London September 8 2023: Saudi Arabia’s fiscal breakeven oil prices that are needed to balance its budget are being distorted by significant spending from its sovereign wealth fund on mega state projects, masking the real oil price needed by the world’s biggest crude exporter.
Saudi Arabia needs a fiscal breakeven oil price ranging between $80/b and $88/b, based on estimates from the International Monetary Fund, Institute of International Finance and Goldman Sachs. All of these estimates exclude spending from the Public Investment Fund, which currently owns 8% of Saudi Aramco, the main source of government revenue.
Saudi Arabia and PIF’s need for high oil prices coincide with the country’s 1 million b/d voluntary OPEC+ cut, dubbed the “lollipop” by its energy minister Prince Abdulaziz, which started in July and is extended till the end of 2023. These cuts are on top of voluntary cuts by Saudi Arabia and some OPEC+ members implemented from May and group curbs that started last year and are extended till the end of 2024.
The Saudi unilateral move, alongside Russia’s plan to extend its own voluntary export cuts till the end of 2023, have helped oil prices spike.
Platts Dated Brent was assessed at $91.4/b Sept. 6, nearly the same level it hit on Nov. 17, 2022 and up 22% since end-June, according to data from S&P Global Commodity insights.
The ministry of finance couldn’t be immediately reached for comment on fiscal breakevens in the 2023 budget.
High assets under management
“If the PIF spending on domestic projects was included in the estimates of government spending, it would raise the breakeven price,” said Tim Callen, a visiting fellow at the Arab Gulf States Institute in Washington and a former IMF mission chief to Saudi Arabia. “There has been a clear drop in government capital spending from the budget since 2017-18 and this coincided with the expansion of PIF.”
PIF’s assets under management rose to Riyal 2.234 billion ($595.6 billion) in 2022, and 77% of the AUM was in local investments. Since 2017, AUM has nearly tripled from Riyal 835 billion.
“Projects that would probably have been done from the government budget are now coming from the PIF,” said Callen. “The problem of course is that it is hard to get a handle on PIF spending in the economy.”
PIF, which has been tasked by the government to implement Vision 2030 to diversify the economy away from oil income, is spending big on the country’s “Giga Projects” such as the futuristic city of NEOM, in which it pumped Riyal 25.5 billion in 2022 alone.
Spending on ‘Giga Projects’
The fund spent Riyal 121 billion on Giga Projects in 2022, compared with Riyal 35 billion in 2021 and Riyal 11 billion in 2020.
Under its 2021-2025 plan, PIF is planning to have Riyal 4 trillion in AUM by 2025 and spend at least Riyal 150 billion annually on new local investments.
“If a budget breakeven is in the mid $80s/b, and if you were to include spending on these mega projects in the budget, that would raise the breakeven significantly higher than that,” said Farouk Soussa, an economist at Goldman Sachs responsible for the MENA region.
“PIF has a separate wallet for spending on projects like NEOM and it is coming from its own resources and that’s not included in the budget. It is largely coming from investments from PIF in cooperation with investments from foreign and private sector players.”
PIF, which swung to a Riyal 14.722 billion loss in 2022 compared with Riyal 85.727 billion profit in 2021, also holds stakes in international companies and funds with investments in the Russian Direct Investment Fund, Uber, New Castle Football Club and Blackstone.
“Including PIF and other public enterprises leads us to speak of public sector balance, and this would be complicated due to the lack of reliable information on all public entities,” said Garbis Iradian, IIF’s chief MENA economist.
“In Saudi Arabia, the ratio of transfer of oil exports by Aramco to the budget varies (ranging from 67% to 85%). In general, higher oil prices lead to lower ratio of transfer to the budget. For example, it was 70% in 2022.”
Despite rising PIF spending on state projects, Saudi expenditure is higher than initial estimates.
Gulf oil price breakevens
In its 2022 budget, the finance ministry projected expenditure of Riyal 955 billion, but actual spending was 22% higher year on year and in the first half of 2023 spending was 18% higher.
“We put into our forecast an overshoot on the spending side because Saudis always overshoot their budget by maybe 10% to 15%,” said Soussa.
But Saudi Arabia is not the only Gulf country trying to balance its fiscal budget through higher oil and gas revenue and prices.
“In Qatar and Oman, the volume of natural gas exports will continue to increase, helping lower the fiscal breakeven oil prices,” said Iradian. “Fiscal adjustment in Bahrain is expected to continue, driven by rationalization of government spending.”
Overall, the energy-rich Gulf countries are expected to continue to benefit from high oil prices, thanks to their plans to boost capacity, higher global demand even amid a weak China, and the unlikely uptick in production from the US.
“The economics of investment from a production breakeven perspective are very, very favorable for the GCC countries and they can expand their capacity,” said Soussa.
