The Federal Reserve’s recent decision to cut interest rates by 0.5%—one of the steepest cuts since 2020—aims to provide a temporary buffer to the U.S. economy, which has faced growing uncertainty. However, the decision has sparked criticism across the political spectrum, especially with the looming presidential election. The Fed, as always, reiterated that monetary policy operates with a lag. Democrats argued that the rate cut was delayed, while Republicans questioned the Fed’s autonomy, particularly as inflation remains high and fears of a recession intensify. But what does this move mean for the Arab world?

The Federal Reserve’s role, much like that of central banks globally, is to manage monetary policy in a manner that ensures macroeconomic stability. Lowering interest rates typically stimulates borrowing and investment, thereby fostering job creation. However, such moves often come with the trade-off of rising inflation, which erodes purchasing power. The U.S. dollar’s unique position as a global reserve currency means that many economies, including those in the Gulf, align their monetary policies with the Fed. The UAE Dirham and Saudi Riyal, both pegged to the dollar, are directly influenced by changes in U.S. interest rates. Following the Fed’s decision, the UAE Central Bank lowered its Overnight Deposit Facility (ODF) rate by 50 basis points, while the Saudi Central Bank (SAMA) adjusted its Repo and Reverse Repo rates to 5.5% and 5%, respectively. The reasons behind these dollar pegs vary, but they highlight the interconnectedness of global economies.

Among various national development strategies—such as Qatar’s National Vision 2030, the UAE’s We the UAE 2031, Oman’s Vision 2040, and Egypt’s Vision 2030—Saudi Arabia’s Vision 2030 has drawn particular attention since its launch in 2016. The kingdom’s ambitious National Transformation Program (NTP) seeks to reduce its reliance on oil, a difficult yet necessary endeavor.

Aramco, Saudi Arabia’s state-owned oil giant, continues to be a cornerstone of the kingdom’s economy. The company produces 9 million barrels of oil daily, with an additional 3 million barrels of standby capacity. Aramco’s profitability remains robust, having distributed $100 million in special dividends to its 2% non-government shareholders following its successful 2019 initial public offering. As a key player in Saudi Arabia’s economic diversification efforts, Aramco remains central to government revenue. In June 2024, a second public offering saw 1.545 billion shares sold to institutional investors—equivalent to 0.64% of the company, slightly less than the initially planned 0.7%.

The reality remains that the world is not yet ready for a post-oil economy.  The Saudi government, in partnership with Aramco, understands that the future of its dominance in the oil market depends on a strategic energy mix. As part of Aramco’s diversification plan, 8% of the company’s equity was transferred to the Public Investment Fund (PIF), raising PIF’s total ownership to 16%. The PIF, a state-backed investment vehicle, plays a critical role in driving the kingdom’s economic diversification, including ensuring the sustainability of Aramco.

Aramco’s strategic focus includes maintaining current oil output while adopting more environmentally friendly extraction techniques. The company has allocated approximately $58 billion in capital investments to deploy advanced modeling and smart drilling technologies aimed at reducing emissions, particularly methane. Aramco is also increasing its investment in natural gas, which has a lower environmental impact than oil, and in decarbonization technologies. Currently, Aramco ranks fourth globally—behind ADNOC, TotalEnergies, and BP—in spending on low-carbon technologies.

Saudi Vision 2030 is a proactive response to the evolving global landscape, driven by climate change, shifting geopolitical realities, and economic factors like the Fed’s monetary policy. Energy transition and economic stability are key to the vision’s success. Lower interest rates could encourage greater investment in renewable energy projects, potentially accelerating the global energy transition—a shift that may ultimately reshape Aramco’s long-term business model.