Saudi Arabia’s economy has experienced a significant setback due to its decision to cut oil production to support global oil prices. The official statistics agency of the country reported that the gross domestic product (GDP) contracted by 4.5% year-over-year in the third quarter of 2023. This marks the largest contraction since the onset of the COVID-19 pandemic in 2020. However, the decline would have been even more substantial if not for a 3.6% growth in non-oil activities.
The country’s oil sector had been contracting for several months, but the overall economy still managed to grow by 1.2% year-on-year in the second quarter. In the third quarter, Saudi Arabia’s oil sector experienced a staggering 17.3% year-on-year contraction, the most significant drop recorded for any quarter since at least 2011. This contraction resulted from voluntary oil production cuts initiated to stabilize global oil prices.
Saudi Arabia reduced its oil production to nine million barrels per day in July, collaborating with Russia as the largest player in the OPEC+ alliance to limit supply amid concerns of weakening demand attributed to a slowing global economy. Analysts from Oxford Economics anticipate that oil production will remain low until the end of the year, with a gradual increase expected in early 2024.
The International Monetary Fund (IMF) predicts that Saudi Arabia’s GDP will grow by a mere 0.8% for the entire year 2023, a sharp decline from the 8.7% growth reported in the previous year.
The purpose of Saudi Arabia’s oil production cuts was to stabilize global oil markets, particularly in light of the risks associated with a global economic slowdown. The decision to reduce supply was driven by concerns of recessionary risks affecting oil demand.
The ability of the Saudi economy to recover hinges on the phased withdrawal of production cuts, which are anticipated to conclude in 2025. Economists expect Saudi growth to remain sluggish, with a projected growth rate of 1.1% in 2024.
While other Gulf states have also felt the economic impact of reduced oil production, the United Arab Emirates has managed to sustain economic growth. The UAE’s economy minister reported a 3.7% GDP growth in the first half of the year, driven by non-oil sector growth. Non-oil revenues in the UAE are also experiencing the fastest growth in four years, as indicated by new PMI data from S&P.