JAKARTA (08/07/2026)

For decades, Saudi Arabia’s name has been almost synonymous with oil. The oil and gas sector isn’t just one part of the Saudi economy’s backbone, the largest source of state revenue and the main engine of gross domestic product (GDP) growth since oil was first discovered in the country back in the 1930s. At its peak in the 1970s and early 1980s, the sector accounted for more than two-thirds of Saudi GDP. Even in early 2026, state oil producer Saudi Aramco still posted a 25 percent jump in first-quarter profit, driven by strong export volumes and oil prices that spiked amid regional geopolitical turmoil.

Not long after, though, the trend reversed. Heading into the second quarter of 2026, Saudi Arabia’s oil and gas sector suffered a sharp contraction. Infact, its deepest quarterly decline since the Covid-19 pandemic. The war between the United States and Iran, which struck directly at global oil shipping routes, was the main trigger. What’s notable is that even as this heavy blow landed on the kingdom’s flagship sector, other parts of the Saudi economy showed resilience and some even grew. That’s the two-sided story worth understanding for anyone trying to make sense of where the Saudi economy is heading next, including international business audiences watching the Gulf as one of the world’s key economic hubs.

The US-Iran War and the Disruption of Gulf Energy Routes

The conflict between the United States and Israel on one side and Iran on the other broke out on February 28, 2026, and by mid-year had reached a stalemate with neither a political settlement nor an agreement to reopen shipping through the Strait of Hormuz. The strait is one of the world’s most critical routes for oil and gas shipments, the passage through which most of the Gulf’s energy exports reach global markets. Ballistic missile and drone strikes on energy and civilian infrastructure across the Gulf left many tanker owners reluctant to enter the region, driving up shipping costs and disrupting energy trade flows.

The impact has been felt most heavily by Kuwait and Qatar, two countries that rely almost entirely on the Strait of Hormuz to export oil and liquefied natural gas respectively. Saudi Arabia is in a relatively better position than its neighbors. The kingdom has access to the Red Sea as well as cross-country pipeline infrastructure, including the East-West pipeline built during the Iran-Iraq War in the 1980s. That pipeline can carry up to seven million barrels of oil a day from fields in the east to ports on the Red Sea, allowing a portion of exports to continue even with Hormuz largely closed.

Even so, this alternative route can’t fully replace tanker shipping capacity through Hormuz. Saudi oil exports have fallen by roughly two million barrels a day from prewar levels, and the kingdom’s total exports have held at around 60 to 70 percent of normal volumes. Facilities on the Red Sea side aren’t entirely safe either, remaining within range of missile and drone strikes, while threats to Red Sea shipping lanes from Iran-aligned Houthi forces have added further pressure on that alternative route.

The Decline in Numbers: The Deepest Contraction Since the Pandemic

Official data from Saudi Arabia’s General Authority for Statistics (GASTAT) shows GDP contracted 4.8 percent year-on-year in the second quarter of 2026, covering April through June. That figure marks a sharp reversal from the 3 percent growth recorded in the first quarter of the same year, and it’s the steepest quarterly decline since the second quarter of 2020, when the Covid-19 pandemic pushed Saudi growth down to minus 7 percent.

The contraction was driven almost entirely by a collapse in oil-sector activity, which fell 24.7 percent year-on-year in the second quarter. This is a sharp reversal from 2.9 percent growth the previous quarter. The drop in oil production also affected natural gas output used for domestic power generation, while output from refineries, petrochemical plants, and the fertilizer and aluminum sectors was squeezed by limited supplies of raw materials from the eastern region affected by Hormuz’s closure.

On the fiscal side, a surge in wartime government spending pushed Saudi Arabia’s budget deficit to its highest quarterly level on record, even as revenue from elevated oil prices provided some financial cushion. The International Monetary Fund (IMF), for its part, revised down its 2026 growth forecast for Saudi Arabia, from an initial April estimate of 3.1 percent to somewhere around 1.7–2 percent, warning that a prolonged conflict could erode investor confidence and slow the kingdom’s diversification agenda over the medium term.

The Other Side: Non-Oil Sectors That Kept Growing

Amid heavy pressure on the oil sector, the data tells a different story for Saudi Arabia’s non-oil sectors. Even though growth slowed compared with the previous quarter, from 2.9 percent to 0.6 percent in the second quarter of 2026, the non-oil sector stayed in expansion territory rather than contraction. May 2026 data even showed the non-oil private sector continuing to grow, driven by stronger domestic demand and the resumption of several previously delayed projects.

Several sectors stood out as the main pillars of growth outside oil, including:

• Tourism, culture, and entertainment: Saudi Arabia’s sheer scale has allowed various sporting and cultural events to continue even amid the war. As one example, an Asian football championship final held in Jeddah in late April 2026 still drew tens of thousands of spectators, at a time when similar events elsewhere in the Gulf were being cancelled.
• Manufacturing, logistics, and industry: these sectors have become part of Saudi Arabia’s renewed long-term investment focus, reflecting a shift away from massive real-estate megaprojects toward other productive sectors.
• Artificial intelligence (AI), mining, and renewable energy: these areas have drawn greater attention as new investment priorities from the kingdom’s financial authorities, including the Public Investment Fund (PIF), which unveiled a new five-year strategy in April 2026 built around six main focus areas: AI, industrial development, mining, logistics, travel, and entertainment and tourism.
• Finance and investment: several fund managers have reported rising interest in setting up new investment funds in Saudi Arabia, as some capital shifts away from other Gulf states seen as carrying higher risk during the conflict.

The benefits of this trend run in two directions. For Saudi Arabia itself, a stronger non-oil sector helps cushion the broader economy against the drop in oil revenue, while also supporting the kingdom’s longer-term goal of reducing dependence on a single commodity. For international businesses, these developments suggest that economic opportunity in Saudi Arabia is no longer confined to the energy sector, but is increasingly extending into services, technology, tourism, and higher-value manufacturing.

This “two-sided” pattern (oil weakening while other sectors strengthen) lines up with recent academic research. A study published in the journal Sustainability in March 2026 by Haque and Tausif, which analyzed Saudi economic data from 1970 to 2024, found that the non-oil sector tends to act as the primary stabilizer during periods of weak growth, while the oil sector remains the dominant driver during periods of strong growth. In other words, Saudi Arabia’s economic diversification is unfolding gradually rather than as a sudden structural break and what played out through the first half of 2026 looks like a live illustration of exactly that pattern.

Closing: The Need to Adapt to Global Dynamics

What happened to the Saudi economy in the first half of 2026 points to a fairly clear lesson: dependence on a single sector, however powerful that sector may be, still carries real risk when global conditions shift suddenly. A war involving Iran serves as a reminder that geopolitical factors can significantly affect a country’s economy in a short span of time, regardless of how vast its natural resource reserves are.

At the same time, the resilience shown by Saudi Arabia’s non-oil sectors during this period of pressure is itself a sign that the kingdom’s diversification strategy one that predates the war and traces back to the Vision 2030 agenda is beginning to bear early fruit. Going forward, the most relevant path for Saudi Arabia isn’t simply to preserve oil revenue, but to keep strengthening its capacity to adapt to global dynamics whether geopolitical shifts, commodity price swings, or changing patterns of global investment. A more flexible approach, one not reliant on a single source of revenue, will be a key factor in the resilience of the Saudi economy as it navigates global uncertainty ahead.

Written by: Alhayya Maritza

References

Haque, M. I., & Tausif, M. R. (2026). Saudi Arabia’s economic diversification: Managing the shift beyond oil. Sustainability, 18(6), 2695. https://doi.org/10.3390/su18062695

Khan, S. (2026, July 30). Saudi economy suffers biggest contraction since pandemic as Iran war hits oil exports. The National. https://www.thenationalnews.com

Chin, Y., Cheong, S., Neo, R. W., & Di Paola, A. (2026, August 6). Saudis cut key oil price again as Hormuz talks progress. Bloomberg News, republished by Financial Post. https://financialpost.com

Hannany, Z., & Pratama, R. (2026, June 4). War reshapes Gulf economy as Saudi Arabia attracts investors.

Coates Ulrichsen, K. (2026, May 28). Vision 2030 and the Iran war: Saudi Arabia’s resilience under strain. Arab Center Washington DC. https://arabcenterdc.org