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Continuing low oil prices cause Gulf crisis

Reese Erlich, Oman
July 17, 2015

Low oil prices mean Oman faces rising unemployment and slashed public spending. But the crisis has also increased pressure to diversify the economy, as Reese Erlich reports from Oman.

Oil derrick, Muscat, Oman.
Image: DW/R. Erlich

Lower oil prices may be a boon to European consumers but oil producing countries like Oman are experiencing a crisis.

Crude oil prices in the Gulf have dropped around 40 percent from their peak last year. As a result, oil exploration and drilling companies are not digging new wells and workers on existing oil rigs face unemployment, according to Saud al Salmi, chair of the trade union at Petroleum Development Oman, the country's largest oil company.

Al Salmi says contracts between the workers and oil drillers used to be automatically renewed.

"Now some contracts are finishing and there is no other contract coming," he said. "The companies basically started laying off staff.

And the impact of the crisis isn't limited to those directly employed in the oil industry.

Slashing public spending

Oman is among the Gulf countries that are heavily dependent on oil to fund their national budgets. The Omani government made $4.35 billion from oil sales in the first quarter of this year, down 35 percent from one year ago.

It now plans to slash its spending on defense by a quarter, and halve social spending.

"We need to learn from previous ups and downs of the oil price, and not sleep when the prices are high," said al Salmi. "Keep that money for the dark days when prices go down."

But so far, that hasn't happened. During boom times, the Omani government spent freely on subsidizing gasoline, as well as in social spending to appease Arab Spring demonstrators.

Corruption and lavish spending on the country's autocratic monarchy also drained billions of dollars from the national budget.

According to Sadeq Sulaiman, a former Omani ambassador to the United States, the budget cuts won't hurt the rich.

"The most affected is the middle class, not the top people," he said. "They can survive, like the Gulf States, for another 30 years with the money they have."

Omanis blame Saudi Arabia

Many Omanis believe Saudi Arabia holds at least part of the blame for their economic woes. They suspect their neighbor of maintaining high production in a deliberate bid to drive down prices, dealing a blow to its foes Iran and Russia, while grabbing market share from US oil producers.

Oil in Oman: Sadeq Sulaiman, former Omani ambassador to the USA
Sadeq Sulaiman is a former ambassador to the US who says the Saudis want to keep oil prices low.Image: DW/R. Erlich

Sulaiman says Saudi Arabia keeps production high for a number of reasons – including to fund its current war with Yemen.

"Their security needs have increased a lot," said Sulaiman. They produce more to spend more.”

But he says political motives may also play a role.

"I wouldn't discount completely that there is (an) element of a political kind of consideration as far as Russia is concerned, as far as Iran is concerned, by keeping production high."

Diversifying the economy

Regardless of the cause, low oil prices are hitting Oman hard. A massive 77 percent of the country's budget comes from oil revenue.

As far back as 1990, Oman's leaders discussed the importance of diversifying the economy to become less dependent on oil. Yet today the country has almost no manufacturing or agricultural production.

Tawfeeq al Lawati, a member of the executive committee of Oman's Shura Council or lower house of parliament, says the country plans to develop manufacturing, transportation and tourism.

Oil drilling
Oman depends on oil for more than two-thirds of its budget.Image: Getty Images/J. Raedle

A first step is to develop refineries to process oil into diesel and other petrochemicals.

"We have a business plan," he said. "Rather than exporting an oil barrel for 100 dollars, adding value to it by refining it and having different derivatives, which could also lead to different chemical products."

Logistical hub

The government is also building a huge, modern port in Duqm, on Oman's central coast. Currently, ships exporting oil from Iran or Iraq must pass through the Straits of Hormuz. Ships carrying manufactured goods traverse the Straits in the other direction.

In recent years, wars and political instability have closed the Straits. Al Lawati says the Duqm port could become an alternative shipping route.

Oil producers could store their product in Duqm and then load it onto modern tankers. Other ships could offload in Duqm and transport their goods by land to the nearby countries of the Gulf Cooperation Council, or GCC, such as United Arab Emirates or Qatar.

"Oman could become a main logistics hub for the region," said al Lawati. "The government is upgrading the infrastructure, the transportation, even the introduction of the railway and linking it with the GCC."

Still, similar plans for economic development have been discussed in Oman for years. It remains to be seen whether they will be put into action.

DW correspondent Reese Erlich's most recent book is "Inside Syria: The Backstory of Their Civil War and What the World Can Expect," now available in English and Arabic.

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