Saudi Arabia's OPEC+ strategy supports Vision 2030 by balancing oil production cuts and economic diversification
Saudi Arabia has historically played a significant role in the global oil market as a swing producer—a country or company with the ability to significantly influence global oil prices by adjusting its production levels—within the Organisation of Petroleum Exporting Countries (OPEC). This stance has given Riyadh enormous influence over oil prices due to its ability to change oil output levels as the world’s second-largest producer. Recent events, however, have seen Saudi Arabia impose significant output cuts in line with its ambitious Vision 2030 goals. These measures are not only about stabilising global oil prices; they are also closely tied to the Kingdom's larger goals of economic diversification and reduced reliance on oil revenues. Analysing Saudi Arabia's strategy within OPEC+ reveals how production cuts support Vision 2030's objectives, while also considering the potential domestic and foreign policy implications. This calculated approach balances traditional oil dominance with the necessity of fostering non-oil revenue streams for future economic stability.
Vision 2030 is a comprehensive strategy to change Saudi Arabia's economy by diversifying its revenue streams and reducing its reliance on oil. One of the major techniques behind this concept is strategic control of oil production. Saudi Arabia hopes to balance oil supply and global demand by leading the OPEC+ alliance in production cutbacks, keeping oil prices stable and supporting its economic reforms. The latest extension of voluntary oil output cutbacks until mid-2024, including Saudi Arabia's additional one million barrels per day (bpd) cut, reinforces this policy to support petroleum prices in the face of economic uncertainties. This strategy was strengthened by the OPEC+ online summit in late 2023, during which members agreed to voluntary cuts of more than 2 million barrels per day for the first three months of 2024.
Vision 2030 is a comprehensive strategy to change Saudi Arabia's economy by diversifying its revenue streams and reducing its reliance on oil. One of the major techniques behind this concept is strategic control of oil production.
In addition to economic diversification, maintaining production cuts serves several other objectives for Saudi Arabia within OPEC+. These production cuts strengthen Saudi Arabia’s position within OPEC+ and enhance its influence over global oil markets. By leading the coalition, Riyadh can negotiate favourable terms with other major producers and consumers, thus securing its strategic interests. The recent agreement by OPEC+ to extend cuts of 2.2 million bpd into mid-2024, with Russia also reducing its production and exports, further consolidates this influence and supports oil prices amid rising geopolitical tensions and market uncertainties.
However, these cuts also present certain risks. Reduced oil output may strain relations with major oil consumers who depend on stable and affordable oil supplies. Additionally, the perception of Saudi Arabia as a reliable oil supplier could be affected, potentially impacting long-term contracts and partnerships. The inclusion of Brazil into the OPEC+ bloc in January 2024 adds another layer to this dynamic, as it introduces a significant new player in the coalition that is trying to rein in global supply. From a broader perspective, the production cuts contribute to global energy security by stabilising oil prices and preventing market volatility. This stability is crucial not only for oil-dependent economies but also for the global economic landscape.
The adoption of reductions in production has profound consequences for Saudi Arabia's domestic economy. In the short term, lower oil output means lower government revenue from oil exports. This may provide a challenge to the Kingdom's budget, particularly given Vision 2030's ambitious expenditure programmes. The Saudi government projected a US$21 billion shortfall in 2024 owing to lower oil income. Despite these problems, the cutbacks are part of a larger strategy to maintain long-term economic stability and prosperity. The extension of cutbacks until mid-2024 aims to ensure market stability while progressively restoring further cut volumes based on market conditions.
In the short term, lower oil output means lower government revenue from oil exports. This may provide a challenge to the Kingdom's budget, particularly given Vision 2030's ambitious expenditure programmes.
The International Monetary Fund (IMF) has recently reduced Saudi Arabia's economic growth for the year 2024 by nearly one percentage point due to these production cuts, projecting GDP growth at 1.7 percent. This revision has had a cascading effect, dragging down the projected growth rate for the Middle East and North Africa region. Despite these short-term setbacks, the long-term vision focuses on stimulating the non-oil economy. Saudi Arabia’s non-oil sector activities comprised 50 percent of the country’s real GDP in 2023, which is the highest share ever recorded. The non-oil economy, valued at approximately US$453 billion at constant prices, has been buoyed by growth in investment, consumer spending, and exports. Investments made by the private sector have surged by 57 percent over the past two years, reaching a record US$254 billion in 2023. Leading the charge in non-oil activities are arts and entertainment, which saw an exceptional 106 percent growth between 2021 and 2022. Other sectors, including accommodation, food services, transportation, and storage, also experienced robust growth, expanding by 77 percentand 29 percent, respectively.
The shifting revenue landscape necessitates careful management of domestic policy. To achieve a balanced budget, the government may need to revise social expenditure and subsidy programmes. Even though these challenges are sustained, the continued growth of non-oil sectors offers a more stable and sustainable revenue stream, reducing the economy's susceptibility to oil price fluctuations. The substantial expansion in areas such as social services, healthcare, education, transportation, communication, and trade demonstrates the broad-based nature of this economic diversification. For instance, non-oil activities have seen growth across various sectors, with social services, healthcare, and education experiencing a 10.8-percent growth, while transportation and communication grew by 3.7 percent, and trade, restaurants, and hotels all recorded significant increases of 7 percent. This shift underscores the success of the Kingdom’s diversification efforts under Vision 2030.
There are indications that certain ambitious projects under Saudi Arabia's Vision 2030 may undergo some scaling back. Declining oil prices have impacted government revenues, prompting a reevaluation of these projects and a search for alternative funding approaches. For instance, the Neom project, initially envisioned as a US$500 billion futuristic city, is encountering reductions. Developers will now prioritise completing just 2.4 km of the linear city, The Line, by 2030 as part of the first phase, as opposed to the initially planned 170 km.
The decision to scale back on Neom underscores the financial hurdles that the Saudi government is currently confronting. Neom's funding is allocated by the Saudi government through its sovereign wealth fund, the Public Investment Fund (PIF). The official cost for constructing Neom surpasses the country's entire federal budget for the year by 50 percent, and analysts project that the total execution cost could exceed US$2 trillion. As of September, the PIF, with assets totalling around US$900 billion, held only US$15 billion in cash reserves. In an effort to bolster its capital, Saudi Arabia has divested approximately US$11.2 billion in shares from its national oil company, Saudi Aramco. Despite these measures, Foreign Direct Investment (FDI) has fallen short of expectations, highlighting Riyadh's difficulties in attracting financial support from private firms and international investors.
The decision to scale back on Neom underscores the financial hurdles that the Saudi government is currently confronting. Neom's funding is allocated by the Saudi government through its sovereign wealth fund, the Public Investment Fund (PIF).
In conclusion, Saudi Arabia's strategic manoeuvring within OPEC+ and Vision 2030 demonstrates a sophisticated approach to balancing present economic needs with long-term goals. While production cuts may reduce oil revenue and create foreign policy tensions, they are vital for economic diversification and stability. Extending output curbs until mid-2024 shows the commitment of OPEC+ to stabilising oil prices amid geopolitical and economic uncertainty. Saudi Arabia aims to secure its place as a leading economy by fostering a strong non-oil sector, with projected GDP growth of 4.4 percent in 2024 and long-term non-oil sector growth exceeding 5 percent, highlighting a transformative phase towards a more balanced economy.
Ahmed Fawaz Lathif is an intern with the Observer Research Foundation
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Ahmed Fawaz Lathif is a Research Intern at the Observer Research Foundation ...
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