UAE Backs the Arab Cause

The UAE has said that it will not back any US military intervention in Iraq and has called on Washington to focus on curbing Palestinian-Israeli violence. Public protests – rare in the UAE – against Israeli actions in the occupied territories have grabbed popular attention, although Saddam Hussein’s call for expanding Iraq’s oil embargo to the rest of the Gulf is unlikely to bear fruit. All the same, oil prices have continued to rise in recent weeks, a trend UAE oil minister Obaid bin Saif al Nasseri has attributed to concerns over a US led attack on Iraq. His statements, and OPEC’s decision to stick with current quotas, are an indication that world oil supply is not the underlying cause for the price rises. Meanwhile Gulf countries are continuing to take steps to profit from gas production.



The US vice-president Dick Cheney was briefly in Abu Dhabi on his regional trip in March, from which he returned claiming that most Arab governments would tacitly not be opposed to US military action against Iraq. The UAE minister of state for foreign affairs Sheikh Hamdan bin Zayed al Nahyan countered this supposition on March 28th by saying that the UAE stood with other Arab countries by opposing a "military strike against any Arab country under any excuse". The UAE President Sheikh Zayed bin Sultan al Nahyan shortly afterwards called on Washington to "take a clear and strong stand on the side of justice and international law" regarding Israeli operations in the West Bank and Gaza.



The UAE population has also made its voice felt and has joined other Arabs throughout the Middle East in protesting against Israel. A number of demonstrations have taken place - naturally officially sanctioned – including one in Dubai last week attended by the emirate's crown prince Sheikh Mohammed bin Rashid al Maktoum.



Barely a week after the March 27th-28th Arab summit in Beirut, the UAE also attended the Organisation of the Islamic Conference meeting in Kuala Lumpur, at which the Islamic countries largely repeated the Arab stance. The attendees also looked at an Iraqi proposal of April 1st that envisaged a repeat of the 1973 oil embargo, to target the US for its perceived failure to bring Israel's Prime Minister Ariel Sharon into line. The producers of the Gulf quickly rejected the notion noting that without oil revenues stemming from sales to the US, they would not be able to help the Palestinian cause. A further issue is that Middle Eastern oil is less dominant globally than it was in 1973 and the Gulf countries are more reliant now on the income and on the US for defence. The Arab countries are also keen to push harder for diplomacy and to try and implement the Saudi peace initiative they agreed on in Beirut.



All the same, the threat from Iraq had an impact on the price of oil over the Easter weekend, with Brent, the international benchmark, reaching $26.88 per barrel on April 2nd, bringing prices up around 50% since lows of around $18 in mid-January. The international concern is that higher oil prices could harm the fragile recovery in the US economy. When Iraq implemented its threat on April 8th the oil price rose again, but early indications are that other Arab oil producers will not follow suit, and may raise their own production levels to take up the slack.



The threat of less Iraqi oil through US military action had already affected the price by the time of the mid-March OPEC meeting in Vienna, but the attendees ruled out any change in production levels until June in line with their agreements of December 2001. The current level of 21.7m barrels per day (bpd) gives OPEC an idle capacity of around 5m bpd, plenty to cover Iraqi shortfalls if the country is attacked. That OPEC did not raise production levels at its March meeting is an indication that it does not believe the price rises to have come from a shortage of supply, but purely from concerns over regional conflict. Furthermore, the OPEC price range is $22 to $28 per barrel, although US treasury secretary Paul O'Neill had said the previous week that he regarded $18 to $25 as a comfort zone for the US economy.



In the meantime, Gulf countries are looking at implementing their own comfort zone, at a time when oil prices are relatively low in real terms. Gas is regarded as a far cleaner and cheaper fuel and producers are moving to maximise on its potential. The largest regional gas project is the Dolphin project to bring gas from Qatar, which has the world's third-largest reserves, to the UAE, which sees gas demand rising by around 10% per year. Much of this is through a rapidly rising population and an increase in industrial use.



On March 19th the chairman of Dolphin Energy Limited (DEL) Ali Ahmed al Sayigh said that the crucial agreements with UAE distributors in Abu Dhabi and Dubai would be finalised by September. This would be a vital step as the company hopes to raise around 70% of the estimated $3.5bn that it will cost to build the pipeline through loans by the first quarter of 2003, but banks are keen to see the gas sales agreements before securing financing for the project.



Although Abu Dhabi has significant gas reserves, its gas is full of sulphur and is heavily associated with oil, making it far more suitable for re-injection to improve oil recovery rates. The most likely scenario is that the electricity companies of Dubai and Abu Dhabi will take the gas at a price subsidised by the government, freeing domestic gas for use elsewhere.



Meanwhile Iran has expressed an interest in joining the project, according to the vice-president of the National Iranian Oil Company (NIOC) Ahmad Rahgozar on March 19th. Iran has the world's second largest gas reserves and is looking to expend its production and exports. The difficulty with it joining the Dolphin project is that DEL is committed to buying Qatari gas- although company officials do not rule out future purchases from Iran- and the continuing dispute over three islands in the Gulf claimed by both the UAE and Iran.