First, the scaling back of the megacity project is attributed to budget constraints, with the Public Investment Fund's cash reserves dropping to USD 15 bn in September 2023, its lowest levels since 2020. It is part of the government fiscal discipline. The kingdom has scaled back some of its ambitions for its desert megacity “Neom”. When launching “The Line” in 2021, the Saudi government has announced that 1.5 million people would be living in the city by 2030. Officials now expect there will be fewer than 300,000 residents by that time. Officials are expecting only 2.4km of the 170km city to be completed by 2030. As a result of the scaling back, one contractor dismissed some of the workers it employs on site noting that this would have a negative impact on the construction sector. The kingdom needs considerable revenue to fund the ambitious transformation plans of Crown Prince Mohammed bin Salman, which involve spending hundreds of billions of dollars on everything from futuristic cities like “Neom” to top-flight sports players.
Second, this is the reason behind why Saudi Arabia would probably need a higher oil price than previously thought this year as the OPEC+ leader spearheads the group’s production cuts, according to the IMF. Riyadh will require an average oil price of $96.20 a barrel to balance its budget, assuming it holds crude output steady near 9.3 million barrels a day this year. That’s up 21% from a previous forecast in October, when the IMF predicted that the kingdom would pump 10 million barrels a day in 2024. It’s also higher than the current price for international benchmark Brent futures, which are trading near $89 a barrel.
The Saudis have led the OPEC+ alliance in curbing output to stave off a global crude surplus and shore up prices, deepening cutbacks by 1 million barrels a day since last July. The measures have helped buoy the market, but as Riyadh sacrifices sales volumes, it needs a higher price to compensate. The Organization of Petroleum Exporting Countries and its partners will gather on June 1st to consider whether to continue with supply curbs into the second half of the year. With conflict in the Middle East bolstering the market, it is expected that OPEC+ may start to unwind the curbs. Assuming the kingdom relaxes the supply cuts and revives production to 10.3 million barrels a day next year, its break-even price requirement shall subside to $84.70 a barrel, according to the IMF.
Adding the two together, cutting the costs on giga projects like downsizing “Neom” and a propel production increase in oil with a break-even point estimated at $84.70 per barrel, the Saudi government should have a higher probability of balancing its budget, or at least achieve a manageable deficit. This approach signifies a positive outlook for sustainability and a sign of Saudi Arabia's growing maturity, even considering the partial negative impact on the construction sector in the short term.
