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The End of Easy Oil Money for Saudi Arabia?

Saudi Arabia's spending at home and abroad has led to a significant reduction in its sovereign wealth fund.

The Public Investment Fund's assets decreased from over $105 billion in 2022 to about $37 billion by September.

This reduction in assets is likely linked to Saudi Arabia's decision to cancel an oil production capacity expansion earlier this month.

Last year, Saudi Arabia's sovereign wealth fund spent more than any other country in the world, making up a quarter of the $124 billion total spent by such funds globally. The kingdom has been pouring money into huge projects both inside and outside its borders, including the ambitious $500-billion Neom City and launching a new airline.

Due to this massive spending spree, the Public Investment Fund saw its cash and assets decrease from over $105 billion in 2022 to around $37 billion by September, as the Wall Street Journal reported. With oil prices hovering around $80 per barrel, financing these large-scale projects is becoming more difficult.

Saudi Arabia has been working hard to maintain high oil prices to fund Vision 2030, Crown Prince Mohammed's initiative to diversify the economy beyond oil. However, the kingdom is finding it challenging to balance this ambitious plan with the realities of its oil-dependent economy.

The drop in the sovereign wealth fund's assets might be a reason Saudi Arabia recently decided not to go through with expanding its oil production capacity. Energy Minister Abdulaziz bin Salman mentioned shifting investments within Aramco and focusing more on transitioning to renewable energy as reasons for this change.

Abdulaziz bin Salman pointed out that current production limits provide a safety net of about 3 million barrels per day in spare capacity, should there be a sudden tightening in supply. However, it's uncertain if Saudi Arabia would utilize this buffer in the event of a supply disruption, especially considering the country's extensive investment in projects costing over a trillion dollars.

Aramco recently shared a stark update on the state of global oil production, noting a significant drop. The company's CFO highlighted a yearly loss of 6 million BOE/D due to natural declines and insufficient efforts to find new reserves. This drop has led to a severe cut in the spare production capacity to just 3% of worldwide demand.

The Saudi energy giant has long cautioned that without more investment in exploration and future oil production, the industry faces a critical situation. This concern is especially pressing if OPEC's demand forecasts prove more accurate than those of the IEA.

This potential crisis could benefit Saudi Arabia by driving up oil prices to levels that would support the kingdom's ambitious plans to diversify its economy beyond oil. The big question remains: how long will Saudi Arabia need to wait for this shift, and what steps will it take in the interim? Currently, it's turning to the debt markets for solutions.

In the past year, the Public Investment Fund has gone to market twice, issuing a $5.5 billion bond, including a green bond, and a $3.5 billion dollar-denominated sukuk. Additionally, Saudi Arabia raised $12 billion in January this year through bonds, attracting $30 billion in orders due to high demand.

Aramco itself is looking to issue more debt, with plans for longer maturity bonds and even considering selling more stock, as mentioned by CFO Ziad Al-Murshed.

As the kingdom eyes lower interest rates, the attractiveness of borrowing grows, signaling more debt issuances may be on the horizon.

Moreover, the potential for higher oil prices (by expectations of slower U.S. production growth) adds another layer to the financial strategy. This slowdown could mean more centralized control over shale production.

Saudi Arabia is not short on ambition, with plans to venture into electric vehicle manufacturing, establish a new e-sports and video game industry, and significantly invest in local soccer. Realizing these grand visions will require substantial financial resources, and the kingdom appears ready to leverage every available option to make these dreams a reality.

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