We are used to reading in the reports and analyzes of investment houses about oil prices, that everything depends on supply and demand, on economic cycles and on geopolitical conditions. That is, from its quantities drawn from the deposits, from the quantities required for the world economy to function and from the calmness or unrest that prevails in the countries in which the oil is produced black gold.
Of course, none of this is written in stone. Thus, despite the escalating ignition at Middle East Brent prices in June contracts (LCOM4) remain around $85 per barrel, after temporarily exceeding $90 and despite forecasts for a jump above $100. But even in the past despite weak oil purchases from China, the price of oil remained high due to a reduction in production.
Cases are also recorded where there was clear manipulation of prices, for purely “collective” reasons on the part of the countries that control oil extraction. And this happens because several countries are financially dependent to a large extent on the economic result of their underground mining, such as Russia, Saudi Arabia, Venezuela and others.
And while markets remain content with the absence of widespread concern over oil prices, his report came International Monetary Fund, to stir the waters. The IMF’s report focuses on the finances of Saudi Arabia, the reading of which holds surprises. The country is called upon to manage three important issues that could be considered both problems and challenges at the same time.
The first is the lag in the field of foreign direct investment. Saudi Arabia has set a target of $100 billion annually for the next five years. A particularly ambitious goal, if we compare it with the size of foreign direct investment (FDI) in India, which is at the top of Asian development with $50 billion. Especially if we consider that the aforementioned size of FDI in India, includes a series of investments by of the world’s biggest digital giants such as Apple, Google, Amazon and others.
The second is the size of the budget deficit, which will approach $20 billion by 2024, which needs financing in addition to debt markets and from domestic resources.
And the third is related to the grandiose plans of Prince Mohammed bin Salman, through which he wishes to change the course of the economy, society and more broadly the history of his Kingdom. The pharaoh-sized project of the futuristic city of Neom, which will occupy 26,500 square kilometers on the shores of the Red Sea, is the crown of the prince’s Vision 2030. The high-tech city will be based on hydrogen energy.
Already, the Saudi Arabian government is struggling to finance the project, which will now house just one-fifth of the residents it was budgeted for. And the length of the famous city “The Line”, from 170 km that it would cover, will be limited to 2.4 km by 2030.
It is clear that the budget of the project, which would only reach $230 billion by 2030, will be financed with difficulty. However, the construction of facilities to host the 2029 Asian Winter Games in the mountain resort of Trojena, on the outskirts of Neom, should be carried out.
According to the International Monetary Fund, Riyadh’s government will need an average oil price above $96 a barrel to balance the country’s budget and not jeopardize the execution of the prince’s ambitious plans.
According to Bloomberg, Saudi Arabia may need an oil selling price closer to $108 a barrel this year to finance the state’s operating costs and smoothly execute ongoing projects.
In conclusion, Saudi Arabia has every reason to be at the June 1 meeting OPEC+, to request an increase in the price of oil, not because market conditions dictate it, but because the viability of its own economy requires it. So let’s keep this in mind.
