The UAE had recently made a shocking announcement that it was leaving OPEC, days after Treasury Secretary Scott Bessent publicly backed an emergency dollar swap line for Abu Dhabi before the U.S. Senate. According to Forbes, while the Middle Eastern nation has been facing strains for a while, it was the war in Iran that pushed it to the edge.
“The war suddenly made job one for the UAE ‘take the money and run,’” says Steve H. Hanke, professor of applied economics at Johns Hopkins University. “First, OPEC stood partially in the way, now the Iran war poses a much bigger danger for a long time to come.”
UAE said in a press release “The decision reflects the UAE’s long-term strategic and economic vision and evolving energy profile, including accelerated investment in domestic energy production.” Included was a confirmation that the UAE seeks to lift production beyond the OPEC strictures—framed by understatement apparently designed to avoid freaking the oil market. The UAE pledged to bring “additional production to the market in a gradual and measured manner, aligned with demand and market conditions.”
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The Forbes report says that the development did not surprise Hanke who served on the UAE’s Financial Advisory Council from 2008 to 2014.
Years earlier, he had developed an economic model that addressed how fast an oil-rich nation should produce, assuming different rates of decline in the “real,” or inflation-adjusted price of crude. That projection specified the rising “discount rates” at which the reserves lost value the longer they stayed in the ground. The faster the projected decline in the dollars a barrel fetched on the world market, the quicker a nation should pump to maximize its profits.
“The system showing those optimal pumping rates made sense to them,” says Hanke. “If you think future prices are going higher, you slow down and wait to produce. If you think they’re going lower, you ramp up fast.”
UAE began pushing hard for a much higher share of OPEC’s output in 2021. According to Hanke, this is because its Abu Dhabi-based government was increasingly concerned about the rise in green energy that threatened a long-running slide “real” fossil fuel prices.
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Sustainable technologies looked so promising to the UAE that it invested heavily in projects ranging from solar farms to sustainable aircraft fuel to low-emission hydrogen. “That led to the strategy of ‘pump like hell today,’” says Hanke. The UAE significantly increased its oil investments and wanted to use that added capacity by pushing OPEC to raise its production limit by about 50% to around 5 million barrels a day. This led to tensions with Saudi Arabia, which was already at odds with the UAE over conflicts in Yemen and Sudan.
Things escalated when fellow-OPEC member Iran attacked the UAE following the U.S.-Israeli attacks on Iran.
“The problem’s gone from a long-term decline in the real price, to the possibility that in the future, they won’t be able to sell all, or can only sell much less, because Iran controls the Strait of Hormuz, or periodically takes out part of its infrastructure,” Hanke said.