Saudi Arabia, the world’s largest oil exporter, is facing an escalating fiscal challenge that could have significant global implications. Despite having the lowest production costs in the oil industry—around $10 per barrel—Saudi Arabia’s fiscal breakeven oil price is rising rapidly, driven by ambitious spending under its Vision 2030 initiative.
The Kingdom’s breakeven price—the price per barrel of oil needed to balance its budget—has surged dramatically. According to a May 2023 forecast by the International Monetary Fund, Saudi Arabia needed an oil price of $80.90 per barrel to break even. Fast forward to April 2024, and that figure has jumped to $96.20 per barrel, a 19% increase from the previous year and about 32% higher than the current Brent crude price of around $73 per barrel.
Vision 2030’s Financial Strain
Saudi Arabia’s escalating breakeven price reflects the financial strain of its Vision 2030 projects, which are aimed at modernizing the economy and reducing its dependence on oil revenue. As part of this ambitious plan, the kingdom is investing heavily in mega-projects, including the development of NEOM and preparations for major global events like the 2034 World Cup and Expo 2030.
Li-Chen Sim, a scholar at the Middle East Institute, predicts that the fiscal breakeven price might climb to around $100 per barrel due to these ongoing expenditures and increased competition from new oil supplies in countries like the U.S., Guyana, Brazil, Canada, and the UAE. This price does not even account for the massive investments of the Public Investment Fund (PIF), which is fueling multi-trillion dollar projects. Bloomberg forecasts suggest that including PIF spending, the breakeven price could reach $112 per barrel this year.
The Reality of Deficits
Despite the alarming figures, some analysts argue that breakeven prices might not fully capture Saudi Arabia’s financial health. The kingdom has considerable financial flexibility, including substantial foreign currency reserves, which reached a 20-month high of $452.8 billion in July. It has also been active in issuing bonds, raising $12 billion so far this year.
Saudi Arabia’s public debt has increased from approximately 3% of GDP in the 2010s to 24% today. While this is a significant rise, it remains relatively low compared to global averages, such as 82% in EU countries and 123% in the U.S. This low debt level and strong credit rating provide the kingdom with room to maneuver if needed.
Economic Resilience and Diversification
Despite a contraction in the overall economy for four consecutive quarters, Saudi Arabia’s non-oil sector has shown robust growth. Non-oil economic activity expanded by 4.4% year-on-year in the second quarter of 2024, up from 3.4% in the previous quarter. The kingdom’s reforms aimed at boosting foreign investment and diversifying revenue streams are starting to yield results.
However, risks remain, particularly if oil demand weakens in major consuming countries or if oil supply from non-OPEC+ nations continues to grow. Geopolitical tensions and potential trade disputes, such as a tariff war between China and the U.S. or Europe, could further dampen global economic growth and reduce oil demand.
As Saudi Arabia navigates these financial challenges, the critical question remains: How high will the breakeven oil price climb before the kingdom is compelled to adjust its strategy? The kingdom’s ability to balance its ambitious Vision 2030 projects with its fiscal realities will be a key factor in shaping its economic future.
