Vision 2030 of Saudi Arabia: will falling oil prices derail big plans?

 

Saudi Arabia, whose economy relies heavily on exporting hydrocarbons, is currently facing double-headed challenge: on one hand, it has to boost revenue from selling crude oil that accounts for 70% of the former, despite the sale of the latter being on decline; on the other hand, it still has to fund the highly ambitious projects, an integral part of the Kingdom's 2030  vision.

Since the twin approaches are the two sides of the same coin, Saudi Arabia has been forced to walk the tightrope, while staring into an abyss of fast-evolving challenges that lie underneath, some of which could be critical unless handled strategically. 

The decision by the OPEC+, OPEC plus Russia, not to reverse the production cuts, despite promising to do so in June this year, is a case in point; it was Saudi Arabia, the de facto leader of the organization, that was instrumental in making the decision, while overruling the obvious concerns of some members as if it was completely amicable.

It goes without saying that the production cuts of crude oil inevitably lead to the fall of revenue of every single member of the cartel. The Saudi thinking, all along, has been the fact that it would boost the oil prices as the world still in need of the commodity in vast quantities -  in line with basic economic concept of supply and demand.

The fallacy of this miscalculation lies in the fact that the growth in demand being not linear, no matter how much the decision makers aspire it to be; it is inextricably linked to the global economy, which is not in good shape at all at present: the growth in the most Western economies is not even in a single digit: the dreaded word, recession, has become part of most economic analyses, if not all, much more frequently than ever before; the economic indices do not look promising either. 

One of the major reasons for the weak economic growth is the high energy prices that remains uncontrollable since the end of Covid-19 restrictions; although the prices of oil and gases have fallen dramatically, the consumers do not see a corresponding change at pumps; if consumers do not benefit, how on earth is it going to stimulate the growth of the country in question?

Of course, high taxes levied on fossil fuels are partly to blame for the impasse; OPEC+, however, was at fault for not intervening at the very beginning of post-Covid-19 phase, the most crucial time for the recovery of the global economy, having been dealt the most catastrophic blow in the century. The only goal of the cartel was filling up the coffers of the members at the expense of consuming nations, despite the numerous appeals from the latter not to do so; they all fell on deaf ears.

Even the presidential intervention of the world's only Superpower could not change the status quo; the US was forced to release oil from its SPR, Strategic Petroleum Reserve, to stop oil prices from going through the roof.

In response, the US went ahead with producing oil full steam, while maintaining its position as the world's top crude oil producer. In addition, not only the countries such as Guyana, Brazil and a few non-OPEC producers start pumping out more oil to the markets, but also started bite into the market share enjoyed by the OPEC+, leaving the latter in the lurch. 

Having maintained a position of growing global oil demand beyond 2025, the OPEC+ has reluctantly admitted that it will not be the case; it has slowly fallen in line with the forecasts of the IEA, International Energy Agency, that said the demand in 2024/25 will be lower than its own previous estimates.

In light of these ground realities, Saudi Arabia has finally reduced the price of its Arab Light crude price by $0.70 for Asia, Europe and America. The Kingdom must have taken into account the economic concerns of China, the biggest importer of the Saudi oil and of course, the world's top importer of crude oil; Chinese manufacturing growth, indicated by its PMI, has gone down yet again in August, registering a value of 49.1% that is below its 50% threshold value; it has even fallen by 0.3% from what it was in July, when the estimated value was 49.5%.

In the oil markets on Monday, meanwhile, as of 12:30 GMT, the prices of WTI and Brent were at $68.29 and $71.64 respectively; the price of LNG, liquified natural gas, was at $2.19.

As for the break-even price of crude oil for Saudi Arabia, analysts estimate it to be over $95 a barrel, about $14 above the current price. The IMF estimated it to be $96.20 a barrel, while taking into account the domestic investments by the Saudi Sovereign Wealth Fund in order to reach the goals of the Kingdom's Vision 2030; unless the revenues from oil get a consistent boost, analysts fear that Saudi Arabia will face persistent budgetary deficits. 

With Vision 2030 plans, Saudi Arabia wants to diversify its economy away from the over-reliance on oil. To its credit, it has been focusing on tourism, entertainment, technology and manufacturing. The challenge, however, is siphoning off funds for them that need substantial initial investments, in light of falling oil prices; in addition, sectors such as tourism and entertainment face some headwinds in the deeply-conservative Islamic nation, although attitudes are fast changing, especially among the young. 

Unfortunately, at present, neither OPEC+ as a whole nor Saudi Arabia as the world's top crude oil exporter shows any strategy for shoring up falling oil prices. In this context, ad-hoc moves made solely on impulse hardly are going to make any impact on the numbers that really matter in the game.