Saudi crude oil cuts throw last year's standout economy into slow lane

Saudi Arabia’s decision to extend its oil production cuts — part of a so far largely unsuccessful bid to raise prices — may trigger an economic contraction in what was the Group of 20’s fastest-growing country last year.
 

It would be a stark turnaround for the $1 trillion economy, which surged almost 9% in 2022, helping Crown Prince Mohammed bin Salman invest tens of billions of dollars in everything from sports to tourism and new cities.
 

The boom was propelled by record crude output of around 10.5 million barrels a day and prices averaging $100 a barrel as Russia’s invasion of Ukraine roiled energy markets.
 

With a global economic slowdown now weighing on crude demand, Riyadh is lowering output this month and next to just 9 million barrels a day, a level the kingdom’s rarely reached in the past decade. The move lifted prices, but slightly. Brent is trading around $78.50 a barrel, down 9% this year.
 

The slashing of supply will be a drag on the world’s biggest oil exporter. The economy will fall by 0.1% this year if the government raises production in September and by 1% if it holds the course for the rest of 2023, according to Bloomberg Economics. “The Saudi cut could be costly,” said Jean-Michel Saliba, Middle East and North Africa economist at Bank of America Corp. 
 

The US lender’s base case is a slowdown in growth to 0.9%. But it forecasts a contraction of 0.6% if the supply reductions aren’t reversed this year. A drop of that level would make Saudi Arabia the worst-performing economy in the G20 after Argentina, according to Bloomberg surveys.
 

Non-Oil Growth
 

Some analysts are optimistic gross domestic product can grow even if the cuts stay in place until 2024. Oxford Economics’ Amy McAlister sees GDP rising 0.3% in that scenario.
 

And the non-oil economy — where the vast bulk of Saudis are employed and which the crown prince’s Vision 2030 plan is aimed at transforming — remains buoyant. 
 

Private companies outside the oil industry boosted their orders at the fastest rate on record in June, according to a purchasing managers’ index.
 

“This is the sector that really matters for job creation and corporate profits,” said Ziad Daoud, chief emerging-markets economist at Bloomberg Economics.  
 

The government says the non-oil economy will probably expand 5.8% this year.

“Saudi economic transformation and diversification under Vision 2030 are focused on the non-oil GDP,” a spokesperson at the Saudi Finance Ministry said.