LONDON (Bloomberg) - The friction between Saudi Arabia and the United Arab Emirates that had held oil markets hostage finally ended last week, with an announcement that the Emirati quota from which production cuts are calculated will be increased.
Thus ends the latest drama within the ranks of OPEC+, but the curtain did not fall before giving us a preview of how that consortium is likely to ultimately unravel. The trigger won’t be the historical and political tension between the two Persian Gulf states, but their opposing views of the coming global shift away from fossil fuels and the way in which they can best protect their interests during the energy transition.
The Saudi-UAE spat is part of a longstanding pattern of disagreements. Although the two countries are aligned in many ways, the relationship has been peppered with friction from the outset. Territorial disputes marred the early years of Emirati independence after 1971, and a treaty allegedly resolving the issues remained contentious for decades.
In the mid-2000s, Saudi Arabia thwarted efforts of the UAE to build a causeway from its territory to Qatar. Even more acrimonious was Emirati action in 2009 to scupper the Saudi project, after the UAE lost the battle to host the monetary agency in its country.
More recently, the Saudis and Emiratis parted ways on the conflict in Yemen and, last month, the UAE was hit hard by a Saudi tariff on goods produced by foreign workers in neighboring countries.
But ultimately, it is not the uncomfortable geopolitical relationship that will cause the two countries to part, but diverging perceptions of the energy transition.
The UAE has a clear strategy: It seeks to attract investment and become a global leader in renewable energy and the petrochemical industry. The country has already diversified its economy; only roughly a third of government revenues comes from oil and gas in the UAE, whereas hydrocarbon revenues represent at least two-thirds of government revenue in the other Persian Gulf Cooperation Council nations. Moreover, the UAE has become an important destination for foreign investment related to green energy.
In oil and gas, the UAE is focused on increasing its production capacity and securing markets in emerging economies — the only places where demand for oil will continue to grow in the years ahead. It is making good progress toward its goal of being capable of producing 5 million barrels of oil a day by 2030, up from 3.5 million in 2018. The purpose of this large production increase, at a time when the global transition away from fossil fuels is gaining momentum, is twofold.
First, in the short and medium term, the UAE wants to be in a position to capitalize on and monetize its oil resources as much as possible over the course of the transition. Second, in the longer term, the country seeks to ensure that it is one of the few oil producers the world still relies on, even when most of the world’s energy needs are met by other energy sources.