Saudi Arabia's Oil Production Cuts Plunge Economy into Downward Spiral
Saudi Arabia's economy suffers a significant setback as it takes a sharp U-turn due to reduced oil production, causing a decline in prices
The Saudi Arabian economy has experienced a significant downturn following a reduction in crude oil production, which was implemented to stabilize prices. According to the country's official statistics agency, Saudi gross domestic product (GDP) contracted by 4.5% year-over-year in the third quarter of 2023. This marks the largest decline since the Covid-19 pandemic in 2020. However, the contraction would have been even more severe if not for a growth rate of 3.6% in non-oil sectors.
Despite the decline in the country's extensive oil sector for several months, the overall economy demonstrated growth of 1.2% in the second quarter compared to the previous year. In the third quarter, the oil sector of the kingdom experienced a significant contraction of 17.3%, marking the largest decline in any quarter since at least 2011. This decline was a result of voluntary oil production cuts, undertaken to stabilize global prices.
In July, Saudi Arabia, the largest member in the OPEC+ alliance, collaborated with Russia to limit oil supply in response to declining demand caused by a sluggish global economy. Analysts from Oxford Economics predict that oil production will continue to be restrained throughout the year and gradually normalize by early 2024.
The IMF projects a mere 0.8% growth of the kingdom's GDP for the entire year of 2023, a significant decrease from the 8.7% recorded last year.
Raif Weigert, Economics Director for the Middle East and North Africa at S&P Global Market Intelligence, stated that Saudi Arabia implemented oil cuts with the intention of stabilizing global oil markets.
"In the second quarter of 2023, the oil markets were facing the impact of potential global economic slowdown," Weigert explained. "To mitigate the risks of reduced oil demand due to a recessionary environment, the Saudi leadership made the strategic decision to reduce supply in the market."
According to Weigert, the Saudi economy's recovery will heavily depend on the gradual elimination of production cuts, which are anticipated to cease by 2025. He further mentioned that the growth rate of Saudi Arabia is projected to remain slow at 1.1% in 2024.
Despite facing economic pressure due to cuts in oil production, the United Arab Emirates' economy has managed to sustain growth. The country's economy minister recently stated that the UAE's GDP increased by 3.7% in the first half of this year, primarily driven by growth in the non-oil sector.
Non-oil revenues are growing at the fastest rate in four years, according to new PMI numbers from S&P.
