Saudi Arabia’s Oil Production Cuts Reflect Cost of Reshaping Economy

It’s the second time in less than six months that the Saudis have disregarded U.S. concerns—despite significant potential ramifications on the bilateral relationship—that elevated oil prices would help fuel Russia’s war machine.

Sunday’s production cut is the clearest signal yet that the Saudis will do whatever it takes to keep oil prices at levels that benefit them. Prince Mohammed is implementing what analysts label a “Saudi First” economic policy aimed at giving priority to national interests at a time of growing uncertainty about the U.S. commitment to defend its Middle Eastern allies amid increased great-power competition in the region. 

Prince Mohammed told associates late last year that he was no longer interested in pleasing the U.S., saying he wants something in return for anything he gives Washington, according to people familiar with the conversation.

Officials and other people familiar with Saudi oil policy say Riyadh’s move wasn’t a surprise, as it needs to defend higher prices to pay for massive development projects at home, some of which are so big that the Saudis call them gigaprojects. These include a Red Sea resort the size of Belgium with Maldives-style hotels hovering above the water and a $500 billion futuristic, high-tech city in the desert that is 33 times bigger than New York City.

Farouk Soussa, Middle East and North Africa economist at Goldman Sachs, said Saudi Arabia is less inclined to subordinate its own economic interests to support those of the U.S. than they have been historically.

“The Saudis have to guard against downside scenarios” of global recession and the implications for energy demand, which could drive oil prices below a yearly average of $80 a barrel and create a budget deficit, he said.

Prince Mohammed, the de facto Saudi ruler, is halfway through an ambitious plan to use his country’s gusher of oil revenue to transform its economy, rework its physical landscape and upend its conservative culture. As prices hit $100 a barrel last year following the Russian invasion of Ukraine, the kingdom accelerated those efforts, which are financed largely by the $650 billion sovereign-wealth fund chaired by Prince Mohammed.

In recent months, Saudi economic advisers have privately warned senior policy makers that the kingdom needs elevated oil prices for the next five years to keep spending billions of dollars on projects that have so far attracted meager investment from abroad.

Before previous production cuts announced in October, Saudi officials said they believed economic data indicated that the government budget required $90 to $100 a barrel for Brent crude, above the $75 to $80 range the kingdom was targeting. With around $450 billion in foreign reserves and the world’s second-largest proven oil reserves, Saudi Arabia is unlikely to run out of money soon. But Prince Mohammed was alarmed by an economic analysis from his energy minister, Prince Abdulaziz, warning that oil could fall below $50 a barrel, imperiling his huge spending plans, the officials said.

Prince Abdulaziz has said publicly that the Saudi government has a single-minded focus on delivering the crown prince’s agenda, known collectively as Vision 2030, including the grandiose building projects designed to spawn industries such as tourism and entertainment that haven’t existed before in cloistered Saudi Arabia.

“I keep hearing ‘Are you with us or against us?’ Prince Abdulaziz said at a Riyadh financial conference in October. “Is there any room for ‘We are for Saudi Arabia and the people of Saudi Arabia?”

Sunday’s decision will cut more than a million barrels of output a day starting next month from production quotas in Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Algeria, Oman and Kazakhstan.

The move has major political ramifications, and could add to Riyadh’s already significant tensions with Washington. Saudi Arabia, once a reliable U.S. security partner, has been setting energy policy at odds with Washington for more than a year, as the West confronts Russia over its invasion of Ukraine. The U.S. has sought to reduce revenue for Russia—one of the biggest oil and gas producers in the world—through sanctions and a price cap, but moves by Saudi-led OPEC and another group of producers led by Russia helped prop up crude prices in much of 2022.

The cuts in October—a few months after President Biden’s trip to Saudi Arabia to heal relations and just before congressional elections—ratcheted up tensions with the White House, which eventually backed off threats of retaliation against Riyadh.

Bjarne Schieldrop, chief commodity analyst at Nordic commodity bank

SEB,

said the new cuts could add some headwinds to the global economy and tighten up the oil market, helping Russia secure better prices for its crude.

Kremlin spokesman Dmitry Peskov said the cuts were intended to keep “crude oil and petroleum product prices at a certain level,” according to Russian news agency Interfax.

Write to Summer Said at summer.said@wsj.com and Stephen Kalin at stephen.kalin@wsj.com

It’s the second time in less than six months that the Saudis have disregarded U.S. concerns—despite significant potential ramifications on the bilateral relationship—that elevated oil prices would help fuel Russia’s war machine.

Sunday’s production cut is the clearest signal yet that the Saudis will do whatever it takes to keep oil prices at levels that benefit them. Prince Mohammed is implementing what analysts label a “Saudi First” economic policy aimed at giving priority to national interests at a time of growing uncertainty about the U.S. commitment to defend its Middle Eastern allies amid increased great-power competition in the region. 

Prince Mohammed told associates late last year that he was no longer interested in pleasing the U.S., saying he wants something in return for anything he gives Washington, according to people familiar with the conversation.

Officials and other people familiar with Saudi oil policy say Riyadh’s move wasn’t a surprise, as it needs to defend higher prices to pay for massive development projects at home, some of which are so big that the Saudis call them gigaprojects. These include a Red Sea resort the size of Belgium with Maldives-style hotels hovering above the water and a $500 billion futuristic, high-tech city in the desert that is 33 times bigger than New York City.

Farouk Soussa, Middle East and North Africa economist at Goldman Sachs, said Saudi Arabia is less inclined to subordinate its own economic interests to support those of the U.S. than they have been historically.

“The Saudis have to guard against downside scenarios” of global recession and the implications for energy demand, which could drive oil prices below a yearly average of $80 a barrel and create a budget deficit, he said.

Prince Mohammed, the de facto Saudi ruler, is halfway through an ambitious plan to use his country’s gusher of oil revenue to transform its economy, rework its physical landscape and upend its conservative culture. As prices hit $100 a barrel last year following the Russian invasion of Ukraine, the kingdom accelerated those efforts, which are financed largely by the $650 billion sovereign-wealth fund chaired by Prince Mohammed.

In recent months, Saudi economic advisers have privately warned senior policy makers that the kingdom needs elevated oil prices for the next five years to keep spending billions of dollars on projects that have so far attracted meager investment from abroad.

Before previous production cuts announced in October, Saudi officials said they believed economic data indicated that the government budget required $90 to $100 a barrel for Brent crude, above the $75 to $80 range the kingdom was targeting. With around $450 billion in foreign reserves and the world’s second-largest proven oil reserves, Saudi Arabia is unlikely to run out of money soon. But Prince Mohammed was alarmed by an economic analysis from his energy minister, Prince Abdulaziz, warning that oil could fall below $50 a barrel, imperiling his huge spending plans, the officials said.

Prince Abdulaziz has said publicly that the Saudi government has a single-minded focus on delivering the crown prince’s agenda, known collectively as Vision 2030, including the grandiose building projects designed to spawn industries such as tourism and entertainment that haven’t existed before in cloistered Saudi Arabia.

“I keep hearing ‘Are you with us or against us?’ Prince Abdulaziz said at a Riyadh financial conference in October. “Is there any room for ‘We are for Saudi Arabia and the people of Saudi Arabia?”

Sunday’s decision will cut more than a million barrels of output a day starting next month from production quotas in Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Algeria, Oman and Kazakhstan.

The move has major political ramifications, and could add to Riyadh’s already significant tensions with Washington. Saudi Arabia, once a reliable U.S. security partner, has been setting energy policy at odds with Washington for more than a year, as the West confronts Russia over its invasion of Ukraine. The U.S. has sought to reduce revenue for Russia—one of the biggest oil and gas producers in the world—through sanctions and a price cap, but moves by Saudi-led OPEC and another group of producers led by Russia helped prop up crude prices in much of 2022.

The cuts in October—a few months after President Biden’s trip to Saudi Arabia to heal relations and just before congressional elections—ratcheted up tensions with the White House, which eventually backed off threats of retaliation against Riyadh.

Bjarne Schieldrop, chief commodity analyst at Nordic commodity bank

SEB,

said the new cuts could add some headwinds to the global economy and tighten up the oil market, helping Russia secure better prices for its crude.

Kremlin spokesman Dmitry Peskov said the cuts were intended to keep “crude oil and petroleum product prices at a certain level,” according to Russian news agency Interfax.

Write to Summer Said at summer.said@wsj.com and Stephen Kalin at stephen.kalin@wsj.com