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Saudi’s economy feeling the brunt of low oil prices and production cuts

Saudi is leading the OPEC+ coalition effort to cut oil production levels and deal with COVID-19's devastating negative impact on petrol use. what is cost that Saudi is paying?

Saudi posted a $29 bn deficit, with oil revenues falling 45% (yoy) in Q2 this year to $25.5 billion Oil prices are is still well below the $77.6 a barrel that the kingdom needs to balance its budget Neom signed a $5bn deal to build the world’s largest hydrogen project

The good news for Saudi is that Brent oil has stabilized near the $45 mark. 

The bad news is that prices are not enough to bring Saudi Arabia into the black when it comes to a ballooning budget deficit.

Saudi economy at a glance

According to Saudi’s Finance Ministry report published on July 28, Saudi posted a $29 bn deficit, with oil revenues falling 45% (yoy) in Q2 this year to $25.5 billion. Total revenues dropped 49% to nearly $36 bn.

Oil revenues represent over 40% of Saudi GDP and almost 80% of exports, employing two-thirds of the population.

One of the ways to counter this, Saudi increased VAT from five to 15% on July 1, and the price of petrol was bumped by 34% in July, with Gasoline 91 now costing $0.34 per liter, up from $0.26.

Read: Oil bulls are betting on OPEC+ agreement; will it be enough?

Production cuts

Saudi saw its crude oil exports in June drop to their lowest on record at just below 5 million barrels per day (bpd), as part of OPEC+ group to withhold a record amount of crude from the market in response to the COVID-19 induced crash in demand.

According to data from the Joint Organisations Data Initiative (JODI), Saudi’s crude oil exports plunged by 17.3% in June compared to May, to stand at 4.98 million bpd.

In April of this year, following the collapse of the previous OPEC+ deal, Saudi exported a record 10.237 million bpd, up from 7.4 million bpd in March.

In May, Saudi crude oil exports plunged to 6 million bpd helping to erase the glut that was building while global demand was crashing by 20 million bpd in April.  

Saudi was once responsible for nearly 30% of global oil exports, a figure that has now dropped to just 12%, according to Capital Economics.

Oil prices are is still well below the $77.6 a barrel that the kingdom needs to balance its budget and demand for crude is projected to fall “by 8.1 million barrels a day, the largest in history” because of COVID-19, according to the International Energy Agency (IEA).  

Read: Refinitiv Special Report: COVID-19 & OPEC – What is the new normal?

OPEC+ quotas

Data compiled for the committee and seen by S&P Global Platts shows the 23-country OPEC+ coalition exceeded its quotas by 357,000 b/d from May to July, a 95% compliance level. 

The alliance implemented the largest coordinated production cut in the oil market’s history in May at 9.7 million b/d, about 10% of pre-pandemic demand. 

After oil prices have stabilized around $45/b in recent weeks, OPEC+ eased its cuts to 7.7 million b/d from August through the end of the year, in anticipation of higher demand. 

The world is expected to reach about 97% of pre-pandemic oil demand in the fourth quarter, Saudi Oil Minister Prince Abdulaziz Bin Salman said.

But does the kingdom have greener plans on the horizon? 

Green Hydrogen and Ammonia

Neom signed a $5bn deal with Air Products, a US industrial gas and chemical company, and ACWA Power, a Saudi power and desalination utility, to build the world’s largest hydrogen project. The production facility will be powered through the integration of more than 4GW of renewable power from solar and wind.

Meanwhile, catalysis technology from Danish specialist Haldor Topsoe will be used to produce 1.2mn t/yr of green ammonia when the facility comes on-stream in 2025.

Air Products will export the green ammonia around the world, where it can be converted back into carbon-free hydrogen for fuel-cell buses and trucks, among other uses. The company expects the link-up to end-user distribution to cost an additional $2bn.

Neom will use a combination of solar PV and wind and claims to be among the best sites in the world for green hydrogen in terms of production cost.  

Kearney estimates that, by 2050, pure hydrogen consumption could grow to 540mn t/yr, with the bulk of the increase coming from the transport and industrial sectors.

Saudi Arabia’s hydrocarbon resources offer Riyadh the convenience of time. As demand for crude drops and the role of hydrogen in the energy mix increases, it could turn out to be the kingdom’s next great resource.