Crude oil storage tanks
Crude oil storage tanks stand at the oil refinery operated by Saudi Aramco © Simon Dawson/Bloomberg

As change blows through the oil industry, western oil groups have finally begun to recognise the reality of the looming transition to a low-carbon economy. Now oil producing countries in Opec are doing the same. Spats in the cartel are not unusual. But last week’s breakdown in efforts to agree on production increases looks a little different. A rift has opened between Saudi Arabia and the United Arab Emirates that poses a risk, at least, that the latter could leave the group. It raises questions, too, about the cartel’s ability to retain discipline and stabilise oil markets as the energy transition gains momentum.

The latest Opec clash comes only 15 months after the last. As coronavirus surged globally, Saudi Arabia and its Opec+ partner Russia briefly launched a reckless price war. They patched things up and Opec+ signed up to unprecedented cuts of 10m barrels a day to prop up oil prices driven to historic lows by collapsing demand.

More barrels have slowly been released on to the market. Riyadh and Moscow proposed monthly production increases from August to December, narrowing the remaining gap. They also sought to extend the Opec+ supply deal beyond its planned expiry next April and into the rest of 2022.

But stresses are emerging over how to respond to future market dynamics. Pressed by activists and shareholders, western oil majors are curbing new production to reduce emissions. Since little has been done to reduce global oil consumption, however, demand is set to continue rising for some years — opening opportunities for national oil companies to bridge the supply gap — before starting to fall. Eyeing an approaching demand peak, some Opec members would rather maximise oil revenues while they can than leave resources in the ground and risk them becoming a stranded asset.

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UAE has broken ranks, opposing any extension that does not include re-evaluating its own production allocation. It says its quota set last year did not take account of its maximum output capabilities — so it has had to cut supply by a bigger proportion than others. UAE has invested billions of dollars in increasing its production capacity to close to 4m b/d now, and a planned 5m b/d in the future. Abu Dhabi sees maximising near-term production as vital to securing its post-oil future — to pay for refinery and petrochemical plants that will add more value to its crude extraction, and fund diversification away from oil. Some other Opec members, such as Iraq, would also privately be happy to open the taps now.

The differences may be less stark than they appear. Saudi Arabia favours controlled production increases to ensure prices do not spike as the global economy recovers and scare consumer countries into shifting faster to renewables. But it wants prices high enough to fill government coffers and encourage investment in meeting demand ahead of the peak, fearing a squeeze could otherwise result. It is increasing its own maximum capacity from 12m to 13m b/d. Its frictions with Abu Dhabi go wider than oil output. But allowing UAE’s production baseline to be raised could lead the whole deal to unravel as Russia, Iraq and other countries aspiring to raise output would demand the same.

After its initial stumble, Opec+ responded effectively to last year’s crisis which despite its depth, as BP’s chief economist Spencer Dale noted last week, turned out to be the kind of shortlived demand shock it is best suited to dealing with. A sustained fall in demand as the move to net zero takes hold would give some Opec members a bigger incentive to increase their share than to stabilise the market. That is a challenge the cartel may find trickier to handle.

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