Explained: The Arab war over global oil production policy and crises ahead

Here’s why the UAE and Saudi Arabia are locked in a diplomatic tussle over the OPEC Plus’ plans to extend its global oil supply pact beyond April 2022

Global oil prices stand at a staggering $75 per barrel and are expected to rise further if the OPEC Plus countries fail to reach a consensus on extending the oil supply deal beyond April 2022. Representative photo

Crude oil prices continue to hover over a staggering $75 per barrel as OPEC (Organisation of the Petroleum Exporting Countries) Plus partners Saudi Arabia and United Arab Emirates lock horns over the cartel’s future production policy.

Even though the disagreements within OPEC Plus are usually confined to the quarters of the royal palaces, they were spilled out in the open on Sunday when Saudi Energy Minister Abdulaziz bin Salman in an interview with Bloomberg TV insisted that OPEC Plus should increase production over the next few months and extend its broader agreement until the end of 2022 to ensure stability.

“We have to extend…the extension puts lots of people in their comfort zone,” Abdulaziz told Bloomberg TV.

AdvertisementChoco-pie Ad

OPEC Plus members including Russia, have agreed to the plan, while UAE is the only member which has opposed the idea of extension.

Stating that it is fine with increasing oil output from August, UAE, however, suggested to defer the decision on extending its global oil supply pact beyond April 2022, to another meeting.

Emirati oil minister Suhail-al-Mazrouei instead pitched for a short-term increase in production while demanding better terms for the country in 2022.

“The UAE is for an unconditional increase in production, which the market requires,” he told Bloomberg TV hours before Abdulaziz’s interview, adding that it was “unnecessary” to take a decision on extending the deal until the end of 2022.

Discussions over the proposals were held on Friday between the 12 OPEC members and later between the 23 members of OPEC Plus. However, there was lack of consensus on oil output between OPEC Plus members led by Saudi Arabia and non-members including Russia. Further negotiations are scheduled to be held on Monday.

Behind UAE’s reluctance

UAE’s reluctance to accede to Riyadh’s proposal stems from its dissatisfaction over its production baseline set by OPEC. Every OPEC country increases or decreases its oil production as per its baseline. If the baseline is more, the country is allowed to mine more oil. UAE, which has a baseline of 3.2 million barrels a day (as of April 2020), says it is too low and needs to be increased to 3.8 million barrels a day if the deal is extended.

“The UAE and its international partners have invested significantly in growing its production capacity and believes that, if/when the agreement is extended, the baseline reference figures should reflect its actual production capacity, rather than the outdated October 2018 production reference,” the UAE ministry said in a statement.

The UAE has heavily invested to boost capacity, even inviting foreign companies. Reports say UAE had initially opposed the current baseline as too low, but had agreed to continue with it till April 2022. The baseline has reportedly left around 30 per cent of the country’s oil producing capacity idle.

It’s stubbornness to proceed with the deal without getting its terms is understood with Iran slated to re-enter the oil market as a strong contender.

Saudi Arabia and Russia, on the other hand, have refused to recalculate UAE’s baseline, fearing it would encourage other members to ask for the same, and eventually jeopardise the deal.

What’s at stake?

The cartel faces a breakdown if UAE quits it over non-compliance to its terms. Investors fear it may lead to a further spike in oil prices. Another scenario could be a crash in prices as seen last year due to a disagreement between Saudi Arabia and Russia over oil prices.

Abdulaziz has made it clear that there would be no increase in oil output post August if the proposed agreement beyond April 2022 is extended – a step which would push oil prices to an inflationary high.  Abdulaziz said the cartel cannot hike the production without the consent of UAE.

The two warring diplomats, however, haven’t spoken on the matter since the Friday meeting. Abdulaziz told Bloomberg that he was ready to speak to “my friend Suhail” on the matter if he calls.

 

Get breaking news and latest updates from India
and around the world on thefederal.com
FOLLOW US: