challenges faced by oil-dependent economies, especially in the context of rising global tensions and a potential economic downturn.
Economic Vulnerability of Saudi Arabia
The report emphasizes that Saudi Arabia is particularly susceptible to fluctuations in oil prices, being the world's leading oil exporter. With oil accounting for a significant portion of government revenue and GDP, the country's fiscal health is closely tied to global oil market dynamics. The forecasts from institutions like Goldman Sachs and JP Morgan indicate a bleak outlook for oil prices, which could exacerbate fiscal deficits and hinder the nation’s ambitious transformation plans.
Implications for Economic Diversification
As the article mentions, the Saudi government has been attempting to diversify its economy away from oil dependency. However, lower oil prices pose a substantial risk to these initiatives, which are largely funded by oil revenues. The discussion around the need for a barrel price above $100 to balance the budget highlights the urgent need for economic reform and diversification strategies to ensure long-term stability.
Perception Management
The article seeks to inform readers about the precarious position of Saudi Arabia amidst a global economic landscape influenced by trade wars and shifting oil dynamics. By presenting expert opinions and forecasts, it aims to cultivate a sense of awareness about the potential economic challenges ahead. It may also serve to rally public support for necessary reforms, framing them as crucial for safeguarding the country’s future.
Potential Omissions
While the analysis is thorough, there may be an underlying intent to downplay the resilience and adaptability of Saudi Arabia’s economy. The report does not extensively cover the government's past successes in mitigating similar challenges or the potential benefits of their diversification efforts, which might create a more balanced perspective.
Trustworthiness of Information
The forecasts and expert opinions cited lend credibility to the article. However, the reliance on predictions about oil prices introduces some uncertainty, as these are inherently speculative. The overall trustworthiness of the piece can be deemed moderate to high, contingent upon the accuracy of the cited forecasts and the context in which they are presented.
Impact on Markets and Politics
This news may influence investor sentiment in oil markets and could lead to fluctuations in stock prices of oil-dependent companies. The economic implications extend beyond finance, potentially affecting political stability in the region as governments grapple with lower revenues and increased public pressure for reform.
Audience and Engagement
The article appears to target a broad audience, including policymakers, investors, and the general public, aiming to raise awareness of economic issues that could affect daily life and national policy. It speaks to those concerned with economic stability and the future of Saudi Arabia's development strategies.
In summary, this analysis suggests that the article serves to inform and prompt discussion about the economic challenges facing Saudi Arabia in light of fluctuating oil prices, while also emphasizing the importance of diversification for future stability.