Oman's Budget and Oil Price Impact

A few days ago the Government published its 2009 budget. News Briefs Oman gives a good summary.

First off, its great that the Government does this. Publishing the countries budget is a good thing. Of course, that is nowhere near comparable to what a public company would have to report, ie a country's version of balance sheet, cashflow, profit and loss, assets and liabilities.

The question going around now is 'what is the effect of the lower oil price in the Gulf economies?'

Oman's 2009 budget is based on a premise of $55 a bbl for its crude exports, and includes a deficit. Note that represents a year average oil price, as Omani crude trades on a monthly officially set price.

On the face of it, that doesn't look too bad. Last years budget - set on $45 / bbl - was easily topped by average oil prices at least 120% above that at around $100. Nice. Assuming Oman exports around 600mln bbl a day, that's almost $22 billion.

So what about a $60?
On the face of it domestic spending will be almost financed at $60. But its more complicated than that.

The so-called 'break even' oil prices being quoted in a very good article in the National.



This is a higher price than Oman'$55 budget, but tries to take account some of the off balance sheet items.Most interesting is the statement:

Economists differ on which GCC economy is the most vulnerable to low oil prices. Mushtaq Khan, an economist at Citigroup, said it was Qatar, which requires $57 a barrel to balance its fiscal budget. Others, like the IIF, report that Bahrain and Oman have the highest break-even oil prices – about $72 and $76 a barrel respectively. Outside the GCC, the economies of other Gulf oil producers like Iran ($90) and Iraq ($110) are even more vulnerable to falling oil prices, according to Mohsin Khan.

If oil prices approach these levels, most economists agree that governments will probably have to stop increasing their spending at the current rate. In a region where government-backed infrastructure and property projects are keystones of national economies, a slowdown in government spending could have serious consequences.

“If there is a concern that the oil price might continue to fall, I think there are a number of projects that might be scaled back – especially those that are still in planning phases or that have just been started,” said Ms Ziemba.

In the short term (~1 year) there is probably not much any of the Gulf countries could do to significantly reduce spending anyhow, as its basically committed, and any additional budget short fall would almost certainly be able to be financed, given the status of their 'Sovereign Wealth Funds' holding over a Trillion $.

In the very short term for any business, the most important factor is marginal cashflow. It's a company's oxygen. And a country's, financially speaking. [see Iceland]. And having that cash & assets on hand is critical. So there is no need in the short term for any problems at all, as Oman probably has at least $6 bln in spare foreign assets, and relatively low debt financing costs (a huge difference to 1998). Being linked to the dollar has now helped too lately.

The oil business is also a cash business, like fast food. Oman actually gets paid cash up front for its crude.

But what about long term?
It depends what you mean by long term I guess. If oil prices stayed below $50 for many years, that would certainly mean Oman perhaps could have been richer if they had avoided a few investments they've made in the last few years. As the article says, projects just starting would certainly be mothballed.

But also, by then, contracts would have been renegotiated. (low oil price = no world demand = cheaper materials and services). And by then Oman would be able to cut its costs back to survive in $30 long-term. So they would remain solvent.

You have to remember that in the day-to-day, what would be important is the marginal cost, not the overall profitability taking into account sunk costs and future investment. Ignoring those long term things, even today, it means Oman is making money on each bbl even if the price reached $8. The big boys even lower. The incentive, if anything, would be to accelerate production to try and partially offset any cash shortfall. What some of my contacts in this rather colorful industry call 'pump like fuck'.

This is what happened in 1998, and is partially responsible for Oman's subsequent rapid production decline in the early 2000s. Also in 1998, Saudi was trying to re=establish its control over world price and Opec, and had started a price war to bring Opec into line (as Saudi had the lowest cost to produce and the biggest reserves, it basically went 'all in').

Hopefully OPEC has learnt that lesson well from 1998 and will move decisively to bring oil at least to $60-$80 by cutting (real) production. Then everyone would be happy I think.

Of course, the rate of Oman's growth would plummet. Oman has gotten used to big growth rates of late, all driven by huge Government spending and slightly iffy real estate developments. This would be a big long-term problem. If the birth rate was ~1.5 and there were lakes of oil for 100s of years, no worries. But it makes the forward development a lot slower and more painful without the blessing of obscenely high oil.

And Oman has picked a very high Capital, 'global bull-market' set of growth industries.
Aluminum, Methanol, Urea, copper - all are highly correlated in price to oil. And anyhow are effectively subsidised by artificially low gas prices.

Mega Real Estate investment dependent on foreign money from relatively rich older people: who have just seen 50% of their stock portfolios vanish.

Tourists jetting in from Europe. Hmmm. There are a lot of credit cards that need paying off, and a luxury foreign holiday is perhaps not going to be as much of a priority when you're afraid of losing your job. Tourism may need to switch to Asia and more GCC.

And a domestic economy highly based on land, housing, a booming stock exchange and new cars, (+ Government spending) with a lot of debt financing. That looks a little shakier now too. The fisheries don't look like being able to grow, if anything in decline. Oil will probably drop to around 500k bbl a day, but will continue to act as the core engine of the economy OK.

So all in all...

Short term
everything will be fine, almost no matter what the oil price.

Medium term
at low oil price also still looks OK. Steady growth at a few % per year. A few long term projects stopped. More focus on diversifying domestic growth, esp agriculture and tourism. Problems of rising electricity costs and financing any new projects. Domestic fuel prices are forced up. A lot less new cars.

Long term.
Not so great. Low growth will be overtaken by the population curve. Big problem. Upside is a bit of reasonable austerity might help improve the Omani average work ethic.

But who reasonably thinks that in the long term oil price will be less than $50?
Not me.