A conversation on trade with Saudi Arabia: Economic Insights, Energy, and Plastics

May 2, 2024

Perc Pineda, PhD
Chief Economist, PLASTICS

Tim Callen
Visiting Fellow, The Arab Gulf States Institute

According to the latest estimates from the U.S. International Trade Commission, the U.S. recorded exports to Saudi Arabia amounting to $12.8 billion last year, with imports totaling $16.0 billion, resulting in a trade deficit of $3.2 billion. Specifically concerning the trade in plastics and related articles, as classified under Chapter 39 of the U.S. Harmonized Tariff Schedule, the value of U.S. exports to Saudi Arabia stood at $238.5 million in 2023, while imports from Saudi Arabia amounted to $26.6 million, resulting in a trade surplus of $211.9 million. 

Saudi Arabia has held the distinction of being the world’s largest exporter of propylene polymers in terms of dollar value since 2011, a position it maintained in 2022 as well. With global trade data for 2023 yet to be released, it is highly probable that Saudi Arabia has continued to maintain its lead. 

I’m pleased to have this year’s annual trade conversation with Tim Callen, a former colleague at the International Monetary Fund (IMF). Tim is an expert on Saudi Arabia’s macroeconomy, having been responsible for the IMF’s engagement with the government of Saudi Arabia and led the IMF’s research program on Saudi Arabia and the Gulf Cooperation Council (GCC) region from 2012-21. From 2021-22, he served as special advisor to the executive director for Saudi Arabia at the IMF’s Executive Board. His research focuses on oil exporting countries and includes the prospects and policies for economic diversification away from oil, frameworks, and institutions to limit procyclical fiscal policy, and appropriate exchange rate policies. Currently, Tim is a Visiting Fellow at The Arab Gulf States Institute in Washington, a non-profit organization dedicated to fostering dialogue on US-Gulf relations.

Pineda: Tim, thank you for this opportunity to have a conversation on trade, energy, Saudi Arabia and the GCC overall. The plastics industry is a mature industry, which means that its growth will track economic growth. What’s your outlook for Saudi Arabia and the GCC this year and the next year? The IMF’s latest projections call for global economic output to grow by 3.2 percent this year and the next. The Middle East and Central Asia region is expected to grow by 2.8 percent this year before accelerating to 4.2 percent in 2025. Saudi Arabia is expected to grow by 2.6 percent and 6.0 percent. Any insights on Saudi Arabia’s GDP, employment, and inflation you would like to share? 

Callen: Hi, Perc. Thanks for offering me the opportunity to discuss these issues with you. The picture of the global economy the IMF painted in its recent April 2024 World Economic Outlook publication is one where the threat of recession in the near-term has declined, but where without strong policy actions, the global economy risks getting stuck with tepid growth in the years ahead—“the tepid twenties” as the IMF Managing Director has labeled it. An extended period of weak growth would complicate the ability of countries around the world to deal with many of the pressing challenges they face—elevated debt levels, high poverty and income inequality, and the need to scale-up investment to address the challenges of climate change. This weak growth outlook also risks further economic fragmentation as rich countries look inward rather than outward as they seek to protect what they already have. 

Turning to Saudi Arabia and the Gulf region. I think it is important to separate the oil and non-oil sectors when looking at oil exporting countries because they are affected by different factors. In 2023, real GDP in Saudi Arabia contracted by 0.8 percent, but the oil and non-oil sectors performed quite differently. The oil sector saw a large contraction because of the cuts in oil production during the year, but the non-oil sector expanded at a healthy clip of close to 4 percent. And non-oil growth is what really matters for creating jobs in the economy. 

What I expect this year in Saudi Arabia is more of the same. The non-oil sector should grow by 3.5-4 percent, but the oil sector is again likely to contract. This will put overall real GDP growth at around 1.5 percent, somewhat less than projected by the IMF, but in the same direction—i.e., stronger growth in 2024 than in 2023. For 2025, the strong pick-up in growth projected by the IMF is important due to the assumed rebound in oil production as OPEC+ unwinds its production cuts. This may be a reasonable central scenario, but one thing I have learned while following the Saudi economy is that the global oil market is exceptionally difficult to predict. My gut says that production will not be restored quite as quickly as the IMF assumes, but we will have to wait and see on that call.  

I expect other Gulf countries will follow similar growth paths to Saudi Arabia. The latest IMF forecasts for the GCC region have growth in 2024 at 2.4 percent compared to 0.4 percent in 2023 and then accelerating to 4.9 percent in 2025. Saudi Arabia and UAE are projected to be the fastest growing countries and Kuwait, where economic reforms have not yet got off the ground, the slowest growing. 

Pineda: It can be expected that with higher economic growth comes increased trade. The World Trade Organization (WTO) now expects merchandise trade to grow by 2.6 percent this year, increasing to 3.3 percent next year, after falling by 1.2 percent last year. These projections are against the backdrop of global output that is expected by the IMF to flatten this year and the next. What’s your view on Saudi Arabia’s trade performance in 2024 and 2025? 

Callen: The IMF’s April 2024 World Economic Outlook made a very interesting point about the fragmentation of global trade. It noted that since the start of the war in Ukraine, trade between different geopolitical blocs (one centered around the United States/EU and the other around China/Russia) has declined much more sharply than trade within these blocs. This reallocation of trade is occurring in the context of a sharp increase in trade restrictions. How these dynamics continue to play out is crucial to the trade outlook.  

The WTO’s forecast for a pick-up in trade this year and next (which is mirrored by the IMF) likely assumes less of a role for fragmentation and therefore a closer relationship between global output and trade growth. This is far from certain. Another important point is that even in the WTO scenario, trade growth is projected to be much weaker than in the past. In the 1980s and 1990s, global trade expanded at close to twice the rate of global GDP growth. The rate of trade growth relative to GDP slowed substantially following the global financial crisis and is expected to slow even further this decade.  

For Saudi Arabia, trade is still dominated by oil, mainly in crude but also in refined products. Oil accounted for around 77 percent of goods exports last year. Chemicals and plastics play an important role (about 13 percent of goods exports in 2023), and we are beginning to see the emergence of metals as an export sector as the mining sector develops. Lastly, service exports, particularly from tourism, have shown exceptional growth over the last few years. 

Looking forward, Saudi’s trade performance will largely be driven by what happens in the oil market. I think both in terms of the number of barrels of oil exported and oil prices, the short-term direction is uncertain. Outside of oil, there is clear desire in Saudi Arabia to expand exports of plastics, chemicals, and metals. The key companies in these sectors such as SABIC and Ma’aden are working in this direction. It is also worth noting the imports into Saudi Arabia have grown very strongly over the past two years. This is due to the ongoing reforms—private consumption has been growing strongly and there is significant investment going into the large projects the Public Investment Fund (PIF) is developing. 

Pineda: Any insights behind those projections? What’s the biggest challenge that Saudi Arabia and GCC could face this year and the next that could slow its trade with the rest of the world? 

Callen: The biggest challenge facing Saudi Arabia from a trade perspective is the uncertainty in the global oil market. The OPEC+ group has extended its production cuts until the middle of the year, and then the big question is whether conditions in the oil market will allow the gradual restoration of these cuts back into the market. While oil prices have been well supported in the $80-90 a barrel range (for Brent Crude), this has come at a cost for Saudi Arabia which has borne the brunt of the production cuts. Saudi is currently producing around 9 mb/d, which is way down on the 10.5 mb/d in the early months of 2023. In fact, in the fourth quarter of 2023, Saudi oil output was at its lowest level since 2007 abstracting from periods of major global economic crisis. This cut in production has resulted in a significant loss of market share for Saudi Arabia. 

Pineda: Has Saudi Arabia recovered from the supply chain challenges caused by the      COVID-19 pandemic? 

Callen: On a macroeconomic level, the answer is yes. The economy has rebounded, inflation is well-contained, and the unemployment rate is at its lowest level since data was first published. The pandemic caused significant stresses in terms of health outcomes, domestic economic impact, and the functioning of the global oil market, but these were all managed deftly by the Saudi authorities.   

Pineda: As we reflect on the pandemic and its aftermath, the question of supply chains and the future of globalization post-COVID-19 remains pertinent. What are your insights on globalization and trade in energy, particularly concerning crude oil and natural gas, given the growing emphasis on environmental sustainability? 

Callen: The forces of globalization have been in reverse since the onset of the global financial crisis, and this reversal has accelerated since the COVID-19 pandemic and the start of the war in Ukraine. The early months of the COVID-19 pandemic were a very volatile time for the global oil market with prices plummeting until OPEC+ cut production, while the Russian invasion of Ukraine clearly reshaped energy trade and ushered in a new era of concern about energy security, notably in Europe.  

Beyond this, trade in oil has been reshaped by the growth in U.S. shale which has seen the U.S. move from a net energy importer to a net exporter. In turn, Saudi Arabia and other large producers have focused their exports on the growing market in Asia, and particularly China. As part of this process, Saudi Arabia has increased investment in refining and petrochemical operations in China and elsewhere in Asia to add value and to secure future demand for their oil. 

Beyond climate sustainability, one important question is how key oil importers such as China, India, and Europe will respond to concerns about energy security. While Saudi Arabia is an extremely reliable supplier of oil, it may be that these countries look to accelerate their own development of alternate energy sources, not just as part of the transition needed from a climate perspective, but to simply become less reliant on energy imports. 

Pineda: What are your thoughts on the shift towards alternative energy sources? How do you anticipate this transition impacting global macroeconomics? Given that some of the world’s leading manufacturing countries are net importers of energy, what role do you see for them in this evolving landscape? Additionally, considering Saudi Arabia and OPEC’s significant influence in the energy market, what role do you foresee them playing? Lastly, what strategies do you believe should be implemented to facilitate a smooth transition to alternative energy sources, considering the potential for disruption and welfare implications? 

Callen: Shifts in the global energy market are ongoing and these will clearly continue in the years ahead. Fossil fuel consumption will decline, alternate energy sources will grow, and natural gas will play an important role in the transition. The question is at what pace the transition will occur. There is considerable disagreement between OPEC and the International Energy Agency, for example, on when demand for oil will peak. It is important to remember that in many parts of the world, there is still a deficiency of energy relative to need and this deficiency may be most easily met by fossil fuels. However, elsewhere, and China is a good example, the expansion of solar and electric vehicles is perhaps happening quicker than expected. The most important thing in my view is that expectations about the extent and pace of the transition are realistic. Technology takes time to develop and the process does not move in a straight line—concerns about electric vehicle charging infrastructure and battery range, for example, are growing and will need to be tackled before many people are persuaded to switch to an electric car.

As a group, oil exporters will be negatively affected by the transition away from fossil fuels, although the extent of the impact will depend on the cost-structure of the oil industry, the extent of reliance on oil, and the availability of financial resources to help restructure and diversify economies. Oil importing countries may benefit as the green transition creates new industries and jobs. But even within these countries, there will be perceived winners and losers even beyond the specific industries involved. Concerns by residents affected by the placement of wind turbines and solar panels in their neighborhoods will likely be a growing source of friction as alternate energy develops. 

The expected transition away from oil has put a premium on economic diversification in oil exporting countries. Countries in the Gulf are very aware of the need to diversify their economies even as they seek to ensure that oil remains a central element of the global energy mix. Almost all countries in the Gulf have introduced ambitious economic reform agendas over the past decade and, in most cases, they have substantial financial resources to back these plans up. I think progress is being made, although oil is still the dominant economic force in these economies. Diversification will be supported by open global markets. Gulf countries want to import technology, attract foreign investment, and encourage skilled-labor to relocate to the region to help develop local industries. They have an interest in a more globalized and less fragmented global system. 

Pineda: With crude oil and natural gas production serving as crucial feedstocks for various downstream industries including plastics manufacturing, Saudi Arabia holds a significant position in the global trade of plastic materials and resin. SABIC, operating across 50 countries with a reputation for technology and innovation, underscores this role. Given the macroeconomic and microeconomic impacts of evolving energy policies, security concerns, and environmental sustainability, how do you assess Saudi Arabia’s prospects, especially if fossil fuels decline as the primary energy source?” 

Callen: Saudi Arabia will remain a significant producer and exporter of oil for many years to come, but it is also in a strong position to develop alternate energy sources and natural gas. Three broad points are worth making here. First, the global transition away from fossil fuels will not happen quickly. Even if demand for fossil fuels does peak in the coming years, and there are different views on this, global oil consumption will continue to be substantial for many years. Second, Saudi Arabia is an exceptionally low-cost producer with a relatively low emissions profile. Because of this, Saudi Arabia will be one of the last oil producers standing. Third, given Saudi Arabia’s climate, the prospects for the development of alternate energy sources from solar and wind are considerable, although whether these sources will only replace oil in the domestic energy mix or be exportable remains to be seen.  

Domestic energy policies will also be important. Prices for many domestic energy products have increased over the last 5+ years in Saudi Arabia as part of the country’s reform efforts. But prices in general are still low by international standards. It is not clear if the authorities intend to raise these prices in the coming years, but if they do it will need to be done carefully and with significant advanced warning to allow industries that are heavy users of cheap energy the time to adjust their production structure. 

Turning to SABIC, the sale of the PIF’s stake in the company to Aramco makes sense from an economic viewpoint, even if questions have been raised about the price paid. There should be substantial synergies that can be exploited between the two companies. Indeed, expanding the country’s petrochemical production, both in volume and in value-added, is a key component of the industrial development strategy. 

Pineda: In 2022, Saudi Arabia held the distinction of being the world’s largest exporter of polypropylene both in terms of value ($6.2 billion) and quantity (4.9 million tons). Saudi Arabia’s polypropylene exports accounted for 22.7 percent of the global total. In dollar value, the country’s polypropylene exports have experienced a compound annual growth rate (CAGR) of 6.5 percent since 2017. Despite the United States maintaining a trade surplus with Saudi Arabia in plastics materials and resin overall, it registers a trade deficit specifically with Saudi Arabia in polypropylene ($10.1 million). While global data for the current year is pending release, it would not be surprising if Saudi Arabia continues to lead in polypropylene production. 

From a Saudi-centric macroeconomic perspective, considering there are external factors, what economic factors or policies could potentially challenge Saudi Arabia’s position as the world leader in this plastic resin? 

Callen: Let me put my answer in general terms. Saudi Arabia will continue to be one of the largest oil producing countries in the world. Indeed, given its significant spare production capacity, it is the only country that can quickly and significantly expand production if market circumstances require. The by-products needed by the domestic plastics industry will therefore remain available at competitive prices.  

Pineda: Tim, thanks for your insights. I’ll be keeping tabs on your activities at The Arab Gulf States Institute considering Saudi Arabia and GCC’s role in the global plastics industry and the Institute is an excellent source of information on economic and policy developments in the region. It’s good to catch up. 

For more information on The Arab Gulf States Institute, please visit agsiw.org.