Explainer: UAE and Saudi Arabia’s spat over OPEC oil production

In a rare public spat between the Gulf state allies, the United Arab Emirates and Saudi Arabia have found themselves at loggerheads over an OPEC plan that seeks to extend a cap on oil production.

Saudi Arabia has led a push in OPEC to raise output by some 2 million barrels per day from August to December 2021 but extend remaining cuts to the end of 2022.

But the UAE pushed back on Sunday, saying a cut in output beyond the initial deadline of April 2022 would be “unfair to the UAE”.

The UAE has said the market is “in dire need of higher production” of crude oil following a plunge in oil prices and production last year as the pandemic hit travel and energy use.

OPEC’s sharp output cuts have kept prices from collapsing even further. However, pumping too much too soon could undermine the rebound in energy prices.

Meetings on Friday, both between the 13 members of OPEC proper and between the 23 members of OPEC Plus, failed to reach a deal on oil output.

Under a proposed OPEC Plus deal, the UAE would proportionally cut its oil production by 18 percent, while Saudi Arabia would cut its output by 5 percent.

Negotiations over the dispute were set to resume on Monday, but the meeting was called off. No new date was agreed.

Reactions to proposal

Speaking to CNBC on Sunday, the UAE’s Energy Minister Suhail Al Mazrouei said that his country has “sacrificed the most, making one-third of our production idle for two years”.

“We can’t make a new agreement under the same conditions – we have a sovereign right to negotiate that,” he said.

But Saudi Arabia has imposed the deepest production cuts and urged caution over raising output during the ongoing pandemic while oil demand and economic recoveries remain weak, with the kingdom’s energy minister calling for “compromise and rationality”.

“Big efforts were made over the past 14 months that provided fantastic results and it would be a shame not to maintain those achievements … Some compromise and some rationality is what will save us,” Saudi Energy Minister Prince Abdulaziz bin Salman said.

Iraq also backed the OPEC Plus proposal to extend the pact on output curbs until December 2022, adding it expected oil prices to remain at $70 per barrel or above until then.

So far, it is yet to be seen whether the UAE would continue in its traditional role of following Riyadh’s directive, or whether it would decide to pursue a more independent policy.

Diverging interests

While Riyadh and Abu Dhabi have seen eye-to-eye on a number of issues over the years, their national interests have also increasingly diverged.

While the UAE had initially joined the Saudi-led war against the Iran-aligned Houthi rebels in Yemen, Abu Dhabi withdrew most of its military forces from the country in 2019.

Along with Bahrain and Egypt, the UAE and Saudi Arabia launched a boycott against neighbouring Qatar in 2017. An agreement to end the boycott was announced by Saudi Arabia in January, but analysts say the UAE is less inclined to bury the hatchet.

Meanwhile the UAE’s normalisation of ties with Israel last year was not followed by Saudi Arabia.

The Gulf allies have also disagreed over restrictions related to the coronavirus pandemic. On Sunday, Saudi Arabia banned all flights to the UAE, Ethiopia and Vietnam to protect against the highly contagious Delta coronavirus variant – which accounts for many new infections in the UAE.

On Monday, Saudi Arabia amended its rules on imports from other Gulf Cooperation Council countries to exclude goods made in free zones or using Israeli input from preferential tariff concessions, in an apparent challenge to the UAE’s status as the region’s trade and business hub.

Free zones, a major driver of the UAE’s economy, are areas in which foreign companies can operate under light regulation, and where foreign investors are allowed to take 100 percent ownership in companies.

According to the decree, goods that contain a component made or produced in Israel or manufactured by companies owned fully or partially by Israeli investors or by companies listed in the Arab boycott agreement regarding Israel, will be disqualified.

The UAE and Israel signed a tax treaty last May as both sides work to spur on business development after normalising relations.