The fluctuation in oil prices last week was nothing short of phenomenal, and it was impacted by more than the ongoing war in Ukraine. Mixed messages from OPEC member United Arab Emirates (UAE) brought prices down from around 140 to less than 110 dollars per barrel.
The Russian invasion of Ukraine and subsequent Western sanctions to strangulate the Russian economy have badly impacted the global energy market. Oil prices reached record levels and natural gas prices almost doubled in the first couple of weeks of the war.
Analysts, economists, and politicians in the West started to draw an analogy with the oil shock of 1973. At that time, six Arab members of OPEC stopped exporting oil to consumers, including US and major Western countries, due to the latter supporting Israel in the Arab-Israeli War of October 1973.
By September of that year, oil prices had almost quadrupled. Back then, it was mainly the Gulf oil producers who stood behind the oil shock, and their role in the current price hike, that of the UAE in particular, is significant.
Russia is one of the world’s largest oil and gas producers and exporters. So, when the US and UK announced that they would stop oil and gas imports from Russia, the market pushed up prices.
American President Joe Biden tried to persuade OPEC’s lead producer and exporter, the Kingdom of Saudi Arabia (KSA), to increase oil production so that prices would go down. But his efforts were not fruitful. KSA stressed the importance of a deal between OPEC and other producers led by Russia (an alliance of OPEC+) to stabilise the market.
When oil prices shot up, UAE Ambassador to the US Youssef Al- Otaiba made a statement that cooled down the market. On 9 March, Al- Otaiba said, “we favour production increases and will be encouraging OPEC to consider higher production levels. The UAE has been a reliable and responsible supplier of energy to global markets for more than 50 years and believes that stability in energy markets is critical to the global economy.”
The next day, Emirati Minister of Energy and Infrastructure Suhail Al- Mazrouei wrote on Twitter that the UAE “believes in the value OPEC+ brings to the oil market”.
He added, “UAE is committed to the OPEC+ agreement and its existing monthly production adjustment mechanism.” The minister’s tweet contradicted the ambassador’s statement but was in line with the Saudi position to honour current production levels, agreed on with Russia and other OPEC partners.
Despite political interpretations of the Gulf oil producers’ moves, seen by some as favouring Russia over the Biden administration, they are mainly driven by forces of supply and demand in the energy market. The fundamentals of supply and demand show that the market is not short of supply; and any unnecessary increase in production might lead to a supply glut and a price crash.
The American administration is worried about the prices of petrol at the pump, which hurt consumers and fuels inflation that could cost the Democratic Party the mid-term election this year.
Another interpretation of last week’s mixed messages from the UAE was propagated mainly by those who dig to find any differences in positions between the two allies: the UAE and the KSA. Social media has been rife with such rhetoric, especially from accounts connected with the Muslim Brotherhood. Yet a well-informed source in Abu Dhabi speaking on condition of anonymity told Al-Ahram Weekly that coordination between the two countries is as close as usual.
“Americans have been pressing for an increase [in oil production] that would support them internally. But Gulf producers are bound by an agreement to stabilise the market and they will honour it. That is a sovereign policy.” He implied that the ambassador’s statement could be just a hint to appease the Americans but the actual decision is based on market information and experts’ analysis.
It is not only oil that has created the energy crisis resulting from the Ukraine war a Gulf’s moment. Qatar is being drafted by Washington to increase its natural gas supply to Europe. It is not clear how much of the loss in Russian gas supply Doha can make up for. The maximum spare capacity of gas supply by Qatar is around 11 billion cubic metres (bcm). Even if we add the spare capacity of Algeria (around 4 bcm), that will still be a fraction of what Europe annually imports from Russia . Europe obtains almost 40 per cent of its gas consumption from Russia; that is more than 360 bcm.
Though Gulf oil and gas producers might be in focus, as they were in 1973, the comparison might not be accurate – for many reasons. First, the world now has energy sources other than fossil fuel. It is still a small percentage (15-20 per cent) of global consumption, but it is promising to invest in renewable energy from solar to wind to even nuclear-powered energy production.
Secondly, in the 1970s, the halt of energy sales was imposed by producers; now it is the consumers who are self-inflicting the energy trade halt through crippling sanctions on Russia. Finally, it is still early to predict whether oil and gas prices will keep rising for years to come.
Nevertheless, as the war goes on and sanctions start to yield drastic effects globally – not only in Russia or the West – a few billion dollars will be added to exporters’ coffers every week. Not only in the Gulf but also in the US, where big energy companies are already reaping huge profits.