Johns Hopkins economist Steve Hanke on why the UAE quit OPEC
The decision was shocking. However, on April 28, the UAE Leaving OPEC ends years of tension where the desert state is upset with the cartel’s quotas and has recently faced serious tensions in its relations with Saudi Arabia, by far the group’s strongest power. Although it has felt tensions before, it was the war in Iran that pushed the UAE to the brink. “The war suddenly made the UAE’s primary job ‘take the money and run,'” says Steve H. Hanke, professor of applied economics at Johns Hopkins University. “First of all, OPEC partially prevented it, now the Iran war poses a much greater danger for a long time.”
The UAE did not mention the Gulf conflict in its public announcement. “The decision reflects the UAE’s long-term strategic and economic vision and evolving energy profile, including accelerated investment in domestic energy production,” the press release said. These included a confirmation that the UAE was seeking to raise production beyond OPEC restrictions, framed by understatements apparently designed to avoid spooking the oil market. The UAE has pledged to “bring additional production to the market in a gradual and measured manner, in line with demand and market conditions.”
One unsurprising observer of the move was Hanke, who served on the UAE Financial Advisory Council from 2008 to 2014. Years ago, he developed an economic model that considered how fast an oil-rich country should produce by assuming varying rates of decline in the “real” or inflation-adjusted price of crude oil. This estimate noted increasing “discount rates” at which reserves lose value the longer they remain in the ground. The faster the expected decline of the dollar per barrel in the world market, the faster a nation must pump to maximize profits. Hanke shared his work with the UAE’s economic leaders. “The system that showed optimal pumping rates made sense to them,” says Hanke. “If you think prices will rise in the future, you slow down and wait to produce. If you think they will fall, you move up quickly.”
The UAE has begun to press intensely to get a much higher share of OPEC’s production starting from 2021. To Hanke, the reason was clear: His Abu Dhabi-based government was increasingly concerned about the rise in green energy that threatened the long-standing decline in “real” fossil fuel prices. In fact, sustainable technologies looked so promising for the UAE that it invested heavily in projects ranging from solar farms to sustainable aviation fuel and low-emission hydrogen. “This led to the ‘pump like hell today’ strategy,” Hanke says. Accordingly, the UAE has greatly accelerated its oil investments and tried to put all this new capacity into practice by pressuring OPEC to raise its limit from around 50% to around 5 million B/d. These demands soured Saudi Arabia and its relations with the two countries. also clashed They support the warring parties in both Yemen and Sudan.
