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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder…

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A Major Rift Remains Within OPEC

Conflicts and major disagreements within OPEC usually go unnoticed as member states use consultation and decision-making mechanisms that prevent a public mess. The UAE’s recent decision to do the unexpected was therefore a shock to the international oil market. Although a production deal has been struck, the recent conflict could be a sign that more instability can be expected in the near future.  The most recent disagreement over an increase of the baseline production rights, pits the UAE and Saudi Arabia, OPEC’s de-facto leader and the Emirates’ most important ally, against each other. Though the interests of the two Arab states have been diverging for a while that can be seen in the economic and geopolitical spheres.

The UAE took a gamble by deciding to increase the stakes and publicly challenge OPEC and Saudi Arabia over their reluctance to increase the baseline. The Emirates have invested billions to increase their production to 5 mbpd by 2030 while currently producing 3.16 mbpd. The compromise allows the UAE to grow its baseline to 3.5 mbpd while Russia and Saudi Arabia also get higher quotas.  For the latter two, however, it is merely political face-saving as neither can produce at those levels. 

The UAE's proposal received support from other members which shocked Saudi Arabia and was one of the reasons to settle the matter with a compromise. Other OPEC members have voiced dissatisfaction with the OPEC+ agreements as smaller producers have less influence and are forced to exert the accords.

For years, the UAE-Saudi relations have been viewed as extremely stable and close as the countries share many interests. Cultural, linguistic, and religious similarities further strengthen ties. The UAE’s recent success in economic diversification and military build-up has allowed it to come out of the shadow of its larger neighbor.

The efficient use of their energy wealth towards diversification has decreased the share of oil and gas to 30 percent of GDP in 2019. Trade between the UAE and Saudi has increased to $24 billion annually with a trade deficit of $18 billion in the favor of the Emirates. The primary reason behind its success is the development of the UAE as an international trade hub that accelerates economic activities.

Related: New Energy Companies Post Mixed Earnings Despite Pivot To Renewables

Economic strength has been translated into scientific and military achievements. The UAE has invested heavily in strengthening its military capabilities. These resources serve two purposes: maintaining independence and projecting influence. While the UAE and Saudi are allies, the Iraqi invasion of Kuwait in the nineties was a lesson for smaller countries of their relative weakness.

The military-industrial complex of the UAE has reached a tipping point as domestically developed products are being exported. Furthermore, the sale of the advanced F-35 could make its air force the most capable in the Middle East after Israel’s. The military success of the Emirates has earned it the nickname ‘Little Sparta’. The independent attitude can be seen in the visit of a UAE delegation to president-elect Ebrahim Raisi of Iran, Saudi Arabia’s arch-enemy. 

The above-mentioned developments are symptoms of the diverging UAE-Saudi relations, not explanations. These can be attributed to the ambitions of their leaders and diverging interests in the oil market. 

Revelations in leaked emails (2017) from an Emirati diplomat to Abu Dhabi’s crown prince Mohammed bin Zayed (MBZ) angered Riyadh: “our relationship with them is based on strategic depth, shared interests, and most importantly the hope that we could influence them. Not the other way around.” It was interpreted by the Saudis as the ‘moldability’ of Saudi crown prince Mohammad bin Salman for which MBZ was his erstwhile mentor. 

Nevertheless, the most important reason behind the somewhat soured relations is the end of the oil era, which seems to be imminent. The condition for OPEC membership is as follows: control production to maintain favorable prices. It means showing restraint in the interest of the group. The situation changes when rapid electrification reduces demand for oil and slashes revenues.

Oil-producing countries are, therefore, confronted with two choices: maximize the value of their oil or remain within OPEC's production quotas and hope that everyone will do the same. While it is unlikely that the UAE will exit OPEC, the situation could change when the relative decline of the oil market accelerates. In the new situation, producing countries need to show remarkable restraint if maintaining compliance when the business model on which their economy has floated for decades is about to become unsustainable.  

By Vanand Meliksetian for Oilprice.com

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