Reshaping the Saudi Arabian economy: the price of cutting oil production
Saudi Arabia’s recent decision to cut oil production in order to maintain higher oil prices is indicative of Crown Prince Mohammed bin Salman’s willingness to prioritize national interests over those of the United States. The move comes as part of Prince Mohammed’s broader “Saudi First” economic policy, which aims to fund the country’s ambitious plans to modernize and diversify its economy.
Oil production cuts
The production cut, announced on Sunday, took many industry analysts by surprise, as Saudi Energy Minister Prince Abdulaziz bin Salman had reportedly indicated privately in February that the kingdom would tolerate oil prices slipping to around $65 or $70 a barrel. However, the decision to cut production was seen as necessary in order to maintain higher oil prices, which are needed to fund a number of large-scale development projects at home.
These “gigaprojects” include a Red Sea resort the size of Belgium and a $500 billion futuristic, high-tech city in the desert that is 33 times bigger than New York City. According to Saudi economic advisers, elevated oil prices will be necessary for the next five years in order to keep funding these projects, which have so far attracted little investment from abroad.
Prince Mohammed’s ambitious plans to transform the Saudi economy, rework its physical landscape, and upend its conservative culture are being financed largely by the kingdom’s $650 billion sovereign-wealth fund, which he chairs. With prices hitting $100 a barrel last year following the Russian invasion of Ukraine, the kingdom accelerated these efforts, which are now a key part of Prince Mohammed bin Salman’s Vision 2030 plan.
However, the recent decision to cut oil production could have major political ramifications, potentially exacerbating tensions with the United States. Saudi Arabia has been setting energy policy at odds with Washington for more than a year, as the West confronts Russia over its invasion of Ukraine.
The U.S. has sought to reduce revenue for Russia through sanctions and a price cap, but moves by Saudi-led OPEC and another group of producers led by Russia helped prop up crude prices in much of 2022.
The cuts in October, which came just before congressional elections and after President Biden’s trip to Saudi Arabia to heal relations, ratcheted up tensions with the White House, which eventually backed off threats of retaliation against Riyadh. Prince Mohammed himself has reportedly told associates that he is no longer interested in pleasing the U.S., saying that he wants something in return for anything he gives Washington.
Unorthodox and unprecedented
Despite the potential risks to the bilateral relationship, the recent production cut demonstrates Prince Mohammed’s willingness to pursue a nationalist energy policy aimed at funding the kingdom’s transformation. According to Farouk Soussa, Middle East and North Africa economist at Goldman Sachs, Saudi Arabia is less inclined to subordinate its own economic interests to support those of the U.S. than they have been historically.
The move also highlights growing uncertainty about the U.S. commitment to defend its Middle Eastern allies amid increased great-power competition in the region. As a result, Prince Mohammed is giving priority to national interests and pursuing a more assertive foreign policy in order to protect Saudi Arabia’s economic and strategic interests.
This is not the first time that Saudi Arabia has clashed with the US, in pursuit of its own interests. In 2018, the murder of journalist Jamal Khashoggi at the Saudi consulate in Istanbul strained relations between the two countries, with many in the U.S. calling for a tougher stance against Saudi Arabia. However, the Trump administration maintained its support for the kingdom, citing its strategic importance and the need to counter Iran’s influence in the region.
Under President Biden, the US-Saudi relationship has become increasingly strained, as the administration has sought to distance itself from the previous administration’s close ties to the kingdom.
The Crown Prince’s economic plan, Vision 2030, is aimed at diversifying the economy away from its dependence on oil exports.
The plan includes developing new industries, building tourist destinations, and creating entertainment options for Saudi citizens. This ambitious plan requires significant investment, and the Crown Prince has been seeking foreign investment to fund these projects. However, with the recent decline in oil prices, foreign investment has been slow to materialize, prompting the Crown Prince to look to other sources of revenue.
The recent production cuts are just one part of the Crown Prince’s nationalist energy policy aimed at funding the country’s transformation. The move has significant political ramifications and could add to Riyadh’s already significant tensions with Washington. Saudi Arabia, once a reliable U.S. security partner, has been setting energy policy at odds with Washington for more than a year, as the West confronts Russia over its invasion of Ukraine.
The U.S. has sought to reduce revenue for Russia, one of the biggest oil and gas producers in the world, through sanctions and a price cap, but moves by Saudi-led OPEC and another group of producers led by Russia helped prop up crude prices in much of 2022. The cuts in October, a few months after President Biden’s trip to Saudi Arabia to heal relations and just before congressional elections, ratcheted up tensions with the White House, which eventually backed off threats of retaliation against Riyadh.
The recent production cuts are a clear signal that the Saudis will do whatever it takes to keep oil prices at levels that benefit them. Prince Mohammed is implementing what analysts label a “Saudi First” economic policy aimed at giving priority to national interests at a time of growing uncertainty about the U.S. commitment to defend its Middle Eastern allies amid increased great-power competition in the region.
The production cut will hit an oil market that was widely seen as tightly balanced between supply and demand. It’s likely that the move will push oil prices higher in the short term, which will benefit Saudi Arabia’s oil revenues. However, it remains to be seen how the move will impact the global oil market in the long term.
Some analysts have raised concerns that the production cuts could lead to a shortage of oil supply in the global market, which could push oil prices even higher. This, in turn, could lead to higher inflation and put pressure on the global economy, which is already struggling with the impact of the COVID-19 pandemic.
On the other hand, others argue that the global oil market is oversupplied, and the production cuts will help bring supply and demand into balance, which could benefit the global economy in the long term.
Long term impacts remain to be seen
Saudi Arabia is one of the world’s largest oil producers, and its energy policy has significant implications for the global oil market. The recent production cuts demonstrate the country’s willingness to put its own economic interests ahead of its relationship with the United States. While the move is likely to benefit the country’s economy in the short term, it remains to be seen how it will impact the global oil market and the world economy in the long term.
The Crown Prince’s economic plan, Vision 2030, is an ambitious and far-reaching plan aimed at transforming the Saudi Arabian economy. The plan requires significant investment, and the recent decline in oil prices has made it difficult to attract the foreign investment necessary to fund the plan. The recent production cuts are just one part of the Crown Prince’s nationalist energy policy aimed at funding the country’s transformation.
The recent production cuts by Saudi Arabia and its allies demonstrate the country’s willingness to pursue a nationalist energy policy aimed at funding an expensive makeover of the kingdom. The move is a clear signal that the Saudis will do whatever it takes to keep oil prices at levels that benefit the country.
It also recently reportedly repaired its relations with Iran, which signals possible end to decades long rival ry between two countries.