Iran war is now an international hostage situation - with UAE the hostage
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For the uninitiated, Dubai, the second city of the UAE after Abu Dhabi, can be both fascinating and grotesque. It is fascinating in the sense that it should not be there, surging out of the sand in one of the most inhospitably hot places on Earth. Only the madness of human ambition would have thought of building such a throbbing city of immigrants where no humans had ever lived in anything but sparse nomadic numbers.
It is grotesque in the way it is a structured hierarchy divided on ethnic grounds. On the top are the fantastically wealthy Emeriti minority. In the middle you have mainly white European professional immigrants, and on the bottom a huge Asian workforce who toil away in the baking heat, building the next new suburb of the mega-city. For all that, the place is a 21st century Gotham, packed with millions of people striving to better themselves, bringing their talents to a multicultural entrepot. Meanwhile, the government, with a nod to Islam, lays down a few ground rules, but generally looks the other way.
In terms of relationships within the UAE, if Dubai is the mistress, Abu Dhabi is the sugar daddy. An hour or so up the road lies the more austere, religious and wealthy city, which tolerates the wayward, partying Dubai and regularly bails the latter out when it suffers the perennial banking and real estate busts that are part and parcel of being a booming frontier city. Not long after the last crash, I spent some time working with the National Bank of Abu Dhabi, and the recurring chat was about how much Dubai might need this time. Among other things, that bank invested a small part of the huge oil surplus that being Opec’s [Organization of the Petroleum Exporting Countries’] third-largest producer generated.
The UAE joined Opec in 1967. Prior to Opec, the world’s oil production was controlled by the so-called Seven Sisters – the seven largest western oil companies. For the 20 years after the second World War, the oil market was rigged by these companies in favour of oil-consuming countries. Seeking sovereignty over their resources, oil producers set up Opec in order to set the global price of oil, agreeing to maintain prices by limiting supply via a strict quota system.
Saudi Arabia is the main operator in Opec, running like the central bank of the oil market. Because it is the biggest producer and has the most capacity, Saudi Arabia can turn on and off the taps, pushing the price of oil up and down as it sees fit. Ultimately, although this is rarely made public, the other Opec members go along with Riyadh’s wishes. Critically, Saudi can drill a barrel of oil for under $10, and therefore, in theory, it can sustain long periods of low oil prices. Long periods of low global oil prices can only be orchestrated from Saudi Arabia because the other more expensive oil producers need higher prices to make it possible to drill for their less accessible oil. In practice, oil price wars originate in Riyadh.
Over the years, the UAE was happy to go along with Saudi’s lead. But the UAE isn’t a small producer. It has the world’s seventh largest proven oil reserves, and extraction costs are also below $10 a barrel - not far above that of Saudi. It produces 3.17 million barrels a day, making it the third-largest producer in the group after Saudi Arabia and Iraq. The other three of the six original Opec members are Kuwait, Iran and Venezuela. Ironically, Opec was designed to bring stability and wealth to those oil-producing countries, but today Venezuela is a poor protectorate of the US, Iran is at war, and Kuwait still looks over its shoulder nervously to see who is in power in Baghdad.
Over the years, most of the original members broke with Opec’s strict cartel rules, breaking their quotas to garner more short-term revenues. The UAE was far better behaved. Ultimately, the UAE is without doubt the most successful of the old Opec member states and, given the company it is keeping in Opec, is it any wonder that the UAE decided last week to leave the dysfunctional cartel?
Recently, the UAE’s foreign policy has become more assertive. Any instability in the region is frowned upon by the Emirates; instability affects business. As a monarchy, it has been resolute in its opposition to radical Islam, seeing what radical Islam did to the Shah of Iran. That urge for stability and capitalism has also driven it towards the US and, unexpectedly, Israel. After all, the UAE’s implacable enemy is not Tel Aviv, but Tehran. Indicative of the complex politics of the region, Abu Dhabi, along with other rich oil- producing Arab monarchies, is even a significant backer of Donald Trump’s Gaza Riviera plan. The Palestinians are not high on Abu Dhabi’s agenda. The immediate dilemma for the latter is not the West Bank or the Palestinians, but stopping the rockets coming from Iran.
The Iranian war has become an international hostage situation where the UAE is the hostage, Iran is the hostage-taker, and the US will have to pay a ransom to Tehran. For the Iranians, the UAE is America’s weak spot. As a result, the UAE has found itself in an impossible situation, stuck between Saudi Arabia with American support and Iran with its Russian support. Russia has also done its bit to undermine the Opec cartel system, because Moscow is not going to stop production when it needs all the oil revenue it can get to prosecute the war in Ukraine and keep the local Russian economy ticking over.
Now that Abu Dhabi’s revenues from oil exports are caught in the Strait of Hormuz, that tourism and travel money has dried up and that its real east market is tanking, Abu Dhabi needs cash. The war and the artificially high cost of oil give it a chance to leave Opec, to pump oil and not cause oil prices to fall. From a timing perspective, there couldn’t be a better time for the UAE to go it alone.
Small countries prefer cartels, communities and larger geopolitical structures because smaller players are protected by being at the top table with the big boys. It takes real courage to realise that maybe the time has come to leave the club. Faced with the changing dynamics of the region, the UAE has come to the conclusion that it can’t depend on the kindness of strangers. If this is the end of Opec, expect more chaos in oil markets before things settle down into a new status quo.