Oil and Copper Trends Part 1: Supply and Demand

Oil and Copper Trends Part 2: Geopolitical Drivers Affecting Oil Supply

Read how geopolitical drivers of the United Arab Emirates and Saudi Arabia fight affects oil supply imbalances.
This article originally published in September 2021.
When looking into the United Arab Emirates (UAE) and Saudi Arabia relations and how they shape OPEC+ decisions, you can see how it resulted in an increase in baseline quotas. This ultimately affects excess supply on the market.
The recent OPEC+ stalemate was on account of UAE voicing their unhappiness with the then baseline production level figures, especially in relation to Saudi Arabia. But the reason was quite deep rooted.
First, there are the economic drivers of the fight. Compared to Saudi Arabia, the UAE has diversified its economy at a faster clip and oil and gas account for just a third of UAE’s national revenues, compared to over 6% for other oil producing nations. This has been achieved in part through creating avenues to attract foreign investment, particularly as it relates to green energy, real estate and finance. Their approach has been strategic as the nation has made deals with both domestic and foreign investors for the explicit purpose of diversifying the UAE’s economy.
In contrast, Saudi Arabia remains heavily dependent on oil and gas and requires more time to diversify away from the sector. They have taken some steps, such as the IPO of Saudi Aramco, as well as proposed economic reforms. But they still rely on the stability provided by OPEC+ and their ability to influence market decisions, especially in regard to maintaining higher prices. Plus, Saudi Arabia is nowhere close to reforming its massive welfare program, which is an immense fiscal drain, making it all the more dependent on oil revenue.
With that said, despite the UAE’s transition from oil, it has made significant investments in the sector and wants to reap the benefits while it can before it transitions even further away from oil. In other words, they’re tied to the fiscal and economic benefits of oil, while concurrently changing the trajectory of the economy.
UAE authorities are aiming to produce 5 million barrels of oil per day by 2030, as compared to the 3.5 million produced in 2018. From their perspective, emerging economies will be the largest source of oil demand growth over time, while the U.S. and European markets shrink. So, in the short to medium term, the UAE seeks to capitalize on its oil resources as much as they can until the transition to green energy is complete.
In their long-term view, they envision themselves as one of a few global oil producers that is relied upon by the rest of the world, but with less geopolitical baggage, such as Saudi Arabia’s ongoing tensions with Iran.
For the UAE, it’s a long-term plan. They’re endearing themselves to new markets that are posed to become economic powerhouses by providing consistent oil, like India and China. They’re also using the money they earn to further invest in their country and diversify their economy. Then they’ll incentivize their new partners win the emerging markets to invest even more in the UAE. So, higher baselines help UAE’s national economic strategy because not receiving those higher baselines due to Saudi Arabia was a thorn in their side.
Second, there’s the security/geopolitical angle to examine. Saudi Arabia and Iran see themselves as the dominant power of the Middle East. Some of this is historical, and some of it is due to the Shia-Sunni divisions between the two nations. However, until recently, it has also meant that the Middle East was largely carved between Saudi Arabia and its friends on one side, and Iran and its friends on the other.
In recent years, the fault lines have become increasingly blurred. Turkey is starting to project itself as a major power in the region. While Turkey for many years saw itself as a potential European state and member of NATO (to which it still belongs), it is actively trying to play a dominant role in Middle East affairs – and it’s not on the same side of either Saudi Arabia or Iran.
Granted, the UAE and Iran do not share close relations, neither does the UAE with Turkey. But this doesn’t automatically mean the UAE will serve as a satellite state of Saudi Arabia. A lot of investments flow to Iran through the UAE, so the UAE and Iran have a natural incentive to keep their relations cordial, at a minimum. In addition, with the rise of new power centers in the Middle East, the UAE no longer believes that it needs to be in one of two caps.
Instead, many believe that the UAE is seeking to create a foothold for itself with its own independent foreign and natural security policy and not just depend on Saudi Arabia. This is partially why the UAE has spent so much money in recent years buying American defense equipment, like the recent order for 50 F-35. American leadership generally only provides this type of equipment to its closest allies. This is also likely why the UAE formally recognized Israel last year.
So, the evolution in the UAE’s position in the region and its policy making signal that the UAE and Saudi Arabia may not be as close as they once were.

Why Did Saudi Arabia Concede To Increase Baselines?

Saudi Arabia conceded to increase baselines mainly to ensure that the value of OPEC+ holds. The UAE benefits from the lowest fiscal breakeven cost of any OPEC member in 2021 at $65 a barrel and this is projected to decline even further. This is a point of leverage for the UAE within OPEC+ because they can:
  • Weaponize their increased production capabilities
  • Compete for market share at lower prices
  • Not adversely affect their economy given their level of diversification
This effectively decreases OPEC+’s role in managing the global markets.
Saudi Arabia knows it can’t compete for market share at low prices and requires a longer runway to reduce its dependence on oil and gas as a share of their overall economy. This was a small giveaway by Saudi Arabia to the UAE, while enabling Saudi Arabia to remain the more dominant oil producer in the cartel.
The same holds true for giving Russia a higher baseline. Last year, Saudi Arabia and Russia had a disagreement over production, with Russia opting to increase its supply to hurt Saudi Arabia. Russia’s baseline will be more than its production capabilities but giving it more headroom in this arrangement helps keep Moscow on their side, too. It’s better to keep OPEC+ members happy, for now, until new non-OPEC+ markets, like Iran, start to provide supply.
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The Hartford’s Global Insights Center team provides analysis on macroeconomics, geopolitics and sectoral risks. The team consists of:
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Puneet Bhasin, Senior Economist
Ben Wright, Principal U.S. Economist
Jeffrey Woodruff, Country and Credit Analyst