Saudi Arabia's Oil Production Cuts May Put Fastest-Growing Economy To Laggard
The decision by Saudi Arabia to extend its oil production cuts, aimed at boosting prices, could potentially lead to an economic contraction in what was the fastest-growing country among the Group of 20 nations last year. This development marks a significant turnaround for the $1 trillion Saudi economy, which experienced a remarkable surge of almost 9% in 2022. The economic growth contributed to Crown Prince Mohammed bin Salman's ambitious investments in various sectors, such as sports, tourism, and the development of new cities.
The economic boom was largely driven by record-high crude oil output, reaching around 10.5 million barrels per day, and an average oil price of $100 per barrel. The energy market was roiled by Russia's invasion of Ukraine during that period.
However, the current global economic slowdown has dampened the demand for crude oil, leading Riyadh to reduce its output this month and the following month to a level rarely seen in the past decade—only 9 million barrels per day. While this move has resulted in a slight increase in prices, with Brent trading at approximately $78.50 per barrel, it is still down nearly 9% compared to the beginning of the year.
The reduction in oil supply is expected to weigh heavily on the world's largest oil exporter. According to Bloomberg Economics, if the Saudi government resumes production in September, the economy may contract by 0.1% this year. If the production cuts continue throughout 2023, the contraction could be as significant as 1%.
Bank of America Corp's Middle East and North Africa economist, Jean-Michel Saliba, commented that the Saudi oil production cuts could come at a high cost.
While Bank of America's base case scenario predicts a growth slowdown to 0.9%, a contraction of 0.6% is projected if the supply reductions persist throughout the year. If such a contraction occurs, Saudi Arabia would become the worst-performing economy in the G20, trailing only Argentina, according to Bloomberg surveys.
The Saudi government remains optimistic about the non-oil economy, projecting a growth rate of 5.8% this year. A spokesperson from the Saudi Finance Ministry emphasized the focus on economic transformation and diversification under Vision 2030, particularly with regards to the non-oil GDP.