The breakdown of talks between the OPEC+ group of oil producers last week came down to disagreements between Saudi Arabia and the UAE. The two often time allies have found themselves on opposite sides of the fence over production levels of oil, a running source source of tension that has come to the fore more visibly than many expected.
Over recent years, the Saudis and Emiratis have been seen to work in lockstep with each other, whether it was their military intervention in Yemen, opposition to the Iran nuclear deal or the recent dispute with Qatar. However, OPEC’s meetings over the past year have told a different story and shown the usual partners to be working from very different playbooks.
Like other countries in the Gulf, both Saudi Arabia and the UAE are aware that their economic influence as oil producers has to change, especially as countries around the world respond to climate change and the need to de-carbonise their economies. The expected decline for oil means that oil producers will need to diversify their economies to future-proof their economies.
Diversification is a common challenge for all Arab Gulf states. But some are further along this path than others. In the UAE, Dubai’s economy is already largely independent of oil, with Abu Dhabi not far behind. That puts the country in a more competitive position than Saudi Arabia, which approached diversification more recently through its Agenda 2030 strategy and is heavily reliant on oil revenues to finance it.
The big question for oil producers like the Saudis and the UAE then, is how to maximise oil revenue to support change to their economies before the overall supply and demand for oil falls over the next few decades. One option is to pump it out and realise its financial value as quickly as possible, like the Emiratis. Another is to limit current production and supply so that oil prices rise, thereby generating more revenue (like the Saudis).
This choice is at the heart of the recent OPEC+ deliberations. Thus far, the UAE has been portrayed as a solitary voice, however this image is far from accurate. The UAE believes that it is not alone in its position on production levels and that others would welcome the policy changes they vocally propose. The dominance of Saudi in the organisation perhaps explains why others have shied away from going so public.
While the Saudis’ reasoning to limit production made sense last year, given the pandemic and resulting fall in economic activity and demand for energy. But now there is growing opinion amongst OPEC+ members, led by the Emiratis, that Riyadh’s determination to keep the current production quotas in place helps them whilst hurting others.
Last year’s production cuts were led by Saudi Arabia and Russia, two of the world’s largest oil producers. The fall in demand for goods and energy saw oil prices reach $11 per barrel – a significant fall from the average 2019 price of $60 per barrel.
The production cuts contained the price fall. Moreover, as the global economy has begun to recover and stockpiles of oil have diminished, prices have risen to $62.50 today. The rationale for releasing more oil to market is clear, as a vaccine-driven economic recovery is driving up demand. All of OPEC agrees with the need to release more barrels to market. The difficulty lies in KSA insistence on linking it to an extension of production quotas.
The benefits to Saudi of this approach are two-fold. First, the Saudis can afford to reduce production more than other oil producers. This is mostly due to greater flexibility in its production capacity; it is able to increase production quicker than other countries can. Second, the Saudis’ current production quotas are more favourable than they are for other OPEC+ countries. Its planned output for July is 9.9 million barrels per day (bpd). If produced this would be equal to 96.9 per cent of the average it produced pre-pandemic, during 2019. By contrast, the UAE’s July production quota of 2.7 million bpd will be equivalent to 89.5 per cent of its average 2019 production.
Other countries have similar levels of disparity between their current production quotas and pre-pandemic production levels. Russia shares the same July quota as the Saudis, but if fully implemented, it would be equal to 82.6 per cent of average production in 2019. Kuwait’s 2.4 million bpd quota and Mexico’s 1.75 million bpd for July will be 90.6 per cent and 92.3 per cent of their average production in 2019 respectively.
The three countries, along with Kazakhstan, were keen, or at least willing, to decouple production levels, along with the UAE at the recent talks. However, they were pushed back into line and any discussion was contained by the suspension of further talks. Yet even if talks have been shelved for this month, they will not be completely silenced. The current production cuts are expected to last until April next year, leaving plenty of time for dissent against the current status quo to grow.
It is therefore likely that opposition will continue to grow between the Saudi and Emirati positions within OPEC+, with the Emiratis the public face of what seems to be growing private frustration.