Oil Price Plunge Adds Challenges to Saudi Arabia's Economic Agenda

Saudi Arabia, whose wealth is inextricably linked to oil revenue, is under increasing pressure to raise debt or cut spending as crude prices fall, complicating plans to fund an ambitious economic diversification agenda.

Oil prices have fallen to near four-year lows amid fears that a trade war will harm global growth and a surprise decision by some OPEC+ oil producers, including Saudi Arabia, to increase output plans.

The price drop threatens to wipe out tens of billions of dollars in Saudi revenue, as well as a planned reduction in dividends from Saudi Aramco, the state-controlled energy giant.

The International Monetary Fund and economists estimate that Riyadh requires oil prices above $90 per barrel to balance its budget. Benchmark Brent prices fell below $65 this week.

Vision 2030

While Saudi Arabia is funding its Vision 2030 reform program off-budget, the government must spend on massive infrastructure projects related to the program, which aims to wean the economy off its self-proclaimed "oil addiction."

The $925 billion Public Investment Fund, which is guiding Vision 2030, also relies on oil, including through its stake in Aramco.

"Saudi Arabia is likely to rely on debt financing, and it will have to delay or scale back some planned contracting awards given that 2024 was already in a twin deficit," said Karen Young, senior research scholar at Columbia University's Center on Global Energy Policy, referring to fiscal and current account deficits.

Prior to the US tariff announcement, she stated that analysts expected Saudi public debt to rise by $100 billion over the next three years. Official figures show a 16% increase to more than $324 billion in 2024.

Dividends from Aramco are also expected to fall by a third this year, resulting in approximately $32 billion and $6 billion less for the government and PIF, respectively, according to Reuters calculations.

Oil accounted for 62% of government revenue last year. Riyadh has not forecast oil revenue for this year, but its 2025 budget, released in November, predicted a 3.7% decrease in total revenue.

RECALIBRATING

Analysts believe PIF will also seek additional financing. The fund's Governor, Yasir Al-Rumayyan, stated last year that it intends to increase annual investments to $70 billion between 2025 and 2030, up from $40-50 billion.

Saudi Arabia was one of the largest emerging market debt issuers last year, and the government has already issued $14.4 billion in bonds this year.

PIF, which borrowed $24.8 billion last year through bonds and loans, has already raised $11 billion for 2025. Several other state-affiliated organizations have also raised billions.

PIF has invested hundreds of billions of dollars in the local economy, ranging from a camel dairy to NEOM, a massive futuristic city in the desert.

Future projects include the 2029 Asian Winter Games, which will feature artificial snow and a man-made freshwater lake, as well as the 2034 World Cup, which will see the construction of 11 new stadiums and the renovation of others.

The finance ministry is "recalibrating and prioritizing" spending to ensure that the economy, including the private sector, can "catch up" without "overheating," according to a spokesperson.

"We are assessing the recent developments and stand ready to take whatever policy decisions needed to ensure that our fiscal position remains strong," a spokesperson added.

"We remain confident that most of our vision targets are either achieved or on track and we will deliver on the key events we are hosting."

The drop in oil prices coincides with geopolitical realignments as US President Donald Trump upends a global economic order that has existed since World War II.

Trump has pressured OPEC and its de facto leader, Saudi Arabia, to lower oil prices and urged Riyadh to invest $1 trillion in the United States. On his first foreign trip in May, he plans to visit Saudi Arabia, Qatar, and the United Arab Emirates.

Lower oil prices. "will likely lead to additional re-prioritization of major projects, further rationalization, revision of delivery timelines and a reduction in project work forces," said Neil Quilliam, associate fellow at Chatham House's Middle East and North Africa Program.

However, Quilliam believes the government will see the short-term risk of lower oil prices as worth the long-term benefit, citing the kingdom's low debt-to-GDP ratio and lender confidence.

S&P upgraded Saudi Arabia's rating to 'A+' from 'A' last month, but warned that unfavorable oil price movements and increased debt-funded investments could lower the rating.