Macroeconomic pathways of the Saudi economy: The challenge of global mitigation action versus the opportunity of national energy reforms

Abstract

We analyse the mid-term macroeconomic challenge to Saudi Arabia of a global low-carbon transition reducing oil revenues, versus the opportunity of national energy reforms. We calibrate a compact, dynamic recursive model of Saudi Arabia on original energy-economy data to explore scenarios. We first assess the consequences of oil prices declining from their levels in the New Policies Scenario (NPS) of the IEA, to their levels in its Sustainable Development Scenario (SDS). By 2030, the Saudi economy loses 1.4 GDP points, 1.6 employment points and USD 504 billion trade surplus accumulation. Its cumulated public deficit rises to 92.8% of GDP. National reforms gradually aligning Saudi energy prices on international prices and inducing structural change of Saudi activity away from energy-intensive industries mitigate these costs if a share of the public income from energy-price deregulation is directed to investment. However, they reduce the cumulated trade surplus and fail to control public deficit accumulation. Sensitivity analysis confirms the capacity of national energy reforms to mitigate the activity cost of global mitigation action, but aggravates the threat of an escalating public deficit. These results underline the importance of broader economic and fiscal reforms as part of the ambitious Vision 2030 Saudi initiative.