Politics Seep Into Oil as Diverging Goals Test Saudi-UAE Ties

Like many relationships, the one between Saudi Arabia and the United Arab Emirates had long rested on two simple principles for when disputes arose: deal with them behind closed doors or bite your tongue.

After the neighbors’ very public spat over future OPEC+ oil output, that’s now looking hopelessly old-fashioned and the consequences are rippling out from the Persian Gulf.

Most obviously, the tussle has left a question mark over crude supply as major nations emerge from Covid lockdowns. OPEC+ abandoned its meeting on Monday without a deal, sending oil past $77.

Politics Seep Into Oil as Diverging Goals Test Saudi-UAE Ties

But it also underlined a growing economic rivalry that’s been sharpened by the pandemic and has implications for global companies, as well as a political divergence with repercussions across the Middle East from Yemen to Israel, Iran to Qatar.

While no one’s saying ties are set to break down, the ground rules have shifted.

“More than 80% of the time, these two capitals are on the same page,” said UAE political science professor Abdulkhaleq Abdullah. “However, there is growing economic competition, it is growing deeper by the day, and we are still in the early stages of it.”

The trigger for the OPEC+ showdown was UAE opposition to a Saudi-led production deal. The U.S. is urging compromise. Abu Dhabi wants to renegotiate the level from which its output cuts or increases are calculated, giving it the ability to pump more oil after spending heavily to increase capacity and strengthening ties with energy-hungry markets in Asia.

The acrimonious rhetoric surprised everyone, said a person familiar with high-level discussions, describing it as politics spilling over into the oil talks and vice versa. Mediation made little headway, and a couple of decisions taken away from the OPEC+ negotiating table threatened to further poison the atmosphere.

Saudi Arabia banned flights to the UAE as talks broke down at the weekend, citing virus concerns. While the timing could be coincidental, it comes ahead of an Islamic holiday when Gulf visitors typically descend on Dubai, now reopened for tourism.

Riyadh also said it would exclude imports from free zones or linked to Israel from a preferential tariff agreement with neighboring Gulf countries, potentially dealing a blow to a key pillar of the UAE economy.

Politics Seep Into Oil as Diverging Goals Test Saudi-UAE Ties

The relationship between Abu Dhabi’s crown prince, Sheikh Mohammed bin Zayed and his Saudi counterpart, Crown Prince Mohammed bin Salman, appears to have cooled, though, as Abu Dhabi flexes its muscles geopolitically, asserting an independent foreign policy. It normalized ties with Israel last year and drew back in 2019 from the Saudi-led coalition at war with Iran-backed fighters in Yemen. Saudi Arabia for its part pushed its Arab allies to restore ties with Qatar to end a separate long dispute, a move the UAE was persuaded to go along with despite tensions continuing to simmer.

The UAE has also engaged in cautious outreach to Turkey, and Ankara has sought to mend ties with Riyadh after the 2018 murder of columnist Jamal Khashoggi at the kingdom’s consulate in Istanbul. Both Gulf states remain suspicious of Ankara’s influence in Arab countries, however, and view its regional ambitions as diametrically opposed to their own.

‘Game On’

At the same time Saudi Arabia has stepped up its ambitious campaign to supplant Dubai as the Middle East’s business capital as it prepares for life after oil. The Saudi push included an ultimatum earlier this year for foreign firms to move their regional hubs to Riyadh by 2024 or lose business.

“The Saudis have explicitly made competition with the UAE ‘game on’ across the aviation business, tourism sector, even green energy, regional headquarters, and now oil policy,” said Karen Young a senior fellow and founding director of the Program on Economics and Energy at the Washington-based Middle East Institute. Still, shared interests mean the neighbors will remain close, she said.

Recent deals indeed suggest Abu Dhabi is keen to stay on good terms with OPEC+ heavyweights Saudi Arabia and Russia. Its sovereign wealth fund Mubadala Investment Co., run by Khaldoon Al Mubarak, a close adviser to the UAE’s Sheikh Mohammed, joined a consortium that paid $12.4 billion for a stake in a pipeline subsidiary of Saudi Aramco. It also paid about $200 million for a holding in Russia’s Eni+ Group International last month.

Dubai’s former finance chief, Nasser Al-Shaikh, said differences over oil policy aren’t the main concern, although it’s better that they’re not aired in public.

“My fear as a Gulf citizen is that the differences move into other issues,” he said on Twitter, adding he trusted leaders to resolve the dispute.

The row also comes at a sensitive time for the region. Both of the Sunni Muslim monarchies are unsettled by U.S. President Joe Biden’s drawn-out attempts to rejoin a nuclear deal with Shiite regional power Iran and world powers.

“What’s exacerbating these tensions is the UAE’s projection of regional leadership,” said a Saudi political analyst, who asked not to be named because of the sensitivity of the topic.

“The UAE’s hyperactivity is used as a machine to project more influence in the region, and perhaps is interpreted in Saudi as trying to overshadow it,” he said. “Both states have already realized the limits of this partnership.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.