Oman to backpedal on key reforms in favor of social stability

Al-Monitor Pro Members

Sebastian Castelier

Business journalist covering Gulf economies

Jan. 2, 2023

The wave of economic reform that has swept through Oman since 2020 to rein in budget deficits spinning out of control enters a consolidation phase. Elevated oil prices in 2022 fueled a buyback of public debt to put state finances on a short-term sound footing. Still, the underlying economic landscape remains fragile as diversification plans struggle to take shape. A rebound in global tourism fueled by the return of Chinese tourists benefits Oman, but its positioning on high-end markets prevents the sector from becoming a central pillar of the local economy. Investments in gas and hydrogen are a glimmer of hope.

 

Scenario 1: Oman backs the wrong horse

Green hydrogen is not the holy grail; critics say it is an inefficient and expensive use of renewable electricity. Green hydrogen is bleeding energy at each stage of the value chain. According to the International Renewable Energy Agency, about 30-35% of the energy used to produce hydrogen through electrolysis is lost. The conversion of hydrogen to other carriers, such as ammonia, can result in an additional 13-25% energy loss. If 10% leaks from production to use, the environmental benefits of using green hydrogen over fossil fuels would be completely wiped out; scientists told Reuters. Also, large amounts of fresh water required to produce hydrogen is an issue in the water-scarce region. “There is no solution; it has to go with desalination,” Al Harthy said, noting that new technologies could provide an alternative to the energy-intensive process. “We are not going to touch groundwater to produce hydrogen; the main source will be desalinated water,” Al Shidhani corroborated, mentioning potential plans to build desalination plants along the coastline between Duqm and Dhofar.

Notwithstanding fair questioning over the environmental relevance of green hydrogen, direct electrification of heavy industries still present technical challenges, offering an opportunity for green hydrogen to step in to replace the current use of fossil fuel-based hydrogen. Global hydrogen demand reached 94 megatonnes in 2021, but only 1% of the production is low-emission hydrogen. According to estimates, GCC countries could reap $70 to $200 billion in annual revenues from hydrogen by 2050 if the green hydrogen market takes off.

Scenario 2: Oman backslides to the good old days

The taxation of people’s purchasing power through VAT fetched Oman $896 million during the first half of 2022. Still, despite all key rating agencies revising Oman’s credit rating outlook upward in 2022, social discontent builds up among citizens. The government already sent gestures of appeasement. The previous decision to phase out residential electricity subsidies by 2025 was adjourned, and neither personal income tax on high earners nor a VAT rate increase will be implemented this year. Omani news outlets now run reports to inform the local audience that the “sizeable” portion of the 2023 budget allocated to basic services such as education, health, housing and social welfare underscores the government’s “commitment to sustaining the well-being” of the Omani population. “The risk is always that when the oil is doing well, the incentive to reform is kind of put on hold,” Sievers told Al-Monitor.
 

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.