[Salon] The Emiratis, OPEC and peak oil - ArabDigest.org Guest Post

The Emiratis, OPEC and peak oil Summary: by quitting OPEC, the UAE has stolen a march on its neighbours in responding to the high probability that the third Gulf war has brought forward ‘peak oil’. The cartel will almost certainly survive the Emiratis’ departure for now but it is surely in permanent decline. We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast (with Jim Krane) here. …divisions [in Opec] will become even clearer as the shift towards a greener economy accelerates. Opec’s latest tiff won’t be its last. The Economist, 8 July 2021 The UAE’s seemingly sudden decision earlier this week to quit OPEC with effect from 1 May has spawned a whole industry of speculation among the commentariat over the ‘why?’ — up to and including the idea that the US has effectively ‘bought’ the Emiratis out by all but agreeing to their request for a swap line. (Couple the fact that the UAE holds billions in US Treasuries and had Forex reserves in excess of US$250bn with its mulling publicly about pricing some oil in yuan and it becomes clear that, if anyone is playing anyone, Abu Dhabi, wisely seeking a safety net in these straitened times, is playing Washington.) In reality, the simple explanation is the correct one, i.e. although the war in the Gulf has played a key part in determining timing, far from being sudden the UAE has done what it has been threatening to do for years over its desire to get as much of its oil out of the ground and to market as possible before the oil age ends. It is at least as long ago as 2021 that the Emiratis signalled that their remaining an OPEC member was dependent upon them being allowed to boost their oil production majorly, as I wrote in the 12 July 2021 Newsletter which also referenced the quote above. This was followed by more UAE brinkmanship a couple of years later, the subject of our 14 June 2023 podcast and the 11 July 2023 Newsletter. As I wrote in the latter, Riyadh’s efforts to keep the UAE in the fold amounted to “papering over the cracks” and would most likely result in “no more than a temporary reprieve.” This remained the case until this week, contributing significantly to the continuing decline in Saudi/UAE relations. The UAE’s decision to exit OPEC stems from a long-standing desire to maximize oil production and revenue before the global transition to green energy permanently devalues its reserves. As has been widely reported in the press, differences of view within the GCC over how to respond to the war have further soured relations. A 16 April essay by the Carnegie Endowment’s Andrew Leber and Sam Worby laid out three scenarios for the Gulf states after the Iran war. At that time the authors favoured something close to the status quo, their second, as the most likely. I suspect that if they were writing today they would opt instead for their third — and “cautionary” — scenario in which… …fractures might emerge along three lines: pre-existing economic competition, divergent assessments of Israel, or differing calculations on accommodating US versus Iranian demands. Acknowledging all three of their ‘lines’ as valid, we should be in no doubt that by far the most important is economic — both short and long-term. In the short-term, although not as badly affected as Qatar (let alone Iran), the UAE faces a sizeable bill for making good war damage to oil-related and other infrastructure — with the cost to the region as a whole now being put as high as US$58bn by Rystad Energy. To Abu Dhabi’s share of these costs, we can reasonably add the following: Accelerating the already planned expansion of oil output to reach five million barrels per day next year (with, I think, more to follow); A major upgrade of the Fujairah pipeline and terminals, bypassing the Strait of Hormuz; Significant additional defence-related expenditure; and A possible economic bail-out of Dubai which could go beyond the US$10bn stumped up by Abu Dhabi in 2009. In the longer-term, the UAE (in common with its Gulf neighbours) now has two major challenges staring it in the face. First, despite proposals for multiple new pipelines to neutralise the Strait of Hormuz as a choke point, the war has raised serious questions over the reliability of the Gulf region as a source of hydrocarbons. In consequence, net energy consuming countries are already turning elsewhere for oil and gas as the recent sharp rise in tankers heading to the United States highlights. Outside OPEC, Abu Dhabi can look to counter this to an extent at least by offering discounts on its oil which, with a balanced budget price for Brent crude estimated at US$55 per barrel (pb), it can reasonably afford — and especially if it can get more oil to market. It is not at all clear what, if anything, Riyadh would be able to do to prevent this; and, with their balanced budget price at around US$90pb, the Saudis could not reasonably accommodate oil at anything close to this level for a protracted period, their recent (ongoing?) attempted — and now seemingly futile — ‘squeeze’ of the US shale sector notwithstanding. Second, and much more profound in its implications, there is the probability that the war has brought forward ‘peak oil’. Indeed, the writing is already on the wall. According to energy think tank Ember, China’s already impressive exports of solar technology doubled in March, with batteries and electric vehicles also hitting record highs. To date, the biggest market growth has been in African and Asian emerging markets, i.e, the hardest hit by the energy crisis. However, developed economies are looking to accelerate their move away from hydrocarbons too. As the United Kingdom’s energy minister Ed Miliband asserted earlier this week: As we face the second fossil fuel shock in less than five years, the lesson for our country is clear: the era of fossil fuel security is over, and the era of clean energy security must come of age. Granted that the UAE still faces daunting challenges, by quitting OPEC it has strengthened its hand in addressing them. As for whether it has weakened the cartel, it has! But more important still is the fact that the war has further eroded OPEC’s already declining leverage, making being the first to find the exit, as the UAE has done, all the more imperative.