In recent quarters, Saudi Arabia’s economy has faced a significant jolt, as the world’s largest crude oil exporter deliberately slashed its oil output to support global prices. The impact has been felt, with the country’s gross domestic product (GDP) shrinking by a notable 4.5% year-on-year in the third quarter of 2023. This contraction is the most substantial one since the height of the Covid-19 pandemic in 2020. However, it’s crucial to note that this economic downturn would have been even more severe if not for the resilience of non-oil activities, which managed to maintain a growth rate of 3.6%. In this blog post, we’ll explore the reasons behind Saudi Arabia’s oil production cuts, their effects on the nation’s economy, and what the future may hold for this key player in the global energy landscape.
Saudi Arabia’s decision to cut its oil production can be understood as a strategic move aimed at stabilizing global oil markets. Ralf Wiegert, the Economics Director for the Middle East and North Africa at S&P Global Market Intelligence, explained that in the second quarter of 2023, concerns about a potential global economic slowdown were weighing on oil markets. In response to these recessionary risks and to ensure oil demand remained balanced, Saudi leadership opted to reduce oil supply to the market. This reduction was necessary to counter the potential adverse effects of weakening global economic conditions.
The extent and duration of the oil production cuts will play a pivotal role in determining Saudi Arabia’s economic recovery. At present, it is anticipated that these production cuts will continue until 2025. Consequently, Saudi Arabia’s economic growth is expected to remain subdued, with a growth rate of 1.1% predicted for 2024. While these projections indicate challenges on the horizon, the kingdom’s resilience and adaptability will undoubtedly be key factors in overcoming these economic hurdles.
It’s worth noting that other Gulf states have also felt the economic pressure resulting from cuts in oil production. However, one standout is the United Arab Emirates, which has managed to maintain economic growth in the face of these challenges. The country’s economy minister recently announced that the UAE’s GDP grew by an impressive 3.7% in the first half of the year, largely driven by growth in the non-oil sector. This is an encouraging sign that diversifying the economy away from oil dependency can help in mitigating the impact of such production cuts. Non-oil revenues in the UAE are experiencing their most robust growth in four years, as indicated by new PMI (Purchasing Managers’ Index) numbers from S&P.
