For decades, Saudi Arabia has relied on oil revenues to underwrite its social contract and foreign policy ambitions. That model is now under unprecedented strain. The kingdom’s break-even oil price, the level needed to balance its budget, has risen to over $100 per barrel.
With Brent crude trading near $75, Riyadh faces a widening fiscal deficit. Meanwhile, the International Energy Agency projects global oil demand will peak before 2030. Saudi Arabia’s Vision 2030, Prince Mohammed bin Salman’s flagship reform programme, was designed to diversify the economy and reduce dependence on hydrocarbons.
Yet five years on, non-oil revenues remain modest, and major projects such as NEOM, the $500 billion futuristic city, continue to consume vast sums. The kingdom has drawn down its foreign reserves by more than $150 billion since 2014. It has also borrowed heavily, issuing bonds and tapping international markets.
The strain is visible. In 2023, Saudi Arabia announced cuts to oil production to prop up prices, a move that cedes market share to rivals such as the United States and Iraq. The shift in global energy markets is structural, not cyclical.
Electric vehicles, renewable energy and efficiency gains are eroding demand growth. Saudi Arabia’s sovereign wealth fund, the Public Investment Fund, has been deployed to acquire stakes in technology firms and sports leagues, generating returns that do not offset the loss of oil income. The kingdom’s ambitious spending is running into hard fiscal realities.
The IMF estimates Saudi Arabia needs oil at $85 a barrel to balance its budget this year. Current prices leave a shortfall. To close the gap, the government is raising taxes and cutting subsidies.
In 2024, it increased the value-added tax to 15 percent and reduced fuel subsidies. Social discontent is growing among the young population, who face high unemployment and rising living costs. The political calculus is delicate.
The monarchy’s legitimacy rests on its ability to distribute wealth. Without sustained high oil prices, the kingdom’s foreign policy, including its arms purchases from the West and its intervention in Yemen, also comes into question. The United States, traditionally a guarantor of Saudi security, is increasingly focused on domestic energy independence.
The bipartisan consensus in Washington that underpinned the petrodollar system is fraying. Saudi Arabia’s leadership is not blind to these pressures. It is accelerating investments in tourism, entertainment and technology.
But the transition from an oil economy is a generational project. The spending spree of the past decade has bought time, but it has not solved the fundamental equation. Global oil demand is shifting.
Saudi Arabia’s reserves of patience and capital are not infinite. The kingdom is now in a race to reinvent its economy before the oil era ends. The outcome will define the Middle East for decades.
