Wednesday, December 3, 2008

Oman reduces oil price assuption for 2009 budget from $55 to $45

Oman is cutting the assumed 2009 oil price from $55 a bbl to $45 - a cut of 18%.

The Government was already forecasting a deficit based on $55, so indeed there will either have to be some budget cuts, or a big slice of money transferred from the reserve fund(s), or a bit of both.

Oman's economy, despite the efforts of diversification, still effectively runs Government spending of one form or another, and Government spending runs on oil and gas. The drops in oil price to less than $60, if sustained, will have a nasty effect on the local economy, which will reduce tax revenues too. OK, it won't be as bad as the recession in most of the world, but a chill wind will still be blowing.

Most Omanis don't know what 'lay-offs' or 'redundancy' mean. The only example I know of was the closure of the Gulf Air call centre back-office last year when the Oman Government pulled out of Gulf Air, and the papers were full of stories of shell-shocked Omanis worried about the fact they were in debt to the eyeballs and were about to be ... OMG!!! out of work. There was a strong expactation that it was up to the Government to 'do something!'.

If the sub $50 oil stays for a while, some of the local employees might start to find out what happens in most other countries when there is a big slowdown: unemployment.

But, as there is no system of unemployment benefit in the Sultanate, this would indeed be potentially devastating, what with school fees to pay, and debt payments to make.

As anyone who works here knows, sacking Omani employees is far from easy, if not effectively impossible without a clear case of fraud. Because of family connections somewhere, or if lacking wasta they will complain to the Ministries, who will then put pressure on the company to keep them on the payrole. This situation may come under some pressure in 2009, and that may turn out to be a good thing. I think the system should be radically updated to both provide some form of compulsory unemployment insurance and to make it as easy to hire and fire local staff as Expat staff.

Of course, under-employment is nothing new in Oman, but this sort of thing has been common for some time in the real world...

The National

Oman, Iran, budget on $45 a barrel oil
Tamsin Carlisle
December 03. 2008 3:35PM UAE

Oman and Iran are planning 2009 budgets based on $45 a barrel oil, following a record decline in crude prices by about $100 a barrel since July.

The Omani council for financial affairs and energy resources agreed this week to amend the average oil price assumed in the sultanate’s budget to $45 from $55, while Iran’s government and a parliamentary committee have an initial accord to base next year’s budget on $45-a-barrel crude, in place of a previous price assumption of $55 to $60 a barrel.

The revisions are likely to mean that both Gulf states will either run deficits next year or will have to slash government spending to balance their budgets.

The International Monetary Fund has estimated Oman’s break-even oil price at $77 for the current fiscal year, and Iran’s at $90, significantly higher than for most other Gulf states.

Record oil revenues earlier this year helped Oman post a large budget surplus of 912 million rials (Dh8.7 billion) for the first quarter of its current fiscal year, instead of a forecast deficit. However, sharply lower oil prices later in recent months will have eroded the state’s chances of avoiding a deficit for the full year.



  1. I agree with you. One of the biggest problems is the artificial rigidity of the labor market. Relaxing the firing/layoff process might actually increase employment of the locals. Combine that with a well designed, not to generous, unemployment insurance, and we might have us a Labor market.
    With reference to Oil prices, do you expect prices to be as low for the next couple of years? Just curious on your take.

  2. Per,

    Man, if I knew the answer to that, I wouldn't need to be here working.

    But its hard to believe it can stay sub-$50 for much more than a year. In the end, it will depend on OPEC cutting production significantly, and that means Saudi bringing Iran and Venezuela into line.

    But... will they? The Americans will want low prices, both for the economy, and to give a wake up call to Iran/Venezuela/Russia. And Saudi still rely heavily on US support.

    Plus, extreme volatility is a fundamental outcome of the oil market, when marginal costs are so low for everyone, but especially the big producers (<$2/bbl), and there is huge 'beta' due to the nature of the physical market combined with leveraged speculation.

    All I can be relatively sure of, long term (>5yrs), the average oil price must go around $80 at least, or the world will just not not get the massive investment needed to sustain production, and supply will naturally wane.

  3. Omanis dont know about lay offs and redundancies because the labor market is still in its infancy (not because of ignorance) ... as the market place matures and become more (or less) regulated with Oman entering into more international agreement you will see that all these things will start to change ... its a process that has a positive long term impact ...

  4. Everyone keeps lamenting economy this, economy that. I for one think it's great; it gives companies an excuse to get rid of deadwood.

    -Omani in US

  5. Much as I like the idea of oil holding up over $50 - $75 bl for the sake of all our jobs, I do think a hard rain is gonna fall. What say $20 in Q1 2009? Also, if it does go real low can Obama do a Beach Boy's hit on the NG in Iran?

    Willie Dryer

  6. If it goes to $20, I'll be in there like a shot.
    From what I have been reading and speaking to people about, it is highly unlikely that it will fall much lower.
    If it stays around $50 for a year and then starts to creep up, I think it would be a nice investment.

    (Just my probably highly naive and amateur "stock market newbie" opinion.)


  7. I would disagree that Americans are interested in cheap oil. The outgoing administration wants expensive oil for their buddies (drill baby drill); the incoming administration wants expensive oil to justify planned investments into green energy and infrastructure.

    There is no way we will see $20 oil. Unless China takes a long weekend off. Once winter really kicks in state-side (one-two months), we'll see prices going up again. The Farmer's Almanac is predicting a brutal winter as well. So no worries, your jobs are safe =D

  8. I think it might drop slightly to 40 at the max. It's my opinion only , not a fact. Oil is very sensitive to bad (and good) news and we have had more than our share of bad news for the past 3 months.

    I believe the reasons why oil will not go any lower are:

    1. The whole world is already either in recession (US, Europe, Japan etc.) or witnessing slowing growth (China, India, Russia and the GCC)

    2. The US dollar has appreciated quite a bit in the same period (it is known that a strengthening dollar translates to a lower oil price)

    3. Even with all of this financial meltdown , oil consumption did not drop, only increase in consumption has been much lower than expected.

    A lower oil price could be witnessed if China and India slow down drastically or enter recession, but look on (hope for) the brighter side always.

    Lets all believe my opinion so we can feel safe about our jobs (again) :)

  9. Omanymous

    By 'know' I mean having knowledge through first hand experience. And in general Omanis have not experienced lay offs, etc, very much.

    To an extent, I agree. Everything was getting totally crazy before the crash. If you were in cash, you did well.

    Willie, Boxster, JD, T...
    Lets hope. I'd prefer $80 as soon as possible. Its all up to Saudi.


If you wish to post anonymously, please pick a nickname by selecting the Name/URL option, or at least sign off your comment with one! I will delete comments I find objectionable or needlessly inflammatory. Sorry for the word verification.... OMG the spam has gotten BAD these past 12 months... trying to avoid making one log in...