Market Forces Versus Smart Policy: How Much Credit to Sultan Qaboos for Oman’S Oil-Derived Development?

Working Paper

Market Forces versus Smart Policy: How Much Credit to Sultan Qaboos for Oman’s Oil-Derived Development?

Jim Krane, Ph.D. Wallace S. Wilson Fellow for Energy Studies

© 2021 by Rice University’s Baker Institute for Public Policy. This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and the Baker Institute.

Wherever feasible, papers are reviewed by outside experts before they are released. However, the research and views expressed in this paper are those of the individual researcher(s) and do not necessarily represent the views of the Baker Institute for Public Policy.

INTRODUCTION1 Oman was among the world’s least-developed countries when it began exporting oil in 1967, under the rule of Sultan Said bin Taimur al Bu Said. For three years, the fiscally conservative ruler received a new and plentiful flow of revenue. The next year, Said announced the first development plan since coming to power in 1932. He would build a port, hospitals, roads, a girls’ school and utilities.2

Before Sultan Said’s plans could be completed, the 59-year-old monarch was overthrown. In July 1970, a British-led coup brought Said’s 29-year-old son Qaboos to power. The projects launched by Sultan Said would be completed by Sultan Qaboos, a more profligate spender who leveraged the oil industry established under his father to fund a major increase in development spending.

The change in income and leadership shifted Oman onto a trajectory of rapid modernization. The sultanate entered a renaissance period that propelled it from medieval isolation into the ranks of advanced countries, with indicators documenting enormous advances in life expectancy, education, and infrastructure. Oman has since become known as the Switzerland of the Middle East, as much for its aesthetically pleasing urban evolution as for its political neutrality.

This paper seeks to determine the key events and decisions that contributed to this outcome. How much credit should be given to Sultan Qaboos and his increased willingness to spend, and how much to factors outside his control, particularly the discovery and export of oil shepherded by his father? How much should be attributed to factors under British influence?

Further, Oman’s positive experience is often cited as evidence of an oil “blessing” rather than the “curse” documented in other oil exporters. Is this assessment realistic? Has Oman suffered effects of the so-called “oil curse?”

Among its findings, this paper argues:

1) Oman's development depended on British diplomatic and military assistance in centralizing Sultan Said’s control over geographically dispersed oil gas fields. These fields were outside the area governed by the sultans of Muscat before 1955.

2) The successful development of an oil sector in Oman also owes itself to decades of perseverance and strategic policymaking by Sultan Said, along with foreign investors willing to accept substantial political and geological risk.

3) Major changes in the terms of trade in global oil markets were a crucial factor. Earnings from Oman’s oil exports more than sextupled within four years of the 1970 coup, providing the incoming sultan with an unexpected windfall that supercharged an already willing expansion of fiscal policy.

1 This paper was written for inclusion in the forthcoming book Sultan Qaboos and Modern Oman, 1970–2020 edited by Allen James Fromherz and Abdulrahman al-Salimi (Publishing with Edinburgh University Press, 2022) 2 The Word of the Sultan, cited by J.E. Peterson, Oman After 1970: A House of Cards Transcended (IB Tauris, 2022); Ch. 4, 9-10.

4) The improved rent flows provided cover for Sultan Qaboos’ early missteps in oil sector administration that saw declines in Omani production.

5) Qaboos’ early commitment to development spending synergized perfectly with the increase in oil rents, ensuring rapid economic expansion and improved quality of life.

Timing of the 1970 coup was also important. Oman’s oil income rose nearly 20-fold during Sultan Qaboos’ first decade in power. Historical documentation of Sultan Said’s fiscal and social conservatism suggests that, presented with a similar opportunity, he would have been less willing to spend so freely.

By 1986, as international oil prices and revenues declined with the onset of a nearly two-decade bust, Qaboos had sufficiently institutionalized new governance and spending practices and defeated a virulent insurgency in the Dhofar region. Just fifteen years after the coup, Oman was already a very different country. AN OMANI RESOURCE CURSE? While this paper is mainly concerned with recognizing and attributing the institutional milestones of Oman’s oil development, it bears mentioning that the Omani oil “blessing” makes it something of an outlier. That experience is not shared by many other oil exporting states, including some of Oman’s neighbors, which endured “resource curse” effects such as reduced economic growth, currency appreciation and Dutch Disease effects on employment and exports, institutional deficiency, reduced opportunities for women, oppression of minorities, militarization and war.

In some ways, Oman did fall victim to the oil curse. The sultanate has not transitioned to democracy. Sultan Qaboos diverted substantial shares of resource revenues to finance weapons purchases and procure himself a lavish palaces and a private jet. Five decades after the 1970 coup, Oman’s economy remains volatile, due to dependence on oil and gas exports and their swinging valuations. Women are still underrepresented in the workplace and governance, while Omani society retains rent-seeking expectations toward state subsidies and employment.

But Omanis might not see the “curse” in Qaboos’ tenure. Oman, the most extreme and persistent case of pre-oil underdevelopment in the Gulf, leveraged oil in transformative ways not associated with the resource curse. So, while oil rents financed a proportionally large defense budget, oil did not make Oman more warlike. Rather, Sultan Qaboos leveraged oil rents to end a civil war and, later, to mediate between other warring parties in the region.

Oil rents improved national infrastructure and institutions in public health and education. Oil wealth helped create a national identity and add more than 16 years to average life expectancy. Resource booms can provide temporary cover for mistakes in policymaking, as demonstrated in Venezuela under Hugo Chavez. But these mistakes are often exposed when oil market prices fall. Oman’s oil-financed development model showcases a more durable path, that of a leader who leveraged a boom to make spending choices that prevailed over the long run, and converted Oman into a developed country.

INITIAL DATA AND BENCHMARKS Although pre-1970 data on Oman is inadequate, the available indicators show that Oman was a development laggard in comparison with the oil-producing countries around it. Oman had much lower

2 life expectancy in 1960 and 1970 (42.7 years and 50.3 years, respectively), versus that in the United Arab Emirates (51.5 and 61.2), Kuwait (59.3 and 65.7) and Qatar (61.1 and 68.1).3

School enrollment was also far lower in 1971, with just 2.8% of school-age Omanis attending in 1971 versus 80% in the UAE, 89% in Kuwait and more than 100% in Qatar, where older Qataris were also enrolled. By 1980, Oman had jumped to 49% while the UAE increased more modestly, to 91%. Enrollment in Kuwait and Qatar that year was again above 100% due to older students seeking formal education.4

Oman’s late start is an important part of the story. Where oil discoveries started in 1930s in Bahrain, Kuwait, Qatar and Saudi Arabia, and the 1950s in Abu Dhabi, oil in Oman did not come on stream until the 1960s. The late start meant that Oman’s early oil production occurred on far more generous fiscal terms than that of the neighbors. In this sense, Oman contrasts sharply with Bahrain, another state with a small endowment. Bahrain saw its oil largely depleted over more than 40 years of production by western IOCs, before the sector was nationalized in 1975-78. Oman’s partial nationalization occurred just seven years after exports began. From the very beginning Omanis enjoyed higher oil prices and a larger share of the profit.

The charts below depict energy indicators dating to the period before and after the 1970 coup. Oman’s energy consumption, oil production, and oil exports all trailed those of the neighbors, which provides an alternate view of the late start to national development. Importantly, Omani oil production lagged during the crucial boom period of 1973-85.5

3 World Bank, World Development Indicators, March 2021; Life Expectancy at Birth (total years); https://data.worldbank.org/?locations=OM-AE-QA-KW 4 World Bank, World Development Indicators, March 2021; School Enrollment, primary (% gross); https://data.worldbank.org/?locations=OM-AE-QA-KW 5 Global oil prices rose from $3/barrel to $12 in 1974 and averaged nearly $37 in 1980, before falling below $20 in 1985 and remaining low until 2004. BP, “BP Statistical Review of World Energy 2020,” statistical report (London: BP, June 2020), https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world- energy/downloads.html.

Figure 1: Primary energy consumption in Oman remained at very low levels through 1980; Source: BP 2020

As Fig. 1 shows, overall Omani energy consumption remained extremely low under Sultan Said’s rule, rising only modestly after the coup. Omani energy demand remained relatively flat through 1980 in comparison with the rapid growth in similarly sized neighbors with more oil. Figure 2, below, shows that energy consumption per capita grew after the coup but remained far lower than that of the neighbors.

Primary energy consumption per capita 1000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0

Gigajoule per capita 200.0 100.0 - 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Kuwait Oman Qatar United Arab Emirates

Figure 2: On a per capita basis, Omani energy demand remained much lower than its neighbors, reflecting a slower pace of development (Source: BP 2020)

Oil production 2500

2000

1500

1000

500

- 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Oman Qatar United Arab Emirates

Figure 3: Omani oil production was also lower than that of its GCC neighbors. (Source: BP 2020)

Omani oil production was also lower than that of comparable countries, as Fig. 3 shows, as was the sultanate’s oil exports, shown in Fig. 4.

Implied oil exports (production-consumption) 3500

3000

2500

2000

1500

thousands b/d thousands 1000

500

- 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 -^

Kuwait Oman Qatar United Arab Emirates

Figure 4: Omani oil exports stagnated at levels below those of even Qatar (BP 2020)

Oman’s oil exports—and presumed revenues—were little affected by the coup. Omani oil exports in the early period shown above peaked in 1970 at 321,000 b/d and fell slightly after the coup. Exports recovered temporarily in 1975 and 1976, but dipped again and did not surpass 1970 levels again until 1983, at 370,000 b/d. At that point, significant investment in the oil sector brought a steady ramp-up of Omani oil production (Fig. 5). Unfortunately, the increase came too late to take advantage of the boom and coincided with falling oil prices and the long “oil bust” period from 1985-2003. (See Fig. 9 below)

Oman oil production since 1967 (kbd) 1200

1000

800 1970 Coup 600

400

200

1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Figure 5: Omani oil production was flat between 1969 and 1983. Source: BP Statistical Review of World Energy 2020

POLITICAL AND GEOPOLITICAL CONTEXT FOR OMANI OIL DEVELOPMENT The history of the Omani oil sector is a complex one, unfolding amid a backdrop of great power rivalry for concession agreements and territorial control over the oil-rich Arabian Peninsula. The competition pit American-backed exploration against that of Great Britain. The British Foreign Office backed Sultan Said bin Taimur partly as a way to secure oil supplies that could be exported from ports outside the vulnerable Hormuz chokepoint. British backing for Said was also based on thwarting competing Saudi- American oil prospecting and seizure of open lands in the interior, including areas under the influence of the Ibadhi imamate, where sympathies with Saudi King Ibn Saud were strong. The Foreign Office wanted to prevent tribes in what is now Oman from declaring fealty to Ibn Saud, thereby bequeathing the surrounding land—and any oil—to Saudi-American control.

But the policies of Sultan Said bin Taimur were among the biggest roadblocks to the British plan. Said’s governance was capricious and harsh.6 Even before oil, the sultan warned his British advisers that oil

6 Said provided no public education or health services and established few communications or travel links inside Oman. His rule was characterized by repressive restrictions such as bans on foreign travel and purchasing of

6 funds would not be spent on development or on training Omanis to govern. Said saw no need to provide even basic schooling. Given the lack of skilled work in the country, Said felt that an educated populace would either emigrate or rise up against him.7 As it turned out, Said’s governance practices were an even stronger incentive for revolt, largely inspiring the Dhofar insurgency of 1965-76, as detailed in various historical works, particularly Takriti’s Monsoon Revolution.

British advisers clashed with Sultan Said over his neglect of human and economic development, and over the counterinsurgency methods of the Sultan’s Armed Forces or SAF, a largely mercenary army.8 British support for development was largely self-serving. As Takriti argues, the Foreign Office saw development spending as key to the preservation of British interests in the Gulf: First, spending would undermine support for the Dhofar rebellion and hostile Communist or Arab nationalist ideology; and second, spending was necessary to provide the stability necessary for Oman to govern itself and become a supplier of oil to the developed world.9

As momentum swung behind the rebels, British interests in oil flows and access to military bases was being jeopardized. Even with oil rents flowing after 1967 and the British urging—even funding— development, the sultan agreed to only token public investment on his subjects’ behalf.

Oil played an important role in the discussions to overthrow Sultan Said. As far back as 1965, Royal Dutch Shell’s representative in Oman called for British intervention to force Said to “change his ways” and use the public purse to undercut the insurgency. Since Shell was then the dominant partner and operator of oil joint venture Petroleum Development Oman10, or PDO, the sultan’s forced social penury damaged Shell’s reputation in Oman and its relations with Omani employees. Eventually the oil company joined the anti-Said camp.11

Untrusted and actively opposed by much of his own population as well as by governments and ruling sheikhs in neighboring countries, the British were Sultan Said’s final bulwark. A rebel ambush in

property outside one’s local region. He tolerated no imported culture or technology for his subjects, including eyeglasses, radios, umbrellas, and games like soccer. He maintained and practiced slavery until 1970, with the sultan the largest slaveholder in Oman. After an assassination attempt by rogue members of his own guard, Said abandoned Muscat and lived as a recluse in remote Salalah, even less trustful and more disdainful of his subjects. 7 This view comes from numerous sources, including Abdel Razzaq Takriti, Monsoon Revolution: Republicans, Sultans, and Empires in Oman, 1965-1976, Oxford Historical Monographs (Oxford: Oxford University Press, 2013), 45. 8 The sultan punished defeated rebels and their communities, while British methods (honed in Malaya) sought to protect and reward surrendering or defeated villages and fighters. 9 Takriti, Monsoon Revolution: Republicans, Sultans, and Empires in Oman, 1965-1976, 148. 10 I use PDO to refer to the company holding and operating the 1937 concession in Oman and Dhofar, even though the company changed names and shareholders. The original concessionaire was the Iraq Petroleum Co. or IPC, and its five shareholders. The first four shareholders each held stakes of 23.75%: Royal Dutch Shell, Anglo-Persian Oil Co. (the precursor of British Petroleum or today’s BP), Compagnie Française des Pétroles (now Total), Near East Development Co. (a joint venture of Standard Oil of New Jersey, later Exxon; and Socony-Vaccuum, later Mobil). The fifth firm, Partex, held 5%. IPC transferred the concession to a subsidiary, Petroleum Concessions Ltd., which, in turn, created two operating units, one for Dhofar and a second for Oman. Upon relinquishing the Dhofar concession in 1951, the company thereafter became known as Petroleum Development (Oman) or PDO. See: Calvin H Allen and W Lynn Rigsbee II, Oman under Qaboos: From Coup to Constitution, 1970-1996 (Routledge, 2014), 9. 11 Takriti, Monsoon Revolution: Republicans, Sultans, and Empires in Oman, 1965-1976, 150–52.

7 northern Oman in June 1970 that included a broad cross-section of Omani participants finally convinced Said’s British advisers to foment the coup that overthrew him a month later.

Recent writing on the coup, including the memoirs of an Irish mercenary participant12 and a book and pair of journal articles by Takriti13 (based on British historical archives and local revolutionary sources) all but eliminate agency on behalf of Omanis in the overthrow of Sultan Said bin Taimur. As Kane describes, the only ethnic Arabs involved in the coup hid under the stairs in the sultan’s palace as the British-led company of the Sultan’s Armed Forces pressed the assault with rifles and a machine gun. The sultan, armed with a semi-automatic pistol, fired upon his mutinying mercenaries, but SAF troops returned fire and shot the Omani ruler four times. The wounded sultan stood his ground until an SAF company commander threatened to incinerate him with a white phosphorous grenade.14 Under such extreme duress, Said signed a British-drafted abdication document and handed power to Qaboos, who had provided verbal support for the coup. Said was evacuated for medical care in Bahrain and exiled to Britain, where he lived out his final years in London’s Dorchester Hotel. Said bin Taimur died in 1972 at age 62, two years before the big oil shock in 1974 that would begin to transform his country.15

OIL UNDER SULTAN SAID, INCLUDING SPENDING OF OIL RENTS Sultan Said’s legacy was clearly not in developing Oman’s human capital or in enlightened or responsive governance. Even so, Said’s contribution was crucial to Oman’s modernization because it laid the groundwork for enlightened governance. In a nutshell, Said leveraged subsurface mineral development to re-establish16 centralized control over the disjointed territories that were later fused into the nation- state of Oman.

Sultan Said accomplished this in two ways, both of which leveraged British help. First, Said convinced the British to recognize his authority over all of Oman.17 Second, Said convinced the companies—and the British government—to provide military assistance to establish such control. That came about in reality through a PDO-funded, British-led force. Of course, British strategic interests overlapped with those of Said, since neither wanted the increasingly Saudi-leaning imamate to use American-owned Aramco to develop oil in the interior, which would imply Saudi sovereignty.

The oil exploration and production process was contentious, deadly, and riven with failure. It unfolded over a half-century.

12 Ray Kane, Coup d’Etat Oman, Kindle Edition (Seattle: Amazon, 2014). 13 Takriti, Monsoon Revolution: Republicans, Sultans, and Empires in Oman, 1965-1976; Abdel Razzaq Takriti, “The 1970 Coup in Oman Reconsidered,” Journal of Arabian Studies 3, no. 2 (2013): 155–73. Abdel Razzaq Takriti, “Colonial Coups and the War on Popular Sovereignty,” The American Historical Review 124, no. 3 (2019): 878–909. 14 Kane, Coup d’Etat Oman, 223–30. 15 Kane, 248–49. 16 Re-establish, because Oman had previously been unified during the existence during the 18th and 19th centuries of the great Omani trading empire, governed from Zanzibar, which included present day Oman along with portions of East Africa and what is now Iran and Pakistan 17 Francis Owtram, A Modern History of Oman: Formation of the State since 1920 (New York: IB Tauris, 2004), 93.

Figure 6: Oman's oil and gas fields lie outside the area controlled by the sultans of Muscat before 1955. Oil was found mainly in imamate lands to the north-west and in tribal areas in the southwest. (Source: EIA 2021) OIL PROSPECTING AND TERRITORIAL CONSOLIDATION Oil exploration in Oman turned out to be far more difficult than in most other Gulf monarchies, where, other than in the UAE, oil was discovered relatively quickly after the start of exploration. In Bahrain, for example, American prospectors made a commercial discovery on their very first drilled well, in 1932. In Oman, by contrast, first oil came 37 years after the granting of the initial exploration license,18 and after numerous unsuccessful bouts of exploration, surveying and well drilling.

Complications included the vast size and harsh climate of the Omani landmass as well as the locations of the most promising prospecting sites. These sat far from the coastal strip controlled by the Al Bu Said, a factor that increased the cost of transporting oil, and—more importantly—that rendered prospecting sites beyond the jurisdiction of the sultan of Muscat, despite the sultan being the signatory of concession agreements ostensibly granting access. This was problematic for oil companies, which needed to sign concession agreements with a sovereign government that monopolized political control

18 to the D’Arcy group in 1925

9 over the lands to be explored.19 Oman had neither firm territorial boundaries nor centralized sovereignty.

Some authors described the access problems faced by foreign investors as the result of “inhospitable” tribal or imamate-governed areas in the Omani interior. This was indeed the case—the Ibadhi imam refused to grant access by westerners to central Oman between the 1930s and 1955.20 But the lack of “hospitality” may have been a factor of foreign investors pursuing concessions through an authority— the Sultan of Muscat—who held little sway over the lands to be explored, rather than through the tribal leaders who, at least initially, did hold such sway. But the sultan, like other regional sheikhs, consciously leveraged oil exploration to expand and consolidate his territorial claims.

Kechichian describes the process as a competition for rents that could enforce political control. “From the mid-1930s onward, therefore, a race between oil specialists and diplomats started, to explore (and eventually produce) oil, before it was legally determined in which territory the fields were located. The Sultan failed to consult the Imam before granting his concessions, knowing full well that the exploration would be carried out in areas under the Imam’s jurisdiction.”21

Sovereignty aside, exploration teams most wished to explore geological prospects that emerged in an aerial survey of the al-Dhahirah region around Ibri, in the north-central part of Oman overseen by the Ibadhi imam. Sultan Said’s 1937 concession with PDO theoretically granted access to al-Dhahirah. But Sultan Said blocked oilmen from prospecting in the region on claims of dangerous tribal hostility. The 1937 concession borrowed a clause from the original 1925 exploration agreement that allowed the sultan to stall development.

“The company recognizes that certain parts of the Sultan’s territory are not at present safe for its operations. The Sultan undertakes on his part to use his good offices with a view to making it possible for representatives of the company to enter such parts and will inform the company as soon as such parts become safe.”22

Sultan Said’s strategy sought (and ultimately succeeded) in using delays and other difficulties to incite sufficient frustrations among prospectors, who lobbied for British help in establishing Al Bu Said control over the lands in question. A similar oil-driven sovereignty process unfolded in Dhofar, discussed below.

Initial prospecting under the 1937 concession focused on the contested Buraimi oasis and areas under Al Bu Said control along the al-Batinah coast. Those efforts failed. World War II delayed further exploration. When prospecting resumed in the late 1940s and through most of the 1950s, the sultan allowed oil encampments along the coast at Duqm but still refused to grant PDO permission to send exploration teams to al-Dhahirah. Instead, the company conducted an arduous survey in 1948 of the far southwestern region of Dhofar—a six-week trek of 375 miles upon a caravan of 76 camels. That survey

19 Thomas Bierschenk, “Oil Interests and the Formation of Centralized Government in Oman, 1920-1970,” Orient (Hamburg) 30, no. 2 (1989): 205–19. 20 Bierschenk. 21 Joseph A. Kecheichian, Oman and the World: The Emergence of an Independent Foreign Policy (Santa Monica, Calif.: RAND, 1995), 35. 22 Owtram, A Modern History of Oman: Formation of the State since 1920, 81.

10 also found nothing, convincing PDO to relinquish the Dhofar portion of its concession in 1951.23 (PDO retained its concession for the rest of Oman.) BRITAIN PROVIDES MILITARY BACKING In 1954, Sultan Said began consolidating control over the imamate lands, the key event that allowed exploration teams to find what would become Oman’s most lucrative oilfields. The imposition of Al Bu Said sovereignty over the imamate, completed in 1959, 24 ultimately led to oil rents flowing to the ruling family, including Sultan Qaboos, after 1970.

Territorial consolidation dates to a 1950 decision by the Foreign Office to recognize Sultan Said’s sovereignty over the whole of Oman. This forced oil executives to deal solely with the sultan in gaining access to prospects, rather than continue negotiations with sheikhs of three major tribes of the interior. Understanding that Said was unable, on his own, to secure oil exploration in lands beyond his control, the foreign office blessed PDO’s financing of a new military unit, the Muscat and Oman Field Force, which significantly bolstered the sultan’s armed forces.

In 1954, the British-commanded MOFF captured the imamate town of Ibri while escorted a PDO drilling team from Duqm into al-Dhahirah. Sultan Said then sent his own military to capture the remaining imamate territory, including the main town of Nizwa, which fell in 1955. The British-led Trucial Oman Scouts, based in Abu Dhabi, performed the final piece of the territorial amalgamation that year by expelling a small Saudi occupying force from Buraimi, leading to the division of the oasis between Abu Dhabi and Oman.25

The territorial consolidation of 1955 gave the Al Bu Said control over northeastern Oman and established initial boundaries with Saudi Arabia and Abu Dhabi. These actions began to address political risks to foreign investment in the Omani oil sector. But serious hurdles remained.

What might have happened had Sultan Said failed to capture the imamate? An interesting counterfactual arises when considering how oil development might have proceeded. It’s possible that oilfields in al-Dhahirah may never have been exploited had imamate leaders succeeded in attaching their territory to that of Saudi Arabia. The American executives at Aramco may well have concluded that the small fields with modest amounts of oil and gas in place—in comparison with super-giant Saudi fields still in production today—would not warrant the investment required to produce and transport the oil hundreds of miles to the Saudi coast. PROSPECTING IN AL-DHAHIRAH Regardless, territorial consolidation was just the first of several problems to be solved before Oman would join the ranks of the world’s oil exporting states. With the imamate banished, exploration teams still had to find oil.

23 PDO was known as the Iraq Petroleum Co. at the time of the Dhofar exploration. Michael Q. Morton, “The Search for Oil in Oman,” GeoExPro, 2012, https://www.geoexpro.com/articles/2012/06/the-search-for-oil-in- oman. 24 The ousting of the imamate led to the Jebel Akhdar rebellion, in which imamate forces mounted small-scale attacks until British forces defeated them in 1959. 25 Owtram, A Modern History of Oman: Formation of the State since 1920, 88–92.

Early interest centered around promising geology seen in an aerial survey covering Jebel Fahud, a 27- kilometer-long dome rising above the sand and gravel uplands in al-Dhahirah. PDO was sufficiently wary of residual opposition to go to the trouble of airlifting its drilling rig to the site to avoid exposing it to attack. In 1956, PDO drilled the Fahud-1 well. The site chosen was extraordinarily unlucky, drilled too close to a fault and missing by 200 meters what later turned out to be a lucrative pay zone.26

Despite its precautions and military escort, PDO’s exploration team at Fahud was soon embroiled in renewed conflict between Sultan Said and residual imamate forces, which had retreated to the mountain wilderness of the Jebel Akhdar. By 1958, the imam’s supporters had procured small arms and American land mines from Saudi Arabia, and began a campaign of guerrilla ambushes on PDO convoys traveling to Fahud.27

By the fourth dry hole PDO drilled at Fahud, the company had nothing to show for £12 million in investment. The compounding adversity in Oman—contrasting with the bountiful production and welcoming attitudes in nearby Abu Dhabi—led, in 1960, to departure from Oman of most of PDO’s equity partners, including some of the world’s largest oil companies: British Petroleum (now BP; formerly Anglo-Persian Oil Co.); Standard Oil of New Jersey (later Exxon); Mobil (formerly Standard Oil of New York); and Compagnie Française des Pétroles (CFP, now Total). Shell remained, becoming the majority shareholder and manager of PDO, which it still manages today. Partex retained a small stake and Total returned in 1967 to reclaim a minority stake.28

PROSPECTING IN DHOFAR—AND FIRST OIL As difficult as exploration was in the imamate lands around Fahud, oil prospectors in Dhofar—returning after PDO’s 1951 departure—faced an even more menacing reception. The first shots fired in the Dhofar rebellion were directed at oil exploration vehicles and personnel.

In 1955, Oklahoma-based Cities Service Co. bought into the Dhofar concession relinquished by PDO and drilled a few wells. One, at Marmul in 1957, actually did strike oil. However, the economics were unviable due to the well’s weak rate of flow and the low value of Marmul’s heavy crude. Oman’s first producing oil well was abandoned and Cities Service left Oman.29

Texas-based Mecom Oil Co. took over the Dhofar concession in 1962. In 1963, al-Kathir tribesmen held up two Mecom vehicles as they attempted to cross the mountain pass north of Salalah. Tribesmen killed a gendarme escort provided by Sultan Said and pushed one of the vehicles over a cliff. Takriti writes that the rebels were motivated by revolutionary intent—but also by umbrage over companies prospecting on Kathiri land without tribal permission or remuneration. Mecom exploration crews suffered further attacks on vehicles and installations, one of which killed the head of its prospecting camp. Mecom and

26 Geological Society of Oman, “Jebel Fahud: Fahud 50 Years On,” Historical overview (Muscat: Geological Society of Oman, January 2006), http://home.kpn.nl/~lilian_schreurs/oman/Fahud.htm. 27 Allen and Rigsbee II, Oman under Qaboos: From Coup to Constitution, 1970-1996, 20. 28 Allen and Rigsbee II, 22–23. 29 Allen and Rigsbee II, 17; Morton, “The Search for Oil in Oman.”

12 its two American partners (Continental Oil Co. and Union Oil Co.) fled Dhofar in 1967, declaring force majeure after drilling nothing but dry holes amid rebel assaults.30

Meanwhile, back at Jebel Fahud, the reorganized PDO, now dominated by Shell, returned to its prior drilling site. A new well, in 1964, was drilled on the opposite side of the troublesome geological fault. The well struck oil in commercial amounts just a few hundred meters below the surface. At last, the persistent prospecting—and the sultan’s territorial machinations—had paid off. Together with the discovery at nearby Yibal in 1962—Oman’s first commercial oil discovery—and the Natih field in 1963, the Fahud discovery finally elevated Oman into the ranks of oil producers.

The Fahud 2 well was brought on stream in 1967. Initial production sent 57,000 barrels/day31 down a 175-mile pipeline to the new Mina al-Fahal terminal on the Gulf of Oman. Oman’s first export shipment of 544,000 barrels left Mina al-Fahal on July 27, 1967, sold for just $1.42/bbl or about $770,000.32 The sultanate and its PDO partners earned $1.82 for each exported barrel until the end of 1970.33

30 Martin Waldron, “Texas Wildcatter’s Empire Is Running Dry,” New York Times, February 15, 1971. Abdel Razzaq Takriti, Monsoon Revolution: Republicans, Sultans, and Empires in Oman, 1965-1976, Oxford Historical Monographs (Oxford: Oxford University Press, 2013), 62, 76. 31 Eventually, 5 million barrels would be extracted from Fahud. But by 1974, tapering output at Fahud required water injection and other enhancement techniques.). M. Searle, “Preserving Oman’s Geological Heritage: Proposal for Establishment of World Heritage Sites, National GeoParks and Sites of Special Scientific Interest (SSSI),” Geological Society Special Publication 392 (2014), https://doi.org/10.1144/SP392.2. Also: Allen and Rigsbee II, Oman under Qaboos: From Coup to Constitution, 1970-1996, 122–23. 32 Geological Society of Oman, “Jebel Fahud: Fahud 50 Years On.” Morton, “The Search for Oil in Oman.” Ray Petersen, “What Is PDO?,” Oman Observer, June 26, 2017, online edition, https://www.omanobserver.om/what-is- pdo/. 33 Allen and Rigsbee II, Oman under Qaboos: From Coup to Constitution, 1970-1996, 127.

Figure 7: Omani oil basins feature small fields far from the coast, hemmed in by the Hajjar Mountains in the north. Although Yibal was discovered first, it was far from the coast (and closer to Saudi Arabia) and only brought on stream in 1969. (Source: 34)

OIL PRODUCTION and RENTS TO 1970 Despite the political and geological factors endangering oil operations in Oman, Sultan Said managed to procure generous contractual terms with Shell-dominated PDO. Oman’s initial take included 50% of profits as well as 12.5% of the oil itself (most of which was presumably marketed overseas by Shell).

34 Richard M. Pollastro, “Ghaba Salt Basin Province and Fahud Salt Basin Province, Oman -- Geological Overview and Total Petroleum Systems,” U.S. Geological Survey Open File Report 99-50-D (1999), https://pubs.usgs.gov/of/1999/ofr-99-0050/OF99-50D/OF99-50D.pdf.

PDO’s production of 240,000 barrels per day brought the sultan £25 million in 1968, with output rising to 327,000 b/d in 1969 and bringing revenues of £34 million.35

By contrast, a producer that discovered oil in the 1930s or earlier would have expected royalty payments somewhere between 5% and 20% of gross revenues.36 Bahrain’s share was 14% from the start of exports in 1934 until 1950.37 Venezuela was the first country to receive a 50% fiscal take of the profits, which eventually became the norm globally by the 1960s.38 Bahrain won the same share of profits in 1952.39

Unlike Venezuela, Oman was not a member of the OPEC cartel, founded in 1960. But the sultanate did benefit from the cartel’s escalating demands for improved terms of trade from Western oil companies. Since Omani oil exports came so much later than those of its neighbors, it received terms that would have been much improved by OPEC’s negotiations with Western IOCs. Eight years after the cartel’s founding—and just one year after the start of Oman’s oil exports—OPEC announced that oil producers should have full sovereignty over their resources.40 That announcement was a prelude to the rash of nationalizations that began to sweep the globe in the 1970s.

ASSESSING SULTAN SAID’S ROLE IN OIL AND DEVELOPMENT Clearly, the oil production and export sector that transformed Oman’s economy was created on Sultan Said bin Taimur’s watch. Without Said’s long and uncertain campaign to bring the imamate and later Dhofar under centralized control, Oman may never have developed an oil sector. But oil exports provided only the means to modernize. Given the well-known pitfalls of leveraging oil for national advancement, enlightened policy was also required. In this department, the parsimonious sultan was notoriously deficient.

Peterson argues that Sultan Said’s fiscal conservatism owes itself to Oman’s indebtedness to Britain that Said inherited upon accession in 1932. Debt brought a loss in autonomy, forcing the sultan to accept British financial oversight. Through sheer fiscal discipline, Said repaid the sultanate’s obligations to Britain by the mid-1940s. Kechichian writes that Sultan Said “developed a rare talent for husbanding his government’s scarce resources without harming its limited effectiveness.”41 Said eventually built up a substantial buffer of currency reserves, bolstered by selling the Gwadar enclave to Pakistan in 1958. Britain remained involved at an advisory level, but the sultan’s financial independence allowed him to rebuff most British entreaties to improve the country’s infrastructure and education. While Said accepted British help in consolidating territory, his attention to the condition of his countrymen was lacking.

35 Takriti, Monsoon Revolution: Republicans, Sultans, and Empires in Oman, 1965-1976, 88–89. Allen and Rigsbee II, Oman under Qaboos: From Coup to Constitution, 1970-1996, 127. 36 Osmel Manzano and Francisco Monaldi, “The Political Economy of Oil Contract Renegotiation in Venezuela,” in The Natural Resources Trap: Private Investment without Public Commitment, vol. 409, 2010. 37 Rasoul Sorkhabi, “The Emergence of the Arabian Oil Industry,” GeoExPro, 2008, https://www.geoexpro.com/articles/2008/06/the-emergence-of-the-arabian-oil-industry. 38 Manzano and Monaldi, “The Political Economy of Oil Contract Renegotiation in Venezuela.” 39 Sorkhabi, “The Emergence of the Arabian Oil Industry.” 40 Maizar Rahman, “World Oil Outlook to 2025.” World Energy Council speech in Jakarta, Indonesia, July 29, 2004; https://www.opec.org/opec_web/en/903.htm 41 Kechichian, Oman and the World: The Emergence of an Independent Foreign Policy, 83.

Prior to oil, Oman had a subsistence economy based on farming, fishing and animal husbandry. Government revenues came from British subsidies and loans, zakat taxes and customs duties, which ranged from a low of 7.5% on essentials like cotton to a high of 75% on imports of drugs such as opium. Duties on the few exports—dried fish, dates and firewood—were set at 5%.42

Finally, in 1968, with oil revenues coming in, Sultan Said agreed to begin spending on development. But with the Dhofar insurgency capturing territory and significant public support, Said’s commitment was too little, too late. In a grand gesture that turned out to be his sole public policy address, published as The Word of the Sultan, Said agreed to fund £6m in projects, including the Muttrah port and corniche, hospitals, schools, roads and offices.43

“God willing, 1968 will be the start of a new era for our country which will see the beginning of various plans which will be executed under the supervision of qualified technicians and experts. Firstly we shall begin building offices for various government departments; then houses for officials who will come from abroad; then step by step will come various projects such as hospitals, schools, roads, communications and other necessary works including development of fisheries, animals and agricultural resources etc. until modern projects spread over the whole of the sultanate, to each area according to its needs, So long as the oil flows the government will match its flow with continuing development or the welfare of the country.”44

But Said tempered his lofty goals with caveats. Development would have to be “consonant with our people’s heritage and ancient history” and would have to acknowledge “prohibitions of our religion which are inviolable forever.”45

Owtram sums up the dilemma as a race in which the sultan and his British backers tried to leverage oil to modernize the state before the Dhofar insurgency succeeded in ousting them all.46 In the end, it was only Said bin Taimur who was ejected. Most of the sultan’s announced projects were unfinished in 1970 when he was overthrown and forced into exile.

OIL’S ROLE IN QABOOS’ FIRST DECADE The July 1970 coup that brought Qaboos to power did nothing to improve oil sector governance or output. Quite the contrary. Production that had steadied at 330,000 b/d by 1969 under Sultan Said fell by 15% in the first two years following Qaboos’ coup. Output dropped by 38,000 b/d in 1971 and nearly 50,000 b/d in 1972, when it averaged just 280,000 b/d.

Other factors suggest that oil sector management was not Sultan Qaboos’ strong suit. Sultan Said’s concession terms with Shell-led PDO remained in effect until 1974. That year, Qaboos’ regime followed the lead of neighboring countries and began nationalizing the oil sector. The fledgling Omani government, with almost zero oil industry expertise, seized a 25% stake on January 1, 1974, and six

42 JE Peterson, Ch 4, pp. 22-3; Allen and Rigsbee II, Oman under Qaboos: From Coup to Constitution, 1970-1996. 43 JE Peterson, Ch 4, pp. 9-10 44 Said bin Taimur al Bu Said, “The Word of the Sultan,” in Oman: The Making of a Modern State, by John Townsend (London: Croon Helm, 1977), 192–98. 45 al Bu Said. 46 Owtram, A Modern History of Oman: Formation of the State since 1920, 98.

16 months later raised its stake to 60%—backdated to the beginning of the year. The ownership share of Shell, the company operating the sector, fell to 34%, with Total holding 4% and Partex 2%.47

For Shell and its European partners, this was untenable. Oman’s nationalization, combined with an already generous tax and royalty take, rendered continued investment into Oman’s complex geology uncompetitive. Oman’s small fields required costly and intensive exploration and drilling to just to keep output constant. The neighboring UAE provided foreign investors with similar terms for access to much more prolific reservoirs.

The PDO operators announced that, once six small fields were brought online in the mid-1970s, further investment would stop. Oman’s oil production briefly rose in 1976 to 367,000 b/d and began to decline again. Since Omanis lacked even a basic education—let alone the technical expertise to operate an oil industry—the government appears to have overestimated its bargaining power. Sultan Qaboos backtracked and provided sufficient contractual improvements to convince the European consortium to stay.48

Even under improved terms, it took several years for PDO to raise production in Oman. The post-coup decline was finally arrested in 1981. It was not until 1983, 13 years after Qaboos’ coup, that oil production would surpass 1970 levels for good.

While managing the oil sector did not go well, Sultan Qaboos—and Omanis—may not have noticed. By the end of 1973, a deluge of oil revenues began pouring in. The government turned those rents around and spent them on development nearly as quickly as they arrived in state coffers. The transformation of Oman from a medieval backwater to a modern state was finally under way. How did mismanagement become so profitable?

A small portion of the credit for the increased rents is due to Qaboos’ partial nationalization, which increased the Omani take from 50% to 60% in 1974. But this was partly offset by the decline in production.

The dominant factor was market effects. Production constraints imposed by OPEC’s Arab members in response to the 1973 Arab-Israeli war triggered a major spike in international oil prices. In 1979, a second price spike occurred, caused by the Iranian revolution. Oman had nothing to do with any of this, but Sultan Qaboos’ regime suddenly found itself on the receiving end of an enormous rent windfall.

The effects in Oman—as in other exporters—proved dramatic. Global oil prices that held steady at just under $2/barrel under had brought Sultan Said OR40-50 million in yearly oil rents. Oil prices were forced up by market tightness to $3/barrel by 1972, Qaboos’ second full year in power. But due to slightly lower production, export rents held relatively steady at OR 40-50 million. By late 1973, rent flows began hockey-sticking dramatically upward in line with international prices under the embargo.49

47 Calvin H Allen and W Lynn Rigsbee II, Oman under Qaboos: From Coup to Constitution, 1970-1996 (Routledge, 2014), 124-5. 48 Shell, Total and Partex gained the following improvements in terms: Accelerated depreciation schedule for tangible and intangible assets, a guaranteed net income of US$0.23 per barrel and a 7.5% return on their share of PDO’s average net assets. In 1980, the company was formally registered in Oman as Petroleum Development Oman Ltd., overseen by a governing board of directors. Allen and Rigsbee II.; 124-25 49 J.E. Peterson, Oman After 1970: A House of Cards Transcended (IB Tauris, 2022); Ch. 4, 6-7.

By early 1974, oil prices had quadrupled from $3 to $12. Prices remained between $11 and $15 until 1979, when the Iranian revolution’s production outages caused prices to spike even more radically upward, reaching almost $37 in 1980. The surge in rents flooding into the Sultan’s account in Muscat was unprecedented and unimaginable. Oman’s oil revenues leaped sixfold from OR48 million in 1971 to OR 292 million in 1974 and then tripled again by 1980, when revenues reached OR 845.50 Over Qaboos’ first decade in power, Oman’s oil income rose nearly 20-fold.

Again, the ever-compounding growth in revenues flowing to the Qaboos state had almost nothing to do with actions taken by the new sultan. If anything, his initial stumbles in stewardship may have actually reduced the take. Market forces had brought the changes. Oman was more or less along for the ride.

International oil price (US$) $40

$35

$30

$25

$20

$15

$10

$0 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Figure 8: Oil prices began to increase soon after Qaboos took power in 1970, the area in blue (Source: BP 2020)

50 Peterson; Ch. 4, 6-7.

Revenues from oil (in million OR) 12000

10000

8000

6000

4000

2000

1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Figure 9: Oil revenues in Omani riyals (Source: JE Peterson 2022)

WHO GETS THE CREDIT FOR THE OMANI RENAISSANCE? Sultan Said, for all his faults, oversaw the successful implementation of oil development in Oman under exceptionally difficult circumstances. It is all the more remarkable that the contractual terms procured by Said’s regime were so favorable despite the all-too-real political and geological risks endured by foreign investors, some of which—dry holes and political violence—came to fruition.

But the inflows of oil rents that started in 1967 did not themselves hoist Oman from the depths of underdevelopment and isolation. The spending of those rents did. Sultan Said was overthrown while still attempting to consolidate control over a unified Oman, a project aided by the British but undermined by widespread public opposition to his governance practices. Said’s modest and long overdue infrastructure investments announced in 1968 were insufficient to offset dire levels of human development that separated Oman from its neighbors, let alone to put Oman on the path toward the unified rentier state of today.

Sultan Qaboos’ initiatives were those that completed the consolidation of Oman and converted Oman’s subsurface resources into above-ground wealth. Qaboos understood the deficiencies in his father’s governance and agreed with Oman’s British advisers that major changes in development were not only necessary but possible given the initiation of oil rent flows.

The initial focus was on Dhofar, in terms of military and nonmilitary spending, both of which were aimed at ending the rebellion. By war’s end in 1976, extensive development projects had been launched across the sultanate, ranging from hospitals to roads and hotels, housing, government buildings, and schools, to airports, military bases, power plants and transmission lines, ports and municipal water supplies.51 These advances went well beyond what the British had been urging under Sultan Said, and would have been unimaginable a decade earlier. As Peterson details, Qaboos’ “lavish” spending outstripped even the prodigious fount of oil rents flowing to the accounts he controlled, leading to the amassing of deficits.52

Qaboos also eliminated many of his father’s repressive restrictions, ending the hermit-style isolation of the ruler and quickly incorporating Omanis into the government. Valeri sums up Qaboos’ strategy as exploiting oil rents to expand centralized control over the territory and replace traditional socio-political allegiances with a new Omani identity—based around Qaboos himself.53

WAS THERE A RESOURCE CURSE? Resource booms are notoriously difficult to manage for underdeveloped states and autocratic rulers. Oil is a depleting commodity, a source of natural capital that must be converted—preferably wisely—into physical and human capital. This is not easy. World market prices are notoriously volatile and policymakers must take politically difficult and counterintuitive actions to preserve budgetary and macroeconomic stability.54 Oil dependence can bring perverse outcomes, often through rent-seeking by domestic and international actors exacerbated by weak institutions. Oil-rich states have a litany of “curses” awaiting them: slower-than-expected economic growth, difficulty in diversifying the economy, poor human development and social welfare scores, including poverty, inequality and unemployment; corruption and weak rule of law; a tendency to promote political incumbency or autocracy, environmental damage, militarization and war.55 SPENDING OF OIL RENTS FOR PERSONAL AND MILITARY USE Most of the development spending cataloged above—aimed at improving lives and livelihoods of Omanis—appears incongruous with the resource curse hypothesis. But other policies of the Qaboos regime did fit within resource curse parameters.

Notably, military spending remained a huge priority, with defense outlays taking an enormous share of the budget even after the end of the Dhofar War. Peterson documents military spending accounting for 36% of the national budget in 1979 and 31% in 1980, and by 1985 raised the possibility that defense outlays would be larger than the civilian portion of the budget. The Sandhurst-educated sultan had a

51 Peterson. Chapter 4. 52 Peterson. Chapters 4 and 5. 53 Marc Valeri, Oman: Politics and Society in the Qaboos State (London: Hurst Publishers, 2009), 5. 54 Jeffrey D Sachs, “How to Handle the Macroeconomics of Oil Wealth,” Escaping the Resource Curse 180 (2007). 55 Terry Lynn Karl, “Ensuring Fairness: The Case for a Transparent Fiscal Social Contract,” in Escaping the Resource Curse, ed. Macartan Humphreys, Jeffrey Sachs, and Joseph E. Stiglitz (New York: Columbia University Press, 2007), 256–85.

“predilection for advanced weaponry” including expensive aircraft and tanks, some purchases of which had to be dropped after the onset of the oil bust in 1985.56

Sultan Qaboos also showed a weakness for the trappings of royalty. In 1971, with Omani oil revenues at OR48 million, Qaboos splurged around a fifth of the state’s yearly income on himself. Takriti relates how the young sultan demolished the historic palace in Muscat built by his ancestor Said bin Sultan, who ruled the first half of the 19th century, and replaced it with a new one for £3 million. He spent a further £2.5 million on more palaces, one in Salalah and one in Seeb, just east of Muscat.57

A decade later, with global oil prices cratering—and Omani crude selling for $7.20/bbl, just above the production cost of $5.40—the sultan was gifting people expensive cars and buying himself a Boeing 747 fitted out at “astronomical cost with luxurious fittings and communications equipment.”58 Various allegations of corruption also present themselves in the sources examined, often around western advisers procuring uncompetitive contracts with crony service providers.59

Investment in Oman since 1967 in OR (left axis) and % of GDP (right axis)

9,000,000 40 8,000,000 35 7,000,000 30 6,000,000 Gross fixed capital 25 formation (thousands 5,000,000 20 of OR) 4,000,000 15 3,000,000 thousands of OR thousands 2,000,000 10 Gross capital formation 1,000,000 5 (% of GDP) - 0 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Figure 10: Capital investment (fixed capital formation) rose steeply after Qaboos' accession but held relatively steady as a share of GDP (Source: World Bank WDI 2021)

56 Peterson Ch. 5, 4, 11. 57 Takriti, Monsoon Revolution: Republicans, Sultans, and Empires in Oman, 1965-1976, 219–20. 58 Peterson, Oman After 1970: A House of Cards Transcended; See fn. 58 in Ch. 5, p. 18. 59 See Peterson’s descriptions of criteria for awarding contracts and the costly involvement of so-called “mafia” advisers. Peterson Ch. 4, 18-20.

CURSE ON DEMOCRACY Among the numerous negative effects on governance attributed to oil, Ross’ 2015 meta-study of the vast resource curse literature finds strong evidence for three: increased durability of autocratic regimes, increased corruption, and increased likelihood of involvement in violent conflict.60

Oman’s governance was as autocratic as a medieval fiefdom under Sultan Said. Although Qaboos introduced few formal institutions for participation, his regime certainly exercised informal consultation processes and responded to public pressure with policy adjustments. Oil did not make Oman more autocratic. But it is probably accurate to say that oil reinforced autocracy in Oman.

Control over oil certainly bolstered autocratic Al Bu Said rule. Many sources cited in this paper depict how the Al Bu Said deliberately sought to leverage oil prospectors to gain control over territory and use forthcoming oil rents to buy support of otherwise hostile or independent tribes. Once the oil rents began to flow, the Al Bu Said sidelined competing power brokers (British advisers and Qaboos’ uncle Tariq, who sought a UK-style constitutional monarchy) and cemented themselves in uncontested power.

Leaving aside corruption (discussed above), what about the tendency toward war? As mentioned, Oman’s military spending has indeed been high since oil exports began, remaining at roughly 20% of total spending in 2018.61 Of course, initial military outlays were based on combating the Dhofar insurgency that began in 1965. But Oman did not become war-prone; it leveraged oil to end a civil war. Since 1976, the Omani military has taken only small roles in regional conflicts. In the Omani case, oil funded militaristic purchases, not militaristic behavior. ECONOMY and the RESOURCE CURSE The economic effects of the curse are legion. They include lagging economic growth, volatility due to exposure of the domestic economy to unstable global commodity prices, and the so-called Dutch disease, where domestic goods are overwhelmed by more competitive imports. Oman’s record is mixed. ECONOMIC GROWTH: OMAN IS AN OUTLIER Early resource curse literature argued that dependence on commodity exports actually damaged economic growth.62 That literature mostly focused on the period between the 1960s and the early 2000s, a time when global oil prices were on a downward trajectory. When the oil bust ended in 2003 and prices recovered and hit new highs, this aspect of the resource curse was discounted.

Oman, however, is a confounding example—even during the oil bust period. As Mikesell detailed in 1997, Oman was one of only five countries of 23 major mineral exporters that experienced positive per- capita GDP growth between 1980 and 1992, a period when oil prices had declined deeply. 63

60 Michael L. Ross, “What Have We Learned about the Resource Curse?,” Annual Review of Political Science 18, no. 1 (May 11, 2015): 239–59, https://doi.org/10.1146/annurev-polisci-052213-040359. 61 World Bank, World Development Indicators 2021. https://databank.worldbank.org/reports.aspx?source=2&series=NY.GDP.PETR.RT.ZS&country=OMN#. 1970s estimate from Peterson Ch. 4 p. 24 62 Richard M Auty, Resource Abundance and Economic Development (Oxford University Press, 2001); Jeffrey D Sachs and Andrew M Warner, “The Curse of Natural Resources,” European Economic Review 45, no. 4 (2001): 827– 38. 63 Raymond F Mikesell, “Explaining the Resource Curse, with Special Reference to Mineral-Exporting Countries,” Resources Policy 23, no. 4 (1997): 191–99.

Oman was an outlier in another way as well. The sultanate was one of only two oil exporters (with Indonesia) and one of only four mineral exporters to have achieved higher average GDP growth during the 1980-1993 period (7.6%) than it did in the prior decade, (6.2% in 1970-80) when oil was booming. (The other three gainers were nonoil exporters Chile, Jamaica and Papua New Guinea.) While Omani GDP rose by 23% over the oil bust period examined by Mikesell, the average oil exporter’s GDP dropped by 63%, with neighboring Saudi Arabia experiencing a 96% decline.64

Of course, as detailed above, Oman’s performance was dictated by the late onset of exports, as well as the fall in oil production that occurred after Sultan Qaboos’ accession. The fact that Oman’s GDP improved during the oil bust period was a factor of early sector mismanagement—which improved in the 1980s—rather than any reduced economic dependence on oil. (See Fig. 12 below)

IMPORTS AND NONOIL EXPORTS Another resource curse affliction is the killing off of nonoil exports through currency appreciation, known as Dutch disease. This comes about for two reasons. First, income from petroleum exports finances purchases from abroad. Second, the trade surplus typically drives up the currency’s value, which makes imports more competitive with domestic goods, and makes domestic goods less competitive abroad.

The first of these afflictions—the preference for imports—did take place in Oman, driven by oil income. Since Oman was a subsistence economy at the time exports began, it produced few internationally traded goods. Peterson details how, between 1970 and 1973, the value of imports septupled from OR12 million to 86 million, while nonoil exports barely budged, from OR400,000 to 600,000. As a percentage of imports, Omani nonoil exports fell precipitously, from 3.3% to 0.7%. After 1973, imports of consumption goods—food, cars, household goods—continued to rise, hitting OR949 million in 1984.65

But sultans Said and Qaboos kept currency appreciation in check by the use of a peg. The Saidi rial, introduced just before the coup in 1970, replaced Oman’s long-running prior use of outside currencies, mainly the Indian rupee and the Maria Theresa thaler. The Saidi rial was protected from appreciation by a peg to the British pound. When Qaboos changed the name to the Omani rial in 1972, the peg was switched from the pound to the US dollar. FISCAL DEPENDENCE Fiscal dependence on oil exports has remained high since exports began. The data below show dependence declining from the 90% range in the first two decades of production to the 70% range by 2020. Such high dependence remains remarkable given the modest size of the oil resource endowment and production, which only breached 1m b/d in one year—2016—which also happened to be the only year since 1967 that oil as a percentage of government revenues fell below 70%. (Fig. 12)

64 The others were Chile, Colombia, Indonesia and Botswana. See: Mikesell. 65 J.E. Peterson, Oman After 1970: A House of Cards Transcended (IB Tauris, 2022), Ch. 4, 37–38.

% of government revenues from oil 100 90 80 70 60 50 40 30 20 10 0

1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Figure 11: Data missing for 1978 and 1979. Source: 1968-70 author's estimate; 1971-2018 JE Peterson; 2019-20 PWC)

Fiscal dependence on oil rent should decline in 2021, due to the introduction by Sultan Haitham bin Tariq of a 5% value-added tax and the planned income tax on high-earners by 2022.66

As a percentage of GDP however, oil rents have already declined from at least 50% from 1970-90 to 27% in 2018, World Bank data show. Still, benchmarked against middle and upper-middle income countries—even the Middle East and North Africa as a whole—Oman’s economy remains dominated by oil rents. (Table 1)

Table 1: Oil rents as a percentage of GDP 1970 1980 1990 2000 2010 2015 2018 Oman 50.1 56.4 50.9 45.6 37.1 21.4 26.9 Middle East & North Africa 13.1 45.0 22.2 22.7 23.5 14.0 18.9

Middle income countries 1.0 10.1 6.3 4.4 4.1 1.6 2.2 Upper middle income countries 1.2 10.8 6.6 4.5 4.1 1.6 2.2

World average 0.5 4.5 1.8 1.5 2.1 1.0 1.5 Source: World Bank, World Development Indicators 2021

66 Annelle Sheline, “Will Oman’s New Income Tax Be the Start of a Political Sea Change in the Gulf?” World Politics Review, Dec. 4, 2020; https://www.worldpoliticsreview.com/articles/29264/will-the-new-oman-income-tax-be- the-start-of-a-political-sea-change-in-the-gulf

CONCLUSION Oman’s ascent into the modern world was one of the most rapid, ever. The sultanate is one of just 13 countries that have managed average GDP growth of 7% or higher for at least 25 consecutive years—in Oman’s case 39 years, 1960-99.67

Oman based its growth on oil income, which allowed it to flip a few of the oil curse effects into reverse. It was embroiled in a civil war at the time of oil, which oil helped bring to an end. The country was divided at the time of oil, and oil helped re-unite it. Oil improved educational attainment, life expectancy and infrastructure.

Who gets credit? It was Sultan Said bin Taimur who shrewdly managed disparate oil concessions, leveraging them to re-establish territorial integrity under his family’s control. Said did this despite the difficult geologic and geographic conditions, as well as virulent political unrest. His efforts were crucial but, once exports began in 1967, overshadowed by his anti-development mindset.

It was the British, with deep influence in Oman dating to 1798, which ultimately agreed to back a centralized sovereign Oman under Al Bu Said control. Britain did so by providing military support that routed the Ibadhi imamate in 1955 and brought the oilfields of the interior under Muscat’s control. Centralized territorial jurisdiction allowed oil exploration to move ahead. It was the British, too, that understood Said’s policymaking faults were beyond repair, and which intervened to wrest him from power in 1970. While Said’s 1968 speech promised sweeping development, the historical record shows that, even with oil rents coming in, Said’s ambitions remained modest.

Finally, it was Qaboos who put into place the policies, bankrolled with oil rents, which bequeathed us a country now credibly compared with Switzerland. Qaboos did this despite some mild mismanagement of the oil sector and lavish personal spending.

His timing was serendipitous. Qaboos’ takeover occurred during a time when producer countries, led by OPEC, were seizing sovereign control over their natural resources, driving up global prices as well as the share of the “take” they received for exporting oil.

Qaboos’ ambitions wound up being backed by an enormous shift in market forces. International oil prices rose from $2/barrel to $37 during his first decade in power, providing an unexpected windfall. Qaboos was ready. He had spending plans in place which quickly converted the windfall into healthcare, infrastructure, education and ultimately, extended lives.

ACKNOWLEDGEMENTS The author would like to thank Rice University’s Tessa Schreiber, Dan Helmeci and Alreem Al-Khelaifi for research assistance, Michael Maher for useful comments on an early draft, and J.E. Peterson for his thoughts and advice on the subject, as well as his willingness to share parts of a manuscript for his forthcoming book Oman After 1970: A House of Cards Transcended.

67 Looney, Robert, “The Omani and Bahraini Paths to Development: Rare and Contrasting Oil-Based Economic Success Stories,” Working paper (Helsinki: The United Nations University World Institute for Development Economics Research (UNU-WIDER), 2009), 978-92-9230-209-2.