Saudi Arabia Faces Oil Price Dilemma

As Saudi Arabia pushes ahead with its ambitious Vision 2030 plan to build huge futuristic cities and resorts, the world’s top crude oil exporter will need to borrow more money on the debt markets as oil prices continue to linger at levels of about $20 per barrel lower than the Saudi fiscal breakeven oil price.

The Kingdom, the leader and main architect of the OPEC+ production cuts, is starting to ease a small part of these cuts on April 1, per the group’s latest plan to add 138,000 barrels per day (bpd) to supply this month.

Rising OPEC+ output this year could weigh down on oil prices, which have been hovering in the low $70s per barrel in recent weeks. That’s well below the $91 per barrel that the International Monetary Fund (IMF) thinks is the oil price needed to balance Saudi Arabia’s budget.

With many uncertainties about global trade and economic and oil demand growth, the Kingdom may have to endure a prolonged period of lower-than-breakeven prices and raise its public debt. Borrowing will have to increase to cover planned expenditures, or spending on some mega projects and Vision 2030 programs could be delayed or reduced, analysts say.

Moreover, Saudi Arabia’s main cash cow, oil giant Aramco, has just slashed its dividend, which further dents income for the Kingdom, the company’s main shareholder.

Another Deficit

In its 2025 Budget Statement, Saudi Arabia expects total expenditures of $342 billion (1.285 trillion Saudi riyals) as it continues to invest in projects to diversify the economy away from oil revenues, which account for about 61% of total Saudi government revenue.  

Revenues are projected to be lower than expenditures, at $316 billion (1.184 trillion riyals). These estimates indicate a deficit of $27 billion (101 billion riyals), which represents about 2.3% of Gross Domestic Product (GDP).

“The Government will continue funding and supporting the implementation of programs, initiatives, and economic transformation projects in line with Saudi Vision 2030, while maintaining spending efficiency and fiscal sustainability over the medium- and long-term,” the Ministry of Finance said in November.

Related: OPEC+ To Increase Oil Production in May: Report

To fill in the deficit gap, Saudi Arabia will issue more debt this year, aiming “to take advantage of available market opportunities to implement alternative government fiscal operations that enhance economic growth, such as spending that is directed towards strategies, mega projects, and Saudi Vision 2030 programs.”

Public debt is expected to rise to 29.9% of GDP by the end of 2025, up from 29.3% of GDP in 2024.

Saudi Arabia will continue to borrow on the debt markets and explore other financing options this year as it has estimated its funding needs for 2025 are $37 billion (139 billion riyals) to cover the deficit and repay maturing debts.

Lower Dividends from Aramco

The funding needs are likely to be higher than these estimates from January, considering that Saudi Aramco said in early March that its dividend would be 30% lower this year.

Aramco said that it expects total dividends of $85.4 billion to be declared in 2025. This is nearly 30% lower compared to last year’s $124 billion in dividends, which included about $43.1 billion in performance-linked dividends.

The lower dividends for 2025 will cut revenues for the Kingdom of Saudi Arabia, which is the biggest shareholder of Aramco via a direct stake of almost 81.5% and an indirect interest via the sovereign wealth fund, the Public Investment Fund (PIF), which has 16% of Aramco. 

As the deficit widens with the slashed Aramco dividend, Saudi authorities have the flexibility to recalibrate investments, Fitch Ratings said last month.

Fitch expects the Saudi government to cut capex and associated current spending this year.

“Regular project recalibration has recently resulted in a scaling back and resequencing of certain projects, for example,” the credit rating agency noted.

“This flexibility could ease the effect on Saudi Arabia’s public finances if oil prices are lower than we expect, though in Fitch’s view, lower investment spending could also have an impact on efforts to diversify the economy away from oil.”

Ironically, the Saudi efforts to diversify the oil-reliant economy need a sustained period of healthy oil demand and relatively high oil prices.

This year, the uncertainties about oil markets and oil prices are even higher than usual, with a new U.S. Administration seeking American dominance with tariffs on the biggest trade partners and upending foreign diplomacy. Tariffs could weigh on economies, including the U.S. and Chinese economies. If these slow down, demand for oil will slow, too, and oil prices will decline. So will Saudi Arabia’s oil revenues.

The OPEC+ group’s production increase and expectations of weaker demand growth due to the U.S. tariff policies and the potential economic slowdown will cap oil price rises this year, the monthly Reuters poll showed on Monday.

At around $70 oil, the short-term remedies for Saudi Arabia are to raise borrowing to finance the mega projects or delay some of these investments.

By Tsvetana Paraskova for Oilprice.com

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