Oil is near $100, and Saudi Arabia's economy is shrinking anyway

Brent crude went above $100 a barrel in September. For the world's largest oil exporter, that should be good news. Instead, on 30 September Saudi Arabia's Ministry of Finance said it expects the economy to shrink by 3.6% in 2026.

Real GDP is estimated to fall 3.6% in 2026, "primarily because of the performance of the oil sector". (Saudi Ministry of Finance, Pre-Budget Statement FY2027)

The reason is simple. A high price does not help if you cannot pump and ship the barrels. After the US-Israeli war on Iran badly disrupted tankers in the Strait of Hormuz, Saudi Arabia sent its exports west through the East-West pipeline to Red Sea ports. Drones hit that pipeline on 8 April and again on 10 and 11 September. Riyadh shut it as a precaution and restarted it on 22 September.

The same pre-budget statement showed a 2026 deficit of SAR 245bn, against SAR 165bn in the budget. Fitch said the statement highlighted the fiscal pressure from the war. Here are seven charts on how a price spike and a recession can arrive in the same year.

The barrels went missing

Saudi Arabia told OPEC that its crude output averaged 6.238 million barrels a day (mb/d) in August. That was down 1.9 mb/d on July, below April's earlier low of 6.316 mb/d, and the lowest monthly level since 1990, the year of the Gulf crisis. The IEA's estimate is lower still, at 5.97 mb/d. OPEC's own independent estimate is higher, at about 7.27 mb/d. Every measure tells the same story.

For scale, the kingdom's OPEC+ quota for August was 10.42 mb/d and its sustainable capacity is 12.11 mb/d, according to the IEA. Saudi Arabia was 4.45 mb/d below its quota. This was not a choice to cut. More than 10 mb/d of Gulf output was shut in during August, out of world production of about 100 mb/d.

The East-West pipeline was the escape valve. It runs about 1,200 km from Abqaiq to Yanbu and can carry 7 mb/d. Before the September attack it was moving about 4 mb/d, roughly 4% of world supply. Aramco's chief executive, Amin Nasser, had said the pipeline did more to limit the supply shock than emergency stock releases. When it stopped, there was no other way out.

The price kept climbing

Fewer barrels on the market pushed the price up. Brent averaged $69 in 2025 and $91 in August 2026. It settled at $97.81 on 22 September, the day the pipeline restarted.

Forecasters have had to keep up. In its August outlook, the US Energy Information Administration (EIA) expected Brent at $78 in the fourth quarter of 2026. By October it expected $105, citing the pipeline attacks and very tight diesel markets. That is a $27 rise in two editions. In late 2025, when Saudi Arabia drew up its 2026 budget, EIA expected Brent at only $51-55 a barrel for 2026.

So the price is far above anything the budget assumed. The problem is the other half of the sum. Oil revenue is price times volume, and volume fell harder than price rose.

A growth forecast turned upside down

In December 2025 the ministry expected real GDP to grow 4.6% in 2026, after an estimated 4.4% in 2025. It now expects a fall of 3.6%. That is a swing of 8.2 percentage points in nine months, by our calculation.

GDP measures volumes, not prices. When the kingdom pumps a quarter less oil, the oil sector shrinks in real terms, however much each barrel sells for. Because oil is still a large share of the Saudi economy, that drags the headline figure below zero. The official split between oil and non-oil activity for recent quarters will show how much of the rest of the economy held up.

The deficit is far bigger than planned

The 2026 budget planned a deficit of SAR 165bn, or 3.3% of GDP. The ministry now estimates SAR 245bn, or 4.9%. That gap is about SAR 80bn, by our subtraction.

Be precise about the direction. The 2026 deficit is still smaller than 2025's. The ministry estimated the 2025 gap at 5.3% of GDP last December. The final figure looks closer to 5.8%, our estimate from industry and think-tank reporting. For 2027, the ministry forecasts a deficit of SAR 191bn, or 3.6% of GDP. The December 2025 plan had expected just 2.3%. Last year's pre-budget statement underestimated the 2025 deficit by 0.5% of GDP, according to the Arab Gulf States Institute in Washington (AGSI).

Spending, not revenue, opened the gap

Revenue for 2026 is now about SAR 1,190bn, roughly 3.7% above budget. Spending is about SAR 1,435bn, roughly 9.3% above budget. Both figures are our conversions of MEES dollar estimates at SAR 3.75 per dollar, and are rounded.

For 2027 the ministry plans revenue of SAR 1,202bn and spending of SAR 1,392bn. That assumes a cut of about 3% in spending, with no detail on how. AGSI notes that the lower spending the ministry projects for the coming year is rarely achieved. By 2029 the plan has spending at SAR 1,544bn against revenue of SAR 1,351bn, still a gap of about SAR 193bn by our subtraction.

The non-oil cushion is real but thin

This is the part of the story the ministry wants to tell. Non-oil revenue rose from about SAR 166bn in 2015 to SAR 505bn in 2025, about three times as much. Tax revenue in 2025 is estimated at SAR 393bn, of which SAR 297bn came from taxes on goods and services such as VAT.

That cushion is why Saudi Arabia can absorb this shock without a crisis. But it cannot replace oil in a year like this. Non-oil revenue is less than half of total revenue, and spending keeps rising faster than it does.

The bill goes on the debt

The ministry says the 2027 deficit will be funded by domestic and international borrowing: bonds, sukuk (Islamic bonds) and loans. Debt was already rising before the war. It went from SAR 1,216bn (25.9% of GDP) in 2024 to an estimated SAR 1,457bn (31.7%) in 2025. The December plan had it at 32.7% in 2026 and 33.1% in 2027.

That plan was made before the war and before a deficit SAR 80bn bigger than budgeted. A revised debt path was not available when we wrote this. The level is still low next to most large economies. The direction, and the speed, are what matter.

Our call

When the 2027 budget is published in early December, the ministry's estimate of the 2026 deficit will be above 5% of GDP, up from 4.9% today. We also expect the 2027 deficit to end above the 3.6% now planned.

The evidence is the record. Last year the pre-budget statement understated the deficit by 0.5% of GDP. Add that to 4.9% and you get 5.4%. AGSI calls a deficit of about 5.5% a reasonable central scenario. Spending is already 9.3% above budget, and the planned cuts for next year have no detail behind them.

Our base case, at about 65%, needs nothing new to happen. Spending keeps overshooting through the fourth quarter, Saudi output stays well below quota because Gulf flows remain constrained, and the December figure lands between 5% and 6% of GDP. It only needs the pattern of the past two years to hold.

The ministry could still hold the line at SAR 245bn, and we give that 35%. Brent would have to stay near EIA's $105 for the fourth quarter, the restarted pipeline and Gulf convoys would have to lift exports quickly, and spending would have to be trimmed in the last months of the year. Reports that Saudi crude exports reached their highest level since the war began after the restart make this a real possibility.

On balance we expect the overshoot. A higher price helps only the barrels you sell, and the barrels came back late. Spending overruns, by contrast, are already locked in.

The currency trade

The riyal is pegged to the US dollar at 3.75 per dollar. The peg means a shock like this shows up in reserves and borrowing, not in the exchange rate. Betting against the peg is the trade that deserves caution.

• Short the riyal. For: the deficit is above plan, output is at a 36-year low and debt is rising. Against: the peg has held through past oil crashes, the deficit is being funded by borrowing rather than reserves alone, and oil prices are high, not low.
• Long the riyal, or simply trusting the peg. For: debt remains about a third of GDP, non-oil revenue has tripled in a decade, and the state can still borrow at home and abroad. Against: the carry from holding riyals is modest, and the upside is capped by the peg itself.
• What would change our view. Output still below 7 mb/d into 2027 while Brent falls toward EIA's $84 forecast for 2027. That would combine low volumes with low prices, the mix that really tests a peg.

What to watch

These releases will confirm or break the call.

• OPEC report, October 2026. September output after the pipeline restart. A return above 8 mb/d would strengthen the case for a smaller deficit.
• GASTAT third-quarter flash GDP. The split between oil and non-oil activity shows whether the rest of the economy is holding up.
• EIA outlook, November 2026. Whether $105 for the fourth quarter survives, and when EIA expects shut-in Gulf output to return.
• 2027 Budget Statement, early December 2026. The 2026 budget was approved on 2 December 2025. The revised 2026 deficit is the number our call rides on.

The lesson

Oil revenue is price times volume. In 2026 Saudi Arabia got the price and lost the volume, and its economy shrank while the world paid more for oil. The non-oil cushion built over a decade kept a shock from becoming a crisis. But a budget that plans for $55 oil and then overspends at $100 shows that the harder reform is not raising new revenue. It is holding spending to the plan.