A standoff has recently erupted between Saudi Arabia and the United Arab Emirates (UAE), allies in the Gulf Cooperation Council (GCC) and fellow Opec+ member states, after the UAE rejected the Opec+ proposed eight-month extension to output curbs and increase of oil production. The UAE slammed the proposed eight-month extension as “unfair,” while demanding an increase of its own production.
Following this unprecedented stalemate, oil futures soared to their highest level since October 2018, trading at around $76.40 per barrel, while output levels also increased from that year. Prices are up around 55 percent year-to-date and have risen further after crashing to negative prices last April. Most of the 23 other Opec and Opec+ member states had backed the proposal to increase oil output to 400,000 barrels per day each month from August until the end of the year. This puts Saudi Arabia and other powerful members including Russia in opposition to the United Arab Emirates.
While this gives a clear indication of a split within the UAE and Saudi Arabia’s traditionally solid relationship, it could indeed have many additional impacts on future of not only their relationship, but also the status of Opec. Given such a new rift within Opec, the lack of agreement may threaten its unity, which has faced its most significant challenge since the oil price war between Saudi Arabia and Russia in March 2020. Opec faced a similar challenge following Qatar’s announcement in December 2018 that it would quit the organization, which was interpreted as a political move amid the GCC crisis at the time. Qatar however cited its desire to focus on boosting its own energy sector, showing previous fractures within Opec, which has been perceived as being dominated by Saudi Arabia and Russia. Despite the meeting being cancelled, the UAE reiterated that its position would remain unchanged. After all, it appears that Abu Dhabi is also trying to expand its clout and wants to reap oil profits in a recently challenging market.
Then, on July 3, Saudi Arabia announced that it was suspending flights from the UAE over the COVID-19 Delta variant, a move which Abu Dhabi reciprocated. Though the move was understandable given the ongoing pandemic, its timing shows subtle tensions between the two countries. Both Riyadh and Abu Dhabi have endured several divergences over the last two years, which has threatened their otherwise strong alliance. The initial flashpoint came when the two supported diverging factions in Yemen. The UAE’s recent normalization with Israel, which Saudi Arabia has so far withheld from, also forms another split in their foreign policy.
Moreover, Saudi Arabia has been more receptive towards Qatar since the Al-Ula summit last January, while the UAE still holds resentment following the 2017 Gulf crisis. The UAE’s rapprochement with Iran in 2020 during the Coronavirus pandemic may have also irked Riyadh. There have also been economic tensions between the two, as Saudi Arabia has recently made moves to advance itself as a leading hub for business within the GCC. In February, Saudi Arabia announced that it would not work with international companies whose regional headquarters were based outside of the kingdom. As Saudi Arabia is a leading economy in the Middle East, this is direct competition with the UAE and Qatar’s standings as financial centers.
Saudi Arabia’s lavish investments in various sports within the kingdom, including football, boxing, and Formula 1 racing, is also an attempt to boost its economy as part of Mohammad bin Salman’s Vision 2030 to diversify the kingdom’s economy away from its traditional oil dependency. The kingdom also hopes to host the 2030 football World Cup. This comes into competition with the UAE’s own attempts to become a dominant investor in international sports.
Abu Dhabi Crown Prince Mohammad bin Zayed, the UAE’s de-facto ruler, indeed likely desires to assert the UAE’s position as an influential power. And with already existing competition in other areas, it is arguable that these divisions could have less to do with oil production, and instead be a way for the UAE to assert its own rights and dominance.
Nonetheless, this impasse and any potential disagreements over oil output may raise questions over GCC states’ attempts to improve domestic reforms. Saudi Arabia has already faced difficulties in balancing its Vision 2030 reforms with reforming domestic economic policies. In July 2020, there were already concerns that increases to value-added taxes (VAT) could trigger growing social discontent among the public.
From within Saudi Arabia, there is certainly an apparent display of confidence amid changing oil prices. According to finance minister Mohammed bin Abdullah Al-Jadaan, increased prices mean more revenues which can, therefore, help the country reduce its deficit. He also stated that the country has managed to decrease its deficit by 40 percent over the last two years.
Aside from the latest spat, there have been other bullish forecasts for oil prices. Several of the top commodity traders are confident that oil prices will reach $100 per barrel in the coming years, its highest level since 2014. An increase in oil prices could on the one hand benefit Saudi Arabia, and other GGC states more widely. The extra income could generate higher spending and therefore boost the region’s non-oil recovery. This would be particularly useful for economic diversification attempts, given the initial fears that the oil price collapse presented.
However, the International Monetary Fund predicts a short-term uptrend, but suspects prices could eventually remain flat or turn bearish. Global fossil fuel demand is dropping while many countries are increasingly turning to electric vehicle consumption, which could cause difficulties should GCC states remain dependent on oil revenue.
As for Saudi and Emirati cooperation, there are multiple potential scenarios that may occur. Despite their latest differences, Riyadh and Abu Dhabi may otherwise find an agreement over the OPEC+ issue due to their otherwise strong alliance. Nonetheless, a sense of bitterness would likely remain. Perhaps in the coming decade, Saudi Arabia’s continued economic competition with the UAE may lead to further splits.