Oman’s is about to expire of its present oil and fuel reserves in lower than two decades, a extremely problematic estimation. Certainly, hydrocarbons — that are the sultanate’s high exports (see Determine 1) — funded main infrastructural, instructional, and healthcare development within the 1970s and 1980s, and generated 68% to 85% of yearly authorities revenues during the last 30 years (relying on fluctuations in oil and fuel costs). The sultanate’s overreliance on oil has develop into much more problematic given the 2020 fall in world oil costs, which strained each the nation’s gross home product (GDP) enlargement and its fiscal and present account balances.
Throughout his 50-year reign, the late Sultan Qaboos tried to diversify the nation’s economic system away from pure assets. In the end, nevertheless, these makes an attempt had been unsuccessful. After ascending to the throne final yr, Sultan Haitham pledged to handle Oman’s financial challenges. Financial reform is extra urgently wanted within the sultanate in comparison with a few of its Gulf neighbors, as its oil reserves are smaller and extra geologically difficult.
Determine 1: Oman’s high 10 exports in 2018
Supply: The Observatory of Financial Complexity: https://oec.world/en/profile/country/omn
Oman’s financial outlook has frightened home, regional, and worldwide actors lately. As a result of sultanate’s vast fiscal deficits and overreliance on exterior funding, worldwide credit standing businesses — equivalent to Moody’s Buyers Service, S&P Global Ratings, and Fitch Group — downgraded Oman’s credit standing to junk standing and minimize its outlook to negative in 2019 and 2020. Regionally, officers from the Gulf Cooperation Council (GCC), which offered Oman with $10 billion in growth support in 2011, have reportedly acknowledged in 2020 that the sultanate grew to become extra susceptible because of the financial impression of the coronavirus pandemic in addition to low oil costs. On the home degree, a lot of the favored discontent in Oman’s latest historical past has been motivated by financial hardship and the will for socioeconomic reform, as might be seen from the assorted protests and strikes that came about within the sultanate in 2011, 2012, 2018, and 2019.
Low oil costs and lockdown measures carried out in 2019 and 2020 to regulate the unfold of the COVID-19 pandemic have definitely exacerbated Oman’s financial woes. Actually, Fitch estimates a finances shortfall of almost 20% of GDP in 2020, in comparison with 8% in 2019. Nevertheless, even earlier than the pandemic reached Oman, the sultanate was already one of many two most susceptible GCC economies (together with Bahrain). Actually, regardless of being the most important non-OPEC Gulf exporter, Oman suffers from main structural points together with lower-than-predicted oil reserves, overreliance on external funding, excessive exterior vulnerability, excessive public spending, restricted capacity to adjust to exterior shocks, and excessive unemployment charges (which reached round 15% nationally and over 30% for younger individuals in 2017).
OMAN’S OIL CURSE
Each a blessing and a curse, pure useful resource manufacturing dominates Oman’s economic system. Oil and fuel exportation has been the main forex earner in Oman since 1967. Crude oil is a significant catalyst for GDP progress; the most recent knowledge from the Central Financial institution of Oman exhibits that the share of petroleum actions in GDP reached 36% in 2018 — that’s a 7% rise from the earlier yr. (See Determine 2.) In 2019, the sultanate recorded a mean crude oil manufacturing of 977,100 barrels per day (bpd); it exported 281.7 million barrels of crude oil that yr. Oman additionally processes oil at varied refinery amenities, together with in Muscat’s Mina Al Fahal and the Sohar Port Industrial Advanced. In 2017, each had a processing capability of 222,000 bpd of crude oil.
Moreover, a brand new refinery mission set to return on-line in 2022 is underway in Duqm. This mission, together with an enlargement to the Sohar advanced in 2018, is a part of the Omani regime’s efforts to develop refining capability and entice trade buyers. With an approximate value of $2 billion, the Duqm refinery mission will improve the sultanate’s refining capability by 230,000 bpd and can permit Oman to supply excessive value-added merchandise.
Determine 2: GDP shares, petroleum vs. non-petroleum actions (1998-2018)
Supply: Nationwide Centre for Statistics and Data
Oman’s overreliance on pure useful resource exportation signifies that its economic system is tied to the rise and fall of oil and fuel costs. Particularly, it has been negatively impacted by repeated crashes in world oil costs lately. (See Determine 3.) Brent Crude Oil Prices fell from $106.57 per barrel (/bbl) in January 2014 to $45.82/bbl in January 2015. They dropped additional to $28.55/bbl in January 2016. The oil market skilled what was then its worst annual yr loss in 2018, when costs fell from $86.07 to $50.57. In 2020, within the midst of the coronavirus pandemic and the following world financial stoop, oil costs dropped to their lowest level in April 2020, with Brent Crude oil reaching $9.12.
Determine 3: Brent Crude Oil costs – 10 yr day by day chart
Supply: Macrotrends, Brent Crude Oil Costs – 10 12 months Every day Chart, https://www.macrotrends.net/2480/brent-crude-oil-prices-10-year-daily-chart.
Though Oman is the most important non-OPEC oil exporter within the Center East, it has smaller reserves in comparison with its Gulf neighbors. By the tip of 2017, Oman had confirmed oil reserves of 5.4 billion barrels — or 700 million tons, which is 0.3% of the worldwide whole — in line with the Petroleum Development Oman Company (Oman’s main crude oil manufacturing and exploration firm, which pumps many of the nation’s crude oil and operates nearly all of its oilfields, fuel fields, manufacturing stations, and energetic wells).
The sultanate’s reserves-to-production ratio — its remaining quantity of petroleum expressed in time — was solely 15.2 years in 2017. Moreover, not like lots of its neighbors, Oman’s oil reserves are geologically challenging and sometimes require expensive extraction methods. (For context, these are 4 instances costlier than in Saudi Arabia.) Extra oil could also be found in Oman, however this may not have an effect on this estimated timeframe of reserve depletion, until it’s found in nice portions. What does this imply for the regime? It should imperatively adapt to a post-oil economic system prior to different GCC states with greater reserves.
Suggestions: Re-designing the social contract
Since 1996, the regime has been getting ready for the eventual oil scarcity by creating Oman’s second most necessary vitality useful resource, gas (particularly, liquified pure fuel, which is especially used for export and to assist home trade). Nevertheless, the regime now must diversify the economic system away from hydrocarbons altogether. To realize this, the regime should first renegotiate its pseudo-rentier social contract with the inhabitants.
Certainly, the Omani management should put together for the political implications which can be sure to accompany radical financial change. As a primary step, it should minimize public spending (by elevating taxes and reforming the subsidy system). Whereas this may increasingly result in public contestation, the regime shouldn’t rein again its efforts on the first signal of discontent, because it did after the 2018 protests which had been triggered by rising unemployment charges, tax will increase, and a 20% discount (between 2015 and 2018) of the nation’s vitality invoice.15
Second, the Omani management should be ready to simply accept that renegotiating its social contract with the inhabitants will seemingly contain a point of political liberalization on the regime’s half. This may increasingly require the regime to open the political sphere and finally transition from an absolute monarchy, the place the ruling coalition doesn’t share energy, to a much less constrained political system with extra illustration and participation.
Within the instant future, by way of concrete financial change, the brand new sultan should prioritize diversifying Oman’s economic system away from pure assets by specializing in and investing in non-hydrocarbon sectors with potential for top revenues, equivalent to tourism. Moreover, he should prioritize not solely job creation and Omanization of labor, but in addition closing the coaching hole between nationals and expatriates by coaching nationals for particular sectors through which they’re employed to a lesser extent than expatriate staff, equivalent to schooling, engineering, and drugs. (See Determine 4.) Most significantly, the regime should acknowledge that its financial methods can not depend on pure assets.
Determine 4: Nationwide Expatriate Employment by Sector (2018)
Supply: Nationwide Centre for Statistics and Data