Opec impasse shows UAE’s ‘flexing its muscles’ against Saudi Arabia

A few years ago, the United Arab Emirates and Saudi Arabia went as far as secretly drawing a plan for a political union.

While a confederation did not materialise, the Gulf’s autocratic states fought rebels in Yemen and stood united in a boycott of Qatar for its alleged support for Islamism.

In the past few days, however, cracks in this unity have become apparent as the interests of Riyadh and Abu Dhabi diverge again on issues ranging from oil production, Yemen, normalisation with Israel, and the way to handle the pandemic.

A videoconferenced meeting of Opec members and allies (Opec+) ended in deadlock on Friday after Saudi Arabia and Russia asked producers to increase production in the coming months. The request was designed to ease rising oil prices and extend an existing supply deal to ensure stability as the world embarks upon a fragile recovery out of the coronavirus pandemic.

But the UAE refused, digging its heels over a matter of its own output quota that it deems unfair. Opec members are reconvening on Monday.

“The heightened competition within the Gulf states is across a number of economic policy issues,” said Karen Young, a senior fellow at the Middle East Institute. “Saudi Arabia has clearly upped the pressure, while the UAE is pushing to secure its own profit goals in this tight market. These energy giants are preparing for the next ten years of export revenue to sustain their political economies.”

The UAE has sacrificed the most. We can’t make a new agreement under the same conditions — we have a sovereign right to negotiate that.

Other Opec+ countries are on board with the plan to increase production by 400,000 barrels a day each month from August to December and to extend the deal beyond its scheduled April 2022 end date.

A deterioration in Saudi-Emirati relations has combined with the UAE’s determination to expand production capacity to support oil diversification plans. The power struggle between Opec members now threatens the cartel’s ability to unify in the longer term and deliver stability to oil prices.

In a rare public intervention on Sunday, the UAE energy ministry said it supports a production increase, but asked that the country’s baseline production — from which its supply cuts are calculated — factors in its higher output capabilities and is reviewed to ensure fairness “for all parties”.

Abu Dhabi’s tough stance at Opec comes amid a broader diversion of interests between the two Gulf superpowers.

While the UAE and Saudi Arabia have built up a “reservoir of strategic alignment” in the past decade, “economic competition is intensifying among the Gulf states,” said Marwan Alblooshi, an Emirati PhD candidate at the University of Edinburgh.

The UAE in 2019 withdrew most of its military forces from Yemen, leaving Saudi Arabia alone in its battle against Iran-backed Houthi rebels. Southern separatist forces allied to the UAE then clashed with Saudi-backed Yemeni government forces.

While the UAE has accepted a Saudi-led effort to end the trade and travel embargo on Qatar, Abu Dhabi has been alarmed at the speed of the reconciliation with Doha. Similarly, the UAE’s embrace of Israel in the wake of normalising relations last year has raised eyebrows in Saudi Arabia.

A different handling of the pandemic has also been a source of frustration in both states. Riyadh from Sunday has decided to bar travel to and from the UAE, where the Delta variant accounts for a third of all new cases. Saudi Arabia has not approved the Chinese-produced vaccine on which the UAE has largely depended for its mass vaccination.

Saudi Arabia’s threat to cut off multinationals from lucrative government contracts if they do not relocate their headquarters to Riyadh has been perceived as an implicit attack on Dubai, the UAE’s commercial hub where most are based.

Saudis play down talk of tensions, pointing out that Opec spats are “business” and that coronavirus restrictions are about “safety”, not politics.

“For over the past 40 years the UAE consistently followed the Saudi lead in Opec,” said Abdulkhaleq Abdulla, a Dubai-based political science professor. “But lately, the UAE has been more adamant about its just quota and is now flexing its muscles on this front”.

Under the proposed Opec+ deal, the UAE would proportionally cut its production by 18 per cent, compared with a 5 per cent cut for the kingdom and a 5 per cent increase for Russia. The UAE said it has around 35 per cent of its current production capacity shut in, compared with an average of around 22 per cent for others in the agreement.

The UAE had asked that baseline production references be reviewed at a later meeting. The request was declined. 

“The joint ministerial monitoring committee (of Opec) unfortunately only put one option forward, to increase production on the condition of an extension to the current agreement, which would prolong the UAE’s unfair reference production baseline until December 2022,” the UAE energy ministry said in a statement.

Amrita Sen at consultancy Energy Aspects said: “Growing differences of opinion over foreign, economic and security policies between Riyadh and Abu Dhabi, as well as over oil policy itself, will complicate future Opec discussions and efforts to sustain the Opec+ agreement”.

Insiders say debate has been raging in Abu Dhabi at the highest levels of the national oil company about whether to leave the oil cartel. A departure would allow the UAE to fund plans to diversify the economy — from refinery and petrochemicals production to a newly formed commodities exchange and its own crude benchmark that requires access to volumes to make it a success.

The UAE’s departure from the cartel could spark a production free-for-all that would undermine the purpose of Opec+, energy analysts have said.

“The UAE has sacrificed the most,” Suhail Al Mazrouei, the UAE’s energy minister, told CNBC on Sunday. “We can’t make a new agreement under the same conditions — we have a sovereign right to negotiate that.”