Oman’s Make or Break Economic Transition


Oman's turbulent journey on oil and post-oil tracks in a cash crunch.

Oman’s Make or Break Economic Transition

Dr. Leif Rosenberger, Chief Economist, ACERTAS


The Sultan of Oman thought he had a problem back in 2011 when Arab Spring swept across his country. [1] Unemployment – especially among the youth – was acute and Oman had the lowest per capita GDP in the GCC. The Sultan was understandably fearful that social unrest could threaten his monarchy unless his government did something decisively to buy off dissent.

The price for quickly buying off dissent was high: The Sultan opted for 50,000 new government jobs, raised the minimum wage for government employees, launched a new jobless benefit, subsidized around 84,000 low-income households, almost doubled university enrollments and increased the monthly stipend for students. [2]

At the time, creating a bloated public sector appeared to be a prudent quick fix to placate the locals. And when the price of oil was $110 a barrel in mid-2014, the Sultan felt his price for buying off dissent was affordable and necessary. But that overspending would ultimately come back to haunt the Sultan. By early 2015, Oman’s world turned upside down and the global oil market was all of a sudden not what it used to be. (For why oil prices fell, see Appendix).

New Normal in Global Oil Prices

Now let’s fast forward to the summer of 2019. All that government overspending to placate the locals during Arab Spring has created financial instability in this previously rich country. The global oil market has cleared and the average global oil price is around $65 a barrel. [3] This $65 a barrel new normal in oil prices is a far cry from $110 a barrel in mid-2014 and not nearly high enough to create financial stability in Oman.

The financial picture of Oman’s government will remain strained in the near term (12 to 18 months) as long as global oil prices are below the so-called break-even threshold in Oman. This break-even price refers to the price per barrel at which Oman’s oil must be sold for Oman to have enough oil revenue to break even on its budget. Since Oman’s break-even price is $85, that $20 a barrel differential means that Oman’s budget deficit is way too high.

The IMF says just cut overspending. The Sultan of Oman is afraid that taking away the benefits his government gave the locals to buy off dissent could jeopardize his monarchy. The trick is to do something economically decisive while maintaining political stability. Finding that sweet spot in the short run is not easy.

To cut to the chase, the Sultan’s reluctance to balance the books and possibly jeopardize the monarchy translates into a full-blown financial crisis. The credit rating agencies – Moody’s, Fitch and Standards & Poor’s -- have all downgraded Oman’s debt score from investment grade to junk. That makes it a lot harder for Oman to borrow money at an affordable interest rate to finance its debt.

There are good reasons for these downgrades. As a rule of thumb, the EU Maastricht criteria say a budget deficit at or above 3% of GDP is financially unstable and government debt at or above 60% of GDP is also financially unstable. Oman’s budget deficit in 2019 is an alarming 9% of GDP and its government debt is above 60% of GDP and rising. Reducing debt as a percentage of GDP is especially difficult given the fact that the IMF says there is virtually no economic growth in Oman in 2019.[4] To make matters worse, economists are predicting a global recession in the near future.

In addition, there are social challenges on the home front. Unemployment is still stubbornly high. Moreover, IMF pressure on the government to opt for fiscal austerity measures to reduce fiscal spending is not playing well with the locals 9in Oman. In January 2018 protests erupted in Muscat and Salalah and are spreading to other Omani cities.[5]

For too long, Oman’s oil economy has been like a circus with just a one trick pony. When something happens to the pony, the circus has no replacement waiting in the wings. A few years back the government came up with Vision 2020, a good idea to diversify the economy and make it less vulnerable. But there was no sense of urgency when oil prices were over $100 barrel. So, the vision was not fully implemented. Now that all three credit rating agencies have downgraded Oman’s credit and see a negative economic outlook for Oman, there is finally a sense of urgency to do something.

The good news is history is Oman’s friend. This is not Oman’s first rodeo when it comes to reinventing its economy. Over the years a resilient Oman has reinvented itself in a variety of ways. Back in mid-19th century, Oman was a prosperous entrepot for arms and slaves. When Oman declined as an entrepot, it turned to agriculture, camel and goat herding, fishing and handcrafts.

Almost 50 years ago Oman reinvented itself again as an energy producer. That drove Oman’s dramatic economic development. But Oman is no Saudi Arabia. In contrast to 265 billion barrels of proven Saudi oil reserves, Oman’s government says Oman only has a modest 4.8 billion barrels left of proven oil reserves. In fact, Oman has the smallest fossil fuel reserves in the Persian Gulf. In addition, Oman’s oil and gas supplies are depleting fast and set to disappear in 14 and 27 years respectfully. To make matters worse, the oil is expensive to extract. [6]

So, when Oman started to see signs it would run out of oil relatively soon, Oman decided to reinvent itself once again. Along the way, the Sultan prudently invested surplus oil earnings to strengthen the economy for the long run by shoring up its pension fund, reducing its debt, and augmenting its reserves.

As a result, Oman actually has some financial buffers on the domestic side to help the cause. On the trade front, its foreign reserves are more than adequate. Oman has 5 months of import cover. As a rule of thumb, a country’s foreign reserves are adequate if they provide 3 months of import cover. In addition, Oman’s Sovereign Wealth Funds provide an additional financial buffer. On the foreign front, Oman has a longstanding commercial relationship with China. In fact, China buys most of Oman’s oil. So, when all else fails, we will see later in this paper that China can help fill the gaps.

Two Economic Tracks

But crisis management is not enough. Oman needs to somehow generate stronger economic growth if the government keeps refusing to “bite the bullet” politically and decisively cut spending. The Sultan has decided to hedge his bets. Instead of putting all his eggs in one basket, the government has a two-track approach;

· The first track is to get serious about post oil-diversification of the economy.

· The second track is to keep Oman’s hydrocarbon economy going but make diversify its product lines and make it better.

One thing is certain. Oman's overall economy is still heavily reliant on the hydrocarbon track, which supplied over 75% of government revenue and over 60% of export revenue in the first 11 months of 2018. [7]

That said, Oman’s economy is riding on both tracks. But there is lots of uncertainty here:

· How long will it take for a post-oil economy to be competitive and generate significant economic growth?

· If the post-oil economy is sluggish getting out of the starting blocks, how much more can Oman’s government squeeze out of the hydrocarbon economy and how long will that take?

· In other words, which economic track is more promising and why?

Post-Oil Diversification Track

Once before a complacent Oman government talked now and then about diversifying the economy as part of Vision 2020. This time Oman’s government is more decisive. Oman’s economic strategists have designed Vision 2040, a more urgent drive to accelerate transition toward a post-oil Omani economy. The Sultan hopes the end result will be a more balanced, sustainable knowledge-based economy. To offset the economic decline of hydrocarbons, Oman’s government is targeting 5 strategic economic sectors -- manufacturing, tourism, transport/logistics, mining and fisheries.

Vision 2040 and Malaysian Model

In hopes of avoiding the pitfalls of a half-baked Vision 2020, Oman’s government worked closely on Vision 2040 with the Malaysian government’s Performance Management and Delivery Unit (PEMANDU). Oman’s government adopted a Malaysian model called the National Program for Enhancing Economic Diversification (TANFEEDH).[8] Its chief objectives are to accelerate implementation of the five business sectors, develop measurable indicators of progress and do reports on the progress.

While Vision 2040’s emphasis on private sector development is a positive first step, the transition is easier said than done. There remain challenges to improving the business environment. Too often in the past, Omani government officials thought that just having a workshop or doing a report was a solution rather than a means to an end. In other words, they often failed to implement the recommendations. [9]

Cultural differences may also make the Malaysian model less effective in Oman than it was in Malaysia. For example, a major reason for delays is the top‑down manner of decision-making within Oman's bureaucracy. Even minor matters are often passed up the hierarchy, an attitude that may prove different to shift. [10]

Singapore Model

The Sultan looks at Singapore as a role model for where Oman wanted to go as a regional gateway. Oman works closely with Singapore to reinvent itself as a hub for shipping and industry. From a historical perspective, being a regional maritime hub is not new to Oman. As cited earlier, Oman was a prosperous entrepot for arms and slaves back in the mid-19th century. Once again, Oman will try to leverage its vast stretch of coastline reaching the strategic Strait of Hormuz.[11]

As fate would have it, Oman also benefits from the Saudi led boycott of Qatar. Oman lets vital supplies get through. The Omani port of Sohar, which usually slows down during the summer, was buzzing in the summer of 2017. Cargo volumes were up by 30% as more ships arrived carrying goods bound for Qatar. [12]

Oman’s ports became the new gateway to Qatar, supplanting the port of Jebel Ali in Dubai. Qatar Navigation, a major Doha-based shipping and logistics group, announced in early August that it was moving its regional transshipment hub to Oman's Port Sohar from Jebel Ali Port in the UAE. [13]

And when Qatar Airways was barred from Saudi airspace in June 2017, Omani airplanes (rented by Qatar) ferried stranded passengers from Jeddah to Doha. Since then, ties between Oman and Qatar have strengthened. Nearly 150 Qatari investors showed up for a recent event in Oman to explore investments in Oman. Then in September 2017, Omani and Qatari businesses strengthened their economic ties. Oman Global Logistics Group and Qatar Ports Management Company signed a Memorandum of Understanding (MoU) for the development of shipping, passenger ferry and logistics services. [14]

Interestingly enough, the Saudis did not retaliate against Oman. Oman was able to secure $210 million in financing from Saudi Arabia in January 2018. The Saudi Fund for Development, one of Saudi Arabia's state-run agencies, signed a deal with the Omani authorities to finance infrastructure development at Duqm. Some of the money will be used to build a road while the rest of the money will be utilized to develop a fishing harbor in the Duqm industrial zone. [15]

At first glance, being a regional aviation hub is new for Oman. But Oman Aviation Group is catering to the international community which values Oman’s entrepot traditions, heritage and sense of being a safe place in a turbulent region. This approach is working. Oman’s government has made impressive progress using aviation to scale up the transport and logistics sector. In 2018 aviation created more than 980 direct Omani jobs. Aviation also supported nearly 8,000 indirect jobs in Oman and reportedly contributed more than $259 million in economic efficiencies.[16]

Oman Aviation Group is performing as a value engine of Oman’s economic growth by fully unlocking the potential of Oman’s logistics sectors. Oman Aviation Group is reaching out to other well-established aviation-related brands within the freight, hospitality, food and healthcare segments. Oman Aviation Group exchanges ideas and attracts a new set of tenants and investors to further boost airports’ development across Oman. [17]

A new airport terminal in Muscat International Airport also makes a difference. In 2018 the new airport generated a 27% increase in revenue growth, reportedly saw more than 1.3 million passengers and 215,000 tons more air cargo travel through Muscat alone. Instead of being complacent with its success, however, Oman Aviation Group has already set lofty targets to reach 40 million passengers by 2030. In addition, Oman’s National Air Cargo Strategy is planning to increase cargo tonnage to 780,000 tons by 2030 and 1.5 million tons by 2040. [18]

The airport has teams working on key national initiatives such as developing airport vicinities, distribution plans, and growing sea-to-air cargo capability. The Oman Aviation Group also plays a pivotal role in developing Omani young talent with the relevant skillsets. [19]

Aviation is also making progress in using cross-sector collaboration to advance the 2040 vision. The airport connects other key business sectors. In particular, Oman Aviation Group is working to attract new freight-related ancillary businesses to the region while increasing cargo loads. In this regard, the Oman Aviation Group has worked closely with the country’s Ministry of Agriculture and Fisheries to devise novel approaches to expand Oman’s global reach.

As a global exporter of food products, Oman has been a major exporter of green beans to Japan since 2016. And its tomatoes have long been popular to other countries in the GCC, Africa and parts of Europe. When it comes to fish exports, France has long been one of Oman’s top customers. Fisheries will reportedly increase fish production this year to reach 1.4m tons. [20]

National Railway

Toward this end Oman’s government collaborated with Singapore and embraced the Singaporean model of achieving prosperity through combining this role of a trans-shipment and logistics hub with Singapore’s free trade and business-friendly policies. To implement this vision, the Sultan is also planning a new national railway. The establishment of a railway network is crucial in the long run in order to provide a land route to transport goods to its Gulf neighbors. Oman has significant mineral resources (including gypsum and limestone). A domestic rail system will more efficiently enable Oman to transport heavy minerals to its ports.

The railway will be a domestic network linking its ports at Sohar, Duqm and Salalah with Oman’s oilfields and mineral deposits. By developing ports such as Duqm, Sohar and Salalah, Oman is attempting to position itself as a logistics hub connecting the Indian Ocean with the Gulf. [21]

Salalah Port

Salalah Port also adds value as a leading transshipment hub. Salalah Port is made up of a container terminal with 7 berths and a general cargo terminal of 12 berths. Salalah Port’s maritime infrastructure can handle the world's largest container vessels, as well as bulk cargo, bunkering and warehousing. In addition, Salalah Port is strategically located at the major East-West Shipping Lane. Salalah Port is well located to access the Middle East, Indian Subcontinent and East Africa. Salalah Port also provides one of the fastest transit times from the region to connect businesses to the Asia-Europe trade lane.[22]

Sohar Port

In addition, Sohar Port is gaining traction as a promising maritime hub. Back in the fall of 2017, Oman's Sohar Port signed a contract with Trescorp, a Singapore-based oil company, to build a $600 million oil terminal. Once operational in 2020, the Sohar oil terminal will help to boost Oman’s export earnings, thereby contributing to stronger GDP growth and reducing the cash crunch of high budget deficits and debt as a percentage of GDP.

The new Sohar terminal will have 6 deep-water berths, one of which will be capable of receiving very large crude carriers (VLCCs) of up to 320,000 deadweight tonnage. In the first phase, the oil terminal will receive, store and blend crude oil, fuel oil and diesel. In the second phase the oil terminal will blend additional hydrocarbons products, including petrol and jet fuel.

In addition, China Harbor Construction Company’s capacity expansion work at Sohar has facilitated direct calls from larger vessels and an increasing number of Asian shipping lines, thereby contributing to the port’s emergence as the largest dry bulk cargo facility in the Middle East and South Asia. [23]

Since Sohar Port has deep-water access, it is likely to play a vital role in Oman’s plans to make itself an important logistical hub in the region. Sohar Port is geographically located on the Gulf of Oman, next to the chokepoint of the Strait of Hormuz where ships pass from the Indian Ocean into the Gulf. Sohar Port is also only a short distance from Iran, thus providing the opportunity to ultimately reach Oman’s goal of dramatically increasing trade volumes with Iran. [24]

Port Duqm

Of the three sites, the port at Duqm has emerged as the flagship venture of Oman’s port expansion and a major contributor to Oman’s 2040 diversification.[25] The Special Economic Zone Authority of Duqm (SEZAD) manages, regulates, and develops all economic activities at the port. [26] Duqm Port has attracted foreign investors and foreign businesses and has already transformed Duqm into a gateway port and maritime trans-shipment hub for the region. [27]

Just as the Malaysian government provides a useful management model, Oman has also drawn upon the Singaporean “experience” — and on Singaporean talent. In describing the rationale for embarking on construction of oil storage facilities at Duqm, Omani officials reference the success that Singapore has had in using oil storage to foster economic diversification. [28]

SEZAD’s Chief Executive, Lee Chee Khian, is a Singaporean. [29] Under Lee Chee Khian’s watchful eyes, Singapore was the site of a September 2013 “Duqm Calls” promotional campaign organized by SEZAD to showcase investment opportunities in Oman. [30]

Oil and Gas Track

Despite the Sultan’s efforts to diversify Oman’s economy and launch a post-oil economy, Oman is not about to abandon or even shortchange the oil and gas economy. [31] The oil and gas industry arguably remains the dominant economic track and will stay that way for quite some time. But can this oil and gas track diversify its product lines and make it better to boost GDP growth? How much more can Oman’s government squeeze out of the oil and gas economy and how long will that take? Actually, quite a bit and it is already happening.

For starters, it helps to have an energy baseline. Oman's total production capacity currently stands at 1m barrels/day (b/d) of oil (crude and condensates) and 110m cu meters of natural gas per day. That includes domestic and foreign energy production in Oman. [32] Oman’s state-controlled Petroleum Development Oman (PDO) has achieved its highest oil output—610,170 b/d in 2018—since 2005 and it intends to further increase production to 670,000 b/d over the next five years. [33]

PDO continues to dominate Oman's oil and gas sector, but its near monopoly is over. There are now 19 international and domestic oil and gas companies competing for market share. That said, PDO remains by far the most important player, accounting for about 70% of Oman’s total oil output and the bulk of its gas production. A breakdown of ownership in PDO reveals the Omani government with a 60% majority share. The other shares belong to Royal Dutch Shell with 34%, Total with 4% and Partex with 2%. Increasing oil output in recent years has given PDO the confidence to announce a planned increase in oil capacity to 670,000 b/d in the next five years. [34]

Domestic Power Shortages

For the past four years it’s become clear that Oman was unable to supply enough power to meet domestic demand. This shortfall in power reflected the country's rising demographics as well as the needs of an industrializing and diversifying economy. Over the mid-term and long-term, new sources of natural gas would help the cause and the potential was also there for serious investment in renewables. [35]

But four years ago, the issue was also an immediate one, affecting both the domestic and external sectors. In 2015 Muscat saw regular power cuts and there were shortages all across Oman—including in Salalah, Sohar and Sur. Inefficiency in production and the incompetence of employees also played their part. On the foreign front, the Qalhat LNG plant was plagued by spare capacity back in 2015 because power was redirected away from it to meet domestic demand. Only 7.95 million tons of fuel were created out of a possible capacity of 10.4 million. This spare capacity was due to Oman’s LNG exports which had to be rescheduled, thus reducing Oman’s GDP growth and worsening the budget deficit. [36]

Rising Demand for Power

The regularity of power shortages across Oman in 2015 and the delaying of gas exports cited above pointed to the overriding problem: rising domestic demand. Power generation reached 15,290 gigawatts in the first half of 2015 —a 13.8% year-on-year increase, which was not expected by the government and which also clearly still did not meet demand. This rapid expansion was expected to continue, with average power demand expected to grow by about 10% on average over the 2015‑19 period. [37]

Why was this rising demand happening? What were the drivers of this soaring demand for power?

First, population growth was contributing heavily to this increase. Oman's population experienced a 25% increase from 2010 to 2015 and Oman’s population was expected to increase by a further 12% by the start of 2020. This rising population in Oman obviously meant a rising demand for power. [38]

Second, the government assumed that this rising population could potentially rise yet further if instability in the region prompted an inflow of refugees or expatriate workers. Oman's border with Yemen, for example, was 288 km long and Yemen had a population of around 24m. If civil war continued over the next few years, then Oman would struggle to contain refugees from Yemen. [39]

Third, significant parts of this rising population also had more disposable income. Private consumption was expanding and the government expected that as a percentage of GDP, private consumption would rise from 30.4% in 2014 to 38.9% in 2020, with private consumption per capita increasing from US$6,230 a year to US$7,390 over the same period. [40]

Fourth, the diversification of Oman's economy away from oil was also playing a major part in increasing electricity demand. The government invested heavily in infrastructure—as part of Oman's Vision 2020 diversification scheme, $150bn worth of construction projects were either planned or under way in order to add to the country's infrastructure. As cited earlier this involved developing Oman’s its transport network to enhance the economy and enable Oman to become a gateway to the region. Key to this strategy was the construction of the planned national rail network, which would link Oman's ports. The rapidly expanding road and airport networks would also play a key role. [41]

Fifth, the expansion of tourism also required far higher levels of electricity for building hotels. 21 hotels were built in 2014 and at least another 50 were expected to be finished in 2015. Higher levels of electricity were also required for furnishing and maintaining these hotels. The Omani air conditioner market, for example, was projected to boom. Total tourism production was up by 8% year on year in 2014. Tourism added $1.9bn in revenue to the economy in 2014, which represented an 11% year-on-year rise. Its contribution to GDP also rose to 2.2% in 2014. Oman’s tourism minister expected tourism to rise to 5% of Oman's GDP by 2020. The long-term trend for tourism was one of impressive growth. [42]

Solutions to Power Shortages

In response to the serious shortages facing electricity supply and in anticipation of the five drivers of demand worsening, the government took some decisive steps to help the cause. To address the problem of domestic power shortages, Oman has done its best to increase domestic and foreign supplies of natural gas. PDO had one of the largest hydrocarbons finds in the world in 2018. It has potential reserves of 4.5trn cu ft. An initial agreement was signed in May 2018 by the parties and an interim agreement covering the funding and work program for 2019 was signed in late February. The energy majors Shell and Total, both shareholders of PDO, signed a production-sharing agreement with the oil and gas ministry for the project later in 2019. [43]

Downstream projects are tied to Mabrouk gas field development. Despite being within PDO's huge Block 6 concession, the Mabrouk gas field will be operated by Shell, and its development is tied to the creation of two integrated downstream gas projects.

· Shell, which will have a 75% share in the field, is to build a gas-to-liquids plant at Duqm port with the Oman Oil Company.

· The French company Total, with remaining 25% share, will develop a liquefied natural gas (LNG) bunkering service for vessels calling at Sohar port. [44]

Although this foreign natural gas minimizes the amount of investment that a state-controlled company like PDO must raise for the project, it will ultimately reduce the pace of revenue growth for the government. Given the squeeze on public finances and the downgrading of Oman's credit rating by major ratings agencies, further agreements of this sort are likely. [45]

The government is eager to develop the downstream projects to maximize in-country value and create job opportunities for Omanis. However, with relatively few Omanis working in the construction sector and the low number of jobs created by large scale industrial projects, the direct benefit in terms of employment is likely to be limited. [46]


While significant progress was being made in gas power generation, the option with the most untapped potential is renewable energy, specifically solar energy. Oman has consistently clear skies and receives extensive solar radiation, giving it some of the best conditions for solar energy in the world—it receives up to 7,900 gigawatt of solar energy a day. The size of expansion in the alternative energy sector will be important in tackling the country's electricity shortages, because the gas will not last forever and domestic demand will continue to rise. [47]

Solar Power Plant

In May 2019, the Omani government awarded a large solar power plant to a consortium of two Kuwaiti companies and a Saudi-based company. The project, dubbed Ibri-2 Independent Power Producer (IPP), will be the first utility-scale solar power project in Oman. It will also be the first project of its kind to combine desalination and private enterprise. It will utilize Solar PV technology to yield 500MWac of power. At peak generation capacity, the plant output will be enough to supply an estimated 33,000 homes with electricity and will offset 340,000 tons of carbon dioxide emissions a year. It will be developed on a BOO (build, own, operate) basis, which includes the development, finance, construction and operation of the solar power plant. [48]

Slow Progress with Renewables

Despite the significant potential for renewables, particularly solar and wind energy considering Oman's hot climate and extensive coastline, progress was initially quite slow. Back in 2016, one problem was the low subsidized price at which natural gas was sold to power generators. At just over US$3/ million BTU, it was well below global prices even though it was doubled at the beginning of 2015 and that global market prices have fallen sharply. Even, with subsidies for utilities set to be reduced in 2016, the price was still too low. The second issue was the lack of expertise with solar and wind energy, which prevented price and cost efficiency.

Still Low Capacity.

That said, Oman's low capacity in the power sector has continued to be an obstacle to economic growth. With electricity demand set to grow by around 10% a year, and the government already delaying scheduled LNG (liquefied natural gas) exports to meet domestic demand, the timely completion of the several large-scale power projects will be important, as will the development of renewable energy.

Back in 2016 over 85% of Oman's population of 4.4m was connected to the Main Interconnected System (MIS) that serves northern Oman. Peak demand in the MIS grew from about 2,540 mw in 2006 to 5,120 mw in 2014. Consumption of electricity in the MIS over the same period grew at an average annual rate of about 10%.

According to Oman Power and Water Procurement Company (OPWP), the state-owned procurer of all new power generation and water production capacity, peak demand in the MIS is projected to grow about 9% per year. Meanwhile, peak demand is expected to grow even faster at the Dhofar Power System in the Southern governorate, at 10% a year.

Large Plants Under Construction

The good news is several independent power projects have been initiated by OPWP over the past year to help meet rapidly rising demand. For instance, there is the construction of Ibri-Sohar‑3 power plant. A 15‑year power purchase agreement was signed in early 2016 between OPWP and a consortium led by Japan's Mitsui.

The project consists of two gas-fired power plants, one of 1,450 mw capacity at Ibri, and another of 1,700 mw at Sohar. A condition of the power purchase agreement is that around 50% of Ibri's power is available from 2018, with full commercial operations scheduled at both sites for 2019.

This will, in theory, enable demand to be met until 2021 in the MIS, with the plants supplying just under one-third of the electricity consumed in the capital, Muscat, and surrounding area. Elsewhere, the Mitsui-led consortium is also developing a new 400‑mw power plant in the Salalah Industrial Area in southern Oman. The total project cost is estimated at $630 million. With several major power projects in the pipeline, the long-term future of Oman's power generation appeared to be relatively secure.

Substantial Downside Risks.

However, there were always substantial downside risks to this optimism. First, Oman's rapid population growth could exceed OPWP expectations. Second, the push towards diversifying the economy could also see power demand rise above OPWP estimates. As a result, power shortages continue to be an issue. The expansion of the industrial sector is being limited now and given that most of the large projects are unlikely to be operational for a few more years. These power shortages will continue to be a drag on short-term economic growth prospects.

Spot Market for Power in 2020

On the positive side, Oman is preparing to roll out the Middle East’s first Spot Market for the electricity sector in 2020. The market is scheduled to begin operational trials during 2020 and commercial operation is targeted for the end of 2020. This platform promises to open the power sector to competition for the first time. The Spot Market enables power plants that are no longer covered by existing electricity supply contracts to compete for the opportunity to offer some or all their capacity to the grid. It will drive further efficiency improvements and provide a means for generation capacity that is not contracted to OPWP to sell power into the national grid. Most importantly, it will make available additional capacity that might otherwise not be readily accessible through the existing procurement channel. [49]

In addition, Oman has made progress in other areas as well. For instance, Oman has been at the regional forefront of innovation in the power sector. Oman has led the Persian Gulf region in the successful privatization of its electricity and water desalination sectors.

The Role of China:

No discussion of Oman’s economic transition would be complete without mentioning China. The first thing to understand is that there is nothing new about China’s economic connection to Oman. China has been the top importer of Oman’s oil since 2003. Second, Oman exported 70% of its oil to China in June of 2019. In other words, Oman has a strong, longstanding commercial relationship with China.

So, when the price of oil fell and the credit rating agencies downgraded Oman’s bonds from investment grade to junk, China was there with a large infusion of investment capital and infrastructure support to help its longstanding trading partner. At the same time there was a natural harmony of economic interests. Oman’s aim of transforming the Port of Duqm and the surrounding Special Economic Zone (SEZ) converged with China’s Belt and Road Initiative (BRI) to build a maritime and land infrastructure for Beijing’s version of a “New Silk Road.”

These convergent interests have already yielded concrete results. In 2016, the China-initiated Asian Infrastructure Investment Bank (AIIB) allocated $265 million for port infrastructure and $36 million for railway projects to support a capacity expansion program at the Duqm project. [50] Most importantly, a group of Chinese investors signed a 50-year agreement with the Omani government in 2016 to develop a $10 billion Sino-Oman Industrial Park at Duqm. This will be a massive endeavor comprising 35 projects, which are to be developed in phases, with the first tranche to be completed by 2022. Six private Chinese companies will be building a machinery assembly unit, a food processing plant and a major refinery. [51]

Over-reliance on China?

Some observers say this increase in Oman’s financial reliance on China is a significant risk to the Omani economy. If China was the only country involved that concern might be worth considering. But that is not the case.

· First, in the rest of Asia, Oman is working closely with Malaysia in implementing Oman’s economic transformation model.

· Second, Oman is also working closely with Singapore to achieve prosperity through combining free trade and business-friendly policies with its role as a trans-shipment and logistics hub. [52]

· And third, Oman is also big in Europe. The UK’s BP, Royal Dutch Shell and Total from France are still major energy companies committed to Oman’s oil and gas industry.


Oman also has plenty of friends in the Persian Gulf. And in Duqm, there’s not just China. Take Kuwait. Kuwait Petroleum Corporation (KPC) signed a 50:50 partnership agreement with state-owned Oman Oil on 10 April 2017 to develop an oil refinery at Duqm. Kuwait’s planned 230,000‑barrels/day (b/d) refinery is the centerpiece of the Duqm development, Oman's flagship economic diversification project, with plans to manufacture several petrochemicals in adjoining facilities. [53]

Thus, any concerns that observers in America might have that Oman’s rise of economic activity with China makes Oman over-reliant on Beijing is ill-advised. If the Trump administration was genuinely concerned about Oman’s financial challenges, it might want to try more social inclusion and shared prosperity with Oman.


Arab Spring came along in 2011 and threatened the monarchy of the Sultan of Oman. The Sultan bought off dissent with lots of public spending. That decision would come back to haunt the Sultan. At the time the Sultan could argue that a bloated public sector was affordable when the price of oil was over $100 a barrel.

But the collapse of oil prices changed everything for the Sultan. The new normal of about $65 a barrel oil is $20 below the $85 a barrel break-even level for a balanced budget. The Sultan continues to use a bloated public spending to buy off dissent. But that $20 differential between the $65 a barrel new normal price of oil and the break-even price of $85 a barrel translated into budget deficits of 9% of GDP. Since the Maastricht limit is under 3% of GDP for financial stability, Oman’s financial instability triggered alarm bells. The credit rating agencies downgraded Oman’s bonds from investment grade to junk. Thankfully, Oman has financial buffers and a reliable benefactor in China, its longstanding trading partner. That will likely enable Oman to weather the storm.

But crisis management is not enough. The Sultan realizes that Oman could no longer rely on a one trick pony. A one-dimensional economy based on exporting crude oil makes Oman too vulnerable. Oman needs to diversify its economy. But the Sultan still wanted to dance with the girl who brought him to the party. So, he was not about to abandon or even short-change the oil and gas economy. But time is running out. Oman’s oil and gas supplies are depleting fast and set to disappear in 14 and 27 years respectfully. To make matters worse, the oil is expensive to extract.

The Sultan decided to hedge his bets. Instead of putting all his eggs in one basket, the government has a two-track approach; The first track is to get serious about post oil-diversification of the economy. The second track is to keep Oman’s hydrocarbon economy going but make diversify its product lines and make it better.

One thing is certain. Oman's overall economy is still heavily reliant on the hydrocarbon track, which supplied over 75% of government revenue and over 60% of export revenue in the first 11 months of 2018. That said, Oman’s economy is riding on both tracks. But there is lots of uncertainty here. How long will it take for a post-oil economy to be competitive and generate significant economic growth? If the post-oil economy is sluggish getting out of the starting blocks, how much more can Oman’s government squeeze out of the hydrocarbon economy and how long will that take? In other words, which economic track is more promising and why?

One of the most pressing challenges for Oman has been a shortfall in electricity. Power shortages continue to produce black-outs and brown outs. Why is this rising demand for power happening? First, population growth was contributing heavily to this increase. Second, there has been an inflow of refugees or expatriate workers from the civil war in Yemen. Third, significant parts of this rising population also have more disposable income. Fourth, the diversification of Oman's economy away from oil was also playing a major part in increasing electricity demand. Fifth, the expansion of tourism also required far higher levels of electricity for building hotels. The Omani government has responded by building more power plants, including the first major solar power plant.

But it takes time to build power plants. What’s not clear yet is whether enough power plants can be built fast enough to offset the soaring demand for power in Oman in the years ahead. On the positive side, Oman has made progress in several areas. Oman has been at the regional forefront of innovation in the power sector. Oman has led the Persian Gulf region in the successful privatization of its electricity and water desalination sectors. Oman is also preparing to roll out the Middle East’s first Spot Market for the electricity sector in 2020. Most importantly, it will make available additional capacity that might otherwise not be readily accessible through the existing procurement channel.

Oman has been criticized for relying too much on China for its investment capital and projects for the post-oil economy. Once again, there is reason for optimism. The Sultan can make a persuasive case that he is not only relying on China. He’s using a Malaysian management model. He’s using a Singapore model to be a regional hub. He’s making energy deals with the UK’s BP, Total from France and Royal Dutch Shell. And Kuwait’s plans for an oil refinery is the centerpiece of the Port Duqm development, Oman's flagship economic diversification project. In short, the Sultan is dancing with lots of girls at the party.

Appendix – Why Oil Prices Fell [54]

In the past, environmentalists used to warn everyone that the world would soon run out of oil. Not anymore. If there is one thing that is certain, it is that the world suddenly had plenty of oil. Thanks to breakthroughs in energy technology, the new game changer was the discovery of 30 more years of oil supply (or one trillion more barrels of oil) than oil experts said existed only a before. This new oil supply involved unconventional oil extraction of shale oil in the United States, oil sands in Canada, and deep-water oil in Brazil.

In the past, Saudi Arabia was the swing producer. If the Saudis cut oil production, prices rose. Not anymore. When Saudi Arabia cut production in August 2014, oil prices actually fell. Rising U.S. oil production more than offset Saudi cuts in oil output.

In the past, geopolitical risks in the Persian Gulf would cause oil prices to rise. Not so much anymore. Short of a major oil disruption in the Mideast, low oil prices reflected an oil glut outweighing weak demand for oil. Geopolitical risk was a minor driver.

In the past, Wall Street used to worry about inflation. This was particularly true after the global financial crisis when the US Federal Reserve (Fed) bought a trillion dollars’ worth of global assets to boost weak global demand. That spooked Wall Street, which felt the Fed was creating runaway inflation. As a hedge against inflation, Wall Street investors bought vast quantities of oil in the futures market. That distorted the market and drove oil prices sky-high, but investors guessed wrong. Inflation never happened. Long positions in high oil prices began to unwind, and that caused oil prices to nosedive.

In the past, economists also used to worry about inflation. Not anymore. On a global basis, serious economists are no longer worried about inflation. The new worry is deflation, weak demand and a rapid Chinese economic slowdown.

Rising oil supplies, weak demand, financial shifts on Wall Street and a strong U.S. dollar all put downward pressure on global oil prices. To the horror of Oman, global oil prices fell about 50 percent in December 2014 from their peak in mid-July 2014. When oil prices dropped significantly in the past, OPEC would simply cut their production to bolster the price. The market shrugs off the risk and oil producers outside OPEC increase production and just fill the gap.