Oil production cuts are taking their toll on Saudi Arabia’s economy
Saudi Arabia’s economy is set to markedly slow down this year from last year’s 8.7% `growth due to the oil production cuts the world’s top crude exporter is implementing in a bid to “stabilize the market.”
The Kingdom saw its economic growth forecast for 2023 slashed by the most among major economies in the World Economic Outlook Update by the International Monetary Fund (IMF) this week.
Significantly lower Saudi GDP growth will also weigh on the regional economic growth in the Middle East and Central Asia region this year, the IMF said.
While the Saudi growth outlook for 2023 was cut by 1.2 percentage points from the April outlook by the IMF, Russia’s economic growth estimate was upgraded.
Saudi Arabia’s partner in the OPEC+ deal, Russia, saw its growth projection revised upward by 0.8 percentage point to 1.5%, “reflecting hard data (on retail trade, construction, and industrial production) that point to a strong first half of the year, with a large fiscal stimulus driving that strength.”
Saudi Arabia is not only taking much of the burden in the OPEC+ cuts, its voluntary unilateral production cut of 1 million barrels per day (bpd) is weighing on its economic growth prospects, considering the large share of oil in its GDP and export revenues.
Saudi Arabia said in early June that it would voluntarily reduce its production by 1 million bpd in July to around 9 million bpd. The cut was later extended into August, too.
Lower exports and lower oil prices are already shrinking Saudi Arabia’s oil export revenues—the mainstay of its budget revenues accounting for around 80% of total export revenues.
Saudi Arabia’s oil revenues plunged in May to the lowest level since September 2021, official data showed on Tuesday as the Kingdom lowered shipments while oil prices were significantly lower than in the spring of last year. Oil revenues slumped by 37.7% year over year to $19.2 billion (72 billion Saudi riyals) in May 2023. This compares to $30.8 billion (115.5 billion riyals) in oil revenues for May 2022, when Brent crude prices averaged $113 per barrel following the Russian invasion of Ukraine, data from the General Authority for Statistics showed.
This year in May, Brent oil prices averaged around $75 a barrel, which, combined with lowered Saudi oil exports and lower production as part of the OPEC+ deal, dragged down Saudi oil revenues to a 20-month low.
The share of oil exports in the value of total exports decreased from 80.8% in May 2022 to 74.1% in May 2023, the official Saudi data showed.
In May, Saudi exports slumped to below 7 million bpd for the first time in many months. Crude shipments could further decline as Saudi Arabia is now cutting its production by an additional 1 million bpd in July and August.
So it’s not surprising that the IMF downgraded this week its forecast for the Saudi economy this year by the largest percentage among major developed and developing economies. Saudi Arabia’s economy is now expected to grow by 1.9% this year, down by 1.2 percentage points compared to the IMF estimate from April. Next year, economic growth is expected at 2.8%, downgraded by 0.3 percentage points from the April assessment.
“The downgrade for Saudi Arabia for 2023 reflects production cuts announced in April and June in line with an agreement through OPEC+ (the Organization of the Petroleum Exporting Countries, including Russia and other non-OPEC oil exporters), whereas private investment, including from “giga-project” implementation, continues to support strong non-oil GDP growth,” the IMF said.
Back in early May, the IMF said that Saudi Arabia needed oil prices at $80.90 per barrel to balance its budget this year.
Saudi Arabia’s efforts to prop up oil prices with large production cuts will slow down its economy, which could even shrink this year and become one of the worst performers among G20, from the fastest-growing economy in this group last year, analysts say.
