Friday, October 31, 2008

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.


  1. How are you defining your 'terms'? e.g. 'long' term? Not long enough to take into account oil running out in Oman, it seems?

    -Omani in US

  2. And the effects of inflation. How do you predict the trend?

  3. OIUS
    By short term I mean weeks to a year,
    medium term 2-5yrs, long term 5-15++

    Oman has dropped production since 2000, but I recon Oman will be exporting at least 500k a day BOE for the next 20 yrs.

    Oman needed a slowdown - everything was getting crazy. Prices for Capital equipment shot up. This might cool down domestic COL inflation to less then 5% quite soon, and construction costs could drop 40%, which would be nice.

    As long as oil stays constant in real terms, Oman won't suffer too much going forward. Wage demands from many will temporarily be softened as so much expat money is sent back, now for lots more local curency, be than pounds or rupee.

  4. News reports this week suggest that OPEC hasn't even initiated the production cut announced before the latest one, although I think Abu Dhabi acted within the last few days.

    I have put a reminder in my diary to check inflation rate in six months.

  5. You have missed few points like what percentage oil sales is accruing to state and what goes to the owner. Impact of Revenue from LNG sales and gas provision to the new industries if bought from outside.

  6. OIUS
    Oh, and Oman won't 'run out' of significant oil for the next 30yr+, as long as the price remains reasonable. After that, who knows if oil will even be worth anything?

    If I were you, I'd be more worried about where your electricity will be coming from 2010 - 2050++, and who's going to pay for the significant increases in generation cost once the subsidised domestic gas supply is insufficient to meet demand growth (soon). All other options: coal, solar, nuclear, are a lot more expensive per kW/hr (and I mean 200%-400% more), and will take many years to install...


    Oil sales almost all go to the state. After costs are recovered, more than 90%+ of revenue goes to the Omani Government, through both their equity shares and the huge tax imposed on non-state production licence owners.

    LNG sales are rel. minor - about 1200 million a year. And while the low gas prices given to almost all customers (aluminium, methanol, Urea, electricity co.) is a subsidy, there is no medium term impact in cashflow terms as only a bit of the gas could be exported anyway (LNG operates at ~80% capacity)

  7. I should mention that the detailed article in the Times of Oman to which I referred in my posting at newsbriefsoman pertained to the 2008 budget, not the 2009 one. Details of the 2009 budget will not be announced until the beginning of January along with Royal Decree 1/2009 which should approve the budget. The figure of $55 per barrel of oil comes from a statement after a meeting of the Financial Affairs and Energy Resources Council some ten days ago.
    How much of the recurring budget is likely to be salary and related costs for the Civil Service? Given that there was a hefty increase in Civil Service salaries and social benefits in February this year, it would be interesting to observe if annual increases in salaries will be introduced.

  8. UD,

    Is our electricity generated by natural gas? Hm, I always just (mistakenly, it seems) assumed it was oil. Also, is solar really just not practical right now? Even with the abundance of our sunshine? I keep reading conflicting reports on whether the cost is reasonable or not.

    -Omani in US

  9. General opinion is that solar power is still too expensive where oil and gas are cheap. Good read at
    The article states that solar power should become competitive in 10-15 years, as part of a mix of energy sources.
    Big solar power conference coming up in UAE in May 2009.
    In addition, nuclear power has been mooted as an energy source in the Gulf countries.

  10. Sue,

    OK. The key is the basis oil price, $55.

    The budget indeed must be corrected for inflation. But the Government has traditionally dealt with 'money of the day' aka MOD.

    Its something they should make an effort to be able to correct. And the new papers as well should be a bit more explicit in their financial reporting too!

    OK. For a start learn to type OUIS into the Name/Url button!!!!!

    And, yes, gas. And your water too. For 30 years.

    Oil is far too valuable to burn!!!

    OIUS and Sue
    Soar. Yes, expensive, BUT
    - the high cost you see in the media is based on building costs in the real world. A HUGE solar power station is mainly a big concrete tower and lots of flat mirrors on a frame.

    I would get Galfar to build the tower with NRIs, and have the frames and mirrors made in Ruwi/Wadi Khabir. Much cheaper! (but still more than subsidised gas, indeed).

    About double. Now. But it lasts for ever... unlike gas... And if there is 1 country in the world, you would think it should be Oman - sun, sun, sun.

    Nuclear is a waste of time, and a conspiracy to get the GCC to spend shit loads of money with America/France/Russia/Australia/Canada.

    With the money they could potentially spend getting gas from the Iranians [$12+bln?], Oman should build clean coal, solar~, and invest in some conservation...

  11. Sadly, the USA's National Renewable Energy Laboratory doesn't agree with you: 'parabolic trough solar technology is not yet cost competitive in today's energy market.'
    To my knowledge, government ministries were carrying out experiments on using solar energy for small-scale desalination of water in the desert during the 1990s. If you look around, I think you'll find that the technology has not, as yet, been widely adopted.
    Larger-scale solar power energy schemes are operating, I believe, in Israel.
    Have any enterprising citizens installed solar panels for water heating?

  12. Sue,
    Ah, but I'm not talking about parabolic solar troughs - I prefer solar towers (see earlier post).

    And as there isn't enough gas, the economic comparison with the gas turbine option is a false one: it needs to be compared to coal, preferably clean coal.

    And like I said, the costs are very important. Oman has cheap labor and materials, lots of land and sun. If it doesn't work here, it won't work anywhere.

  13. My apologies for not responding earlier. Other areas of my life needed attention.
    I found this item on solar towers,

    and a picture of one at

    So, lots of space needed, well that's OK in the desert isn't it? Would barriers on tall structures apply there?

    Possibly a bit of a problem avoiding frequent sand storms, but who knows?

    Initial costs for building the solar tower and producing the electricity are high, compared with fossil fuel, although the gap closes as the cost of fossil fuel rises. The writers admit that there is still insufficient data to be definitive about costs.

    Still, Google hired a company in 2006 to build a 1.6 megawatt solar system for its Mountain View HQ


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