In 2022, Saudi Arabia’s economy experienced the fastest growth among the world’s major economies, with a GDP growth rate of 8.7 percent, the highest in over a decade. This was due to near-record-high oil prices above $100 per barrel after Russia’s February invasion of Ukraine plunged the oil and gas markets into turmoil. However, lower oil output and softer prices have led to a contraction this year.
Saudi Arabia’s economy is still driven largely by oil export revenues, which dropped by more than $10 billion year-on-year in June as weaker oil prices and production cuts shrank state earnings. The slump in oil prices at the start of 2023 and lower OPEC+ quotas alongside voluntary reductions by Saudi Arabia led the International Monetary Fund to cut its growth projections to 1.9 percent in July from 2.1 percent a month earlier. However, a recovery in oil prices to close to $90 per barrel in September is likely to lead to an upward revision to current estimates.
The IMF expects the Saudi economy to grow by a more modest 2.1 percent in 2023, though it also expects robust non-oil sector growth above 5 percent in the first half. This level of contribution by the non-oil sector aligns with the Vision 2030 objective of weaning the economy off petroleum. The main contributors to non-oil growth were wholesale, retail trade, construction and transport, according to the IMF.
“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 on June 23 after Article IV consultations with Riyadh.
While this indicates that economic diversification is gaining traction, the oil sector still dominates, accounting for 80 percent of export earnings and 67 percent of state revenues last year.
This exposes the economy to oil price volatility, prompting pre-emptive moves by Riyadh through the OPEC+ alliance and unilaterally to balance the market and prop up prices. An uncertain demand outlook in China, the world’s largest crude oil importer and one of the biggest customers of Saudi crude oil is one factor behind the cautious approach to supply management by the OPEC heavyweight.
Saudi Arabia announced voluntary cuts of 1 million barrels per day for each of July, August and September as Chinese demand faltered amid an uncertain global economic outlook and inflationary pressures in the major economies. On September 5, Saudi Arabia and Russia, in what appeared to be coordinated action, said they would extend their pledged reductions — 1 million bpd and 300,000 bpd respectively — to the end of the year. The Saudi announcement, which came in a statement by an energy ministry source by the official Saudi Press Agency, sent prices up above $90 per barrel for the first time this year. The voluntary reductions came on top of the 500,000-bpd quota cut as part of collective action by the OPEC+ alliance.
Saudi oil production dropped to 9.06 million bpd in July, as the unilateral cut came into force. There are already signs that the oil market has tightened, as evidenced by the recovery in oil prices to their highest level since January.
The supply cuts slashed oil exports, which fell to their lowest levels since March 2021. According to Bloomberg, the kingdom exported 5.6 million bpd of crude oil in August compared with a revised 6.3 million bpd in July. This resulted in a 25 percent drop in oil export revenues to $126 billion. With oil prices yet to react to the OPEC+ cuts, export earnings of $12.9 billion in June 2023 were down by $11.9 billion year-on-year. Saudi Arabia earned $326.3 billion in total earnings from oil sales in 2022, the highest in 10 years.
Riyadh posted a modest $2.2 billion deficit over the first half of 2023, leaving it well off the mark to achieve its budgeted $4.3 billion surplus for 2023 as a whole. However, in a move that will boost state coffers, Saudi Aramco has raised dividend payments to shareholders after posting record profits in 2022.
The government has a direct 90.186 percent stake in Aramco, with PIF holding 8 percent and the remainder listed on the Tadawul exchange. This will translate into a direct take of around $8.9 from Aramco’s dividend payout. Assuming that royalty and income tax payments stay flat for the rest of the year — though they are likely to be higher — this would raise Aramco’s contribution to $56.8 billion for the third quarter.
Government expenditure surged by $24 billion year-on-year for the first half of 2023 and is on course to meet the budget’s full year figure of $297.1 billion and may even break last year’s record spending of $310.5 billion.
Even as the Kingdom is diversifying its energy mix, it needs to generate enough revenues to drive its renewable energy program. Saudi Arabia has set a 2060 target to achieve net zero greenhouse gas emissions and has a long way to go to meet its climate goals.
Prince Abdulaziz Bin Salman said in February that Saudi Arabia plans to invest more than SAR1 trillion ($270 billion) in its energy sector to boost clean energy generation capacity and modernize its power transmission and distribution networks.
The kingdom is targeting a 50:50 split between natural gas and renewable energy in power generation by 2030. This entails development of nearly 60 gigawatts of renewable capacity from just 1 gigawatt currently. Achieving its renewables target would free up more than 1 million bpd of oil from the power and water sectors for export. This would obviate the need to expand oil production capacity beyond the currently planned 1 million bpd addition by Saudi Aramco that is due to come online by 2027, taking total capacity to 13 million bpd.
Saudi Arabia’s planned renewables projects are meant to replace existing thermal capacity but also to expand power generation capacity beyond 89.9 gigawatts currently as power demand is expected to increase exponentially to meet its economic expansion plans.
The challenge for Saudi Arabia is now to manage its energy portfolio in a way that meets rising domestic demand for a transformative economy while preparing for the inevitable peak in demand for oil. This is now widely predicted to occur before the end of the decade, at which time the Kingdom can no longer rely on oil exports to generate bumper revenues and sustain high levels of growth.
For more on Energy stories, click here.