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From Boom To Gloom: Saudi Arabia’s Economy Dips Due To Voluntary Oil Cuts

The world's largest crude oil exporter, Saudi Arabia, is paying the economic price of its oil production cuts, especially if oil prices fail to rise materially in the second half of 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.  

This month and next, Saudi Arabia will pump around 9 million barrels per day (bpd) of crude oil-one of the lowest volumes of the past decade. 

Saudi Arabia said in early June that it would voluntarily reduce its production by 1 million bpd in July to around 9 million bpd. Last week, it extended the cut into August, too. 

The production level for July and August would be 1.5 million bpd lower than the 10.5 million bpd the Kingdom pumped for most of 2022 when its economy jumped by nearly 9%, and the budget booked the first surplus in a decade.  

With oil prices failing to rise to $80 per barrel - which is just shy of the estimated price for balancing the Saudi budget - the oil economy will slow down and weigh on the Saudi finances. Non-oil economic growth is expected to remain robust this year. But the large share of oil in the export revenues will weigh on the economy and the budget revenues.  

The Saudi economy is set to shrink by 0.1% in 2023 if the Kingdom unwinds the voluntary cut in September. But if the Saudis continue to push for tightening of the market by keeping the cuts in place by the end of the year, the 2023 economy will shrink by 1%, according to estimates from Bloomberg Economics

To compare, Saudi Arabia was the fastest-growing G20 economy in 2022, the International Monetary Fund (IMF) said last month, just after OPEC's top producer said it would unilaterally reduce its oil production for July. 

Last year, "Overall growth reached 8.7 percent, reflecting both strong oil production and a 4.8 percent non-oil GDP growth driven by robust private consumption and non-oil private investment, including giga projects," the IMF said. 

Last year's surplus - fueled by high oil production and high oil prices - allowed the Kingdom to make large investments in its projects of the future aimed at diversifying the economy from oil, including in NEOM, the futuristic flagship project of Crown Prince Mohammed bin Salman. 

The OPEC+ cuts announced in April are expected to reduce Saudi economic growth to 2.1% this year, from 3.1% growth the IMF expected in its May economic projections for the Middle East economies. 

Back in early May, the IMF said that Saudi Arabia needed oil prices at $80.90 per barrel to balance its budget this year. 

But that estimate was based on Saudi oil production of 10.5 million bpd and excluded the spending on mega projects. At current oil production levels and the same spending on projects, the Kingdom's breakeven oil price rises to $95 a barrel, Bloomberg Economics has estimated. 

Lower oil revenues and production have already resulted in slower growth in Saudi Arabia's economy this year.

In the first quarter of 2023, Saudi Arabia's economy slowed to growth of 3.8% year-over-year, slightly lower than the preliminary estimate of 3.9%, bank Emirates NBD said in a commentary last month.

"On a seasonally adjusted basis, real output contracted -1.4% q/q, largely on the back of declining crude oil and natural gas production," the bank noted. 

Non-oil growth remained strong in Q1, driven by government spending. 

If the Saudis keep the current cuts through the end of this year, the economy will contract, Khatija Haque, Head of Research & Chief Economist at Emirates NBD said last month. 

"In this scenario, overall oil production from the kingdom would be almost -9% lower than in 2022, bringing headline GDP growth down to -0.5% even as we expect the non-oil sectors to post robust growth of 4.8%," the economist added. 

The drag on the economy from the production cuts point to still high dependence on oil. When Fitch upgraded Saudi Arabia's rating in April, citing the Kingdom's strong fiscal position and "formidable" foreign reserves, it warned that the high oil dependence remains a rating weakness for Saudi Arabia's economy, in addition to weak World Bank governance indicators and vulnerability to geopolitical shocks.  

By Tsvetana Paraskova for

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Tsvetana Paraskova

Tsvetana is a writer for with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More