Alan Riley is a Visiting Professor at the College of Europe in Natolin, a member of the Advisory Committee of the Energy Community in Vienna, and a Senior Fellow at the Atlantic Council. The Ukrainian Week spoke to him about the implications of the United Arab Emirates leaving OPEC, why that is bad news for Russia, and why Ukraine’s strikes on Russia’s oil industry are proving highly effective.
– The Wall Street Journal has described the United Arab Emirates’ exit from OPEC as a significant strategic win for the United States over the Saudi-led alliance and, by extension, Russia. Do you agree with that assessment?
– What you’re seeing now is something that simply wouldn’t have been possible twenty years ago. Much of it comes down to the United States becoming the world’s largest producer of both oil and natural gas — largely thanks to the shale revolution. That surge in output has poured additional supply into global markets, weakened OPEC’s grip on prices, and given Washington more sway over how the market moves.
You also have to look at several factors at once. First, the sheer scale of U.S. production. Then, more recently, Venezuela has effectively moved under American direction. Now the United Arab Emirates is entering the picture, and that is starting to shift the dynamics further. The UAE has always mattered for a few key reasons. One is its “swing capacity” — the ability to ramp production up when needed, something Saudi Arabia has also relied on. To run an oil cartel, you need to be able to both increase and cut output. Those with that flexibility are the ones that really shape the market.
Taking the United Arab Emirates out of OPEC would really undermine the cartel. Adding that to the capacity of the United States itself as a major oil producer, along with Venezuela and the UAE, begins to significantly change the dynamic. I think you have to look at a number of things you might start to see. The United Arab Emirates already has roughly two million barrels a day of pipeline capacity that can bypass the Strait of Hormuz. They have a pipeline that allows them to move production around the strait. My suspicion is that this will be increased significantly in the future. That would probably require a lot of Ukrainian air defence to protect it, but I can see that as something that may well happen. You can see that a number of elements are starting to come into play that begin to undermine the cartel.
Of course, the underlying problem is that it has less traction than it once did, partly because of the United States. But it is also because — and this is something I think is often underestimated — the electric vehicle revolution poses a major threat to revenues going forward. To put it in perspective: Europe uses roughly ten million barrels of oil a day, and about six million of that in the European Union is for transport. If electric vehicles begin to roll out at scale, the impact is significant. Globally, we consume around one hundred million barrels a day, with roughly twenty million passing through the straits. If you consider that about half of global demand is tied to transport, and then factor in the potential for electric vehicles to replace internal combustion engines, the scale of the threat to the market becomes clear.
I think several factors are coming together here: the United States as a producer, which is opening a crack in OPEC; the electric vehicle revolution; and, of course, the damage being done to Russian production through the sustained strikes Ukraine is carrying out. All of these are part of the same picture.
– Is it fair to say that the United Arab Emirates leaving OPEC is bad news for Russia in the long term?
– If you work on the assumption that the cartel can influence price, it is not simply about pushing it to the highest possible level. They understand that doing so would create strong incentives to find new supplies, as happened in the 1970s, or to accelerate the shift towards electric vehicles. The aim is to extract the maximum possible revenue without, as it were, “scaring the birds” by destabilising the market. In that sense, while Russia is not formally part of OPEC, it operates as a kind of shadow member and works alongside it, which is to Russia’s advantage.
What you have now is the prospect of the United Arab Emirates outside the cartel, with its swing capacity effectively aligning — at least in part — with the United States to maximise production. The US approach, for domestic political reasons, is generally to favour the lowest possible oil price. There is also another factor that may be shaping the UAE’s thinking: if you take the view that oil’s role as the central global commodity is gradually coming to an end because of the electric vehicle revolution, then oil in the ground tomorrow may be worth less than oil in the market today. That creates an incentive to pump as much as possible in the period between now and the end of oil’s dominance.
That is a real shift in the market. We do not yet know whether the UAE becomes a kind of “canary in the coal mine” — the first to move, with others potentially following. But if everyone starts pumping as much as possible, the end result would ultimately be downward pressure on prices going forward.
– Speaking about prices, over the weekend US Treasury Secretary Scott Bessent said he expects oil prices to fall below January levels within three to nine months, provided the Strait of Hormuz remains open. He also pointed to the UAE leaving OPEC as a key factor pushing prices down, and suggested that a price war could even follow. Do you expect prices to move in that direction — and is a price war after the UAE’s departure really on the cards?
– I think there are several factors at play here. I would be more inclined to say nine months rather than three months. The issue is that when you stop producing oil — perhaps the best way to explain it is to set out the current framework of what I think is happening.
At present, we are talking about roughly twenty million barrels a day that would normally pass through the straits. We have found that the East–West Pipeline, which runs from Saudi Arabia’s eastern provinces to the Red Sea, is now operating at full capacity, moving around seven million barrels a day. Iraq, we think, is moving around one million barrels a day, although it is not entirely precise because we are not one hundred per cent sure. The United Arab Emirates has a diversionary pipeline that can handle up to about two million barrels a day. We believe the Iranians are able to export at least one million barrels a day. That gives you roughly eleven to twelve million barrels a day. So out of the twenty million, about twelve million are getting out.
The problem is that the remaining oil cannot get out. It takes a matter of weeks to get flows back up and running again. I would put that at a minimum of three months.
Of course, if the Iranians, the Israelis and the Americans start actually blowing up terminals, refineries, production facilities and pumping stations, that becomes a different scenario altogether. During the Cold War there was the concept of Mutually Assured Destruction (MAD). I think there is a kind of oil equivalent of that as well. No one is currently going around deliberately targeting major oil production or distribution facilities — apart from some incidents in Bahrain and Kuwait, which may have been accidental. On the whole, nothing significant has been attacked.
The Americans have, however, said they would strike oil production and distribution facilities if necessary. As long as that remains the case, then you are looking at a three- to nine-month period to get things moving again. There are other dislocations, but three to nine months sounds reasonable to me once the decision is taken to reopen the straits — provided, of course, that the infrastructure is not destroyed.
The other point is that if this continues for several more months, there are a couple of additional factors worth noting. As I mentioned earlier, the use of electric vehicles is already increasing. China, in particular, has huge capacity to produce them and will likely be selling large volumes, probably in the Global South given tariff barriers in Europe and the United States. The effect of that will be to reduce oil demand. If this situation drags on for a few more months, we could end up in a scenario where demand is no longer running at around 100 million barrels a day, but closer to 95 million.
There are some interesting International Monetary Fund studies comparing the introduction of the internal combustion engine after 1900 with the speed of electric vehicle introduction today. It is a complex issue to assess the pace, but once this operates at scale — because once people get used to electric vehicles and more charging stations are in place, it becomes normal — more and more people will adopt them. There is a danger that you trigger something which significantly undermines the oil price. Forty to fifty per cent of oil use is for transport, so there is a danger to the entire global oil market. This may be the worst possible thing that could happen for the dominance of oil. We may be exiting the oil age courtesy of Donald Trump, which is quite ironic given the fact he is “Mr. Drill, Baby, Drill.”
From Moscow’s perspective, what Donald Trump is doing could be absolutely disastrous for their ongoing revenues. If you have a situation where Ukraine has been attacking oil towns and reducing export capacity, plus sanctions, and then the dynamic consequence at the end of the war is a very significant fall in demand for oil pushing the price below forty dollars a barrel, that is very dangerous.
– When do you expect electric vehicles to start having a real impact on oil prices — and what kind of timeframe are we talking about?
– I think it is quite clear. China has ramped up production massively and is now able to produce a very significant share of global car sales. It can produce something like 50 million cars a year, and probably more than half of those can be electric vehicles. In other words, it has the capacity to produce vast numbers of electric vehicles. The risk is that if these are rolled out at scale — because energy prices remain high or because people expect these kinds of shocks to repeat — then you are creating a threat to the market that did not exist before. My sense is that the momentum is clearly there. I have not seen recent reports yet on the specific impact of electric vehicles on oil demand, but that is likely to become a very important issue.
– Given the situation in the Middle East, the UAE’s exit from OPEC, and the possibility that the Strait of Hormuz could reopen by the end of the year, do you expect India to shift back towards buying mainly Middle Eastern oil rather than Russian oil? And is it also plausible that China could favour Middle Eastern supplies over Russian ones?
– There are two things going on here. As I understand it, the Indians have started taking oil from Venezuela to replace Iranian oil. They are still receiving some Iranian oil, but that shift is taking place and is being supported by the United States.
With China, there are several factors. One is the impact of electric vehicles on Chinese oil use, which must be significant. Secondly, they currently rely heavily on Gulf oil, not just from Iran. They are still receiving Iranian oil through the straits. I imagine that if the Saudis are diverting seven million barrels a day via the Red Sea, China is getting some of that as well, and perhaps some from the United Arab Emirates, too. Those states will still be able to produce and sell. Of course, China also gets a lot of Russian oil from oil fields in Eastern Russia.
They also retain large oil stocks — some say at least about seven months’ supply. They have diversionary options and can reduce consumption by using more electric vehicles. Their real concern is not ending up in any way dependent on the United States.
The worry for China is that this conflict could end with Washington actually having more control over the straits than it had at the outset. That would be a concern for Beijing. It can still get oil from Russia, but it also does not want to become dependent on Russia. That leaves China in something of a dilemma. It does have a few other sources of oil, but they are not substantial. That is quite problematic for China going forward.
– On Ukraine’s strikes against Russian oil refineries and terminals, is it possible through sustained, day-to-day attacks to significantly undermine Russia’s ability to export oil and supply fuel to the front line?
– There are a number of different elements to this. Look at what has been done so far. The Ukrainian armed forces have been focusing on what you might call “efficiency of action.” They have largely been targeting the terminals, distribution systems and production facilities for oil moving through the Baltic Sea. Fifty-seven per cent of seaborne oil trade goes through the Baltic Sea, so hitting that is highly efficient. It is relatively close to Ukraine and represents the biggest prize. When you strike it hard enough in a number of different places, and are able to do so repeatedly, it creates a very serious problem. You cannot simply reroute the oil elsewhere — it is locked into those systems.
In terms of the efficiency of resources, this is highly effective. It makes a lot of sense from an economic warfare perspective. On the front line, the problem the Russians face is that they have to stockpile oil resources and move them to specific locations. That means creating depots where different types of fuel are concentrated to run jets and tanks. With Ukraine’s drone capability, it should be possible to destroy a significant amount of that infrastructure. That requires range, the right kinds of drones and intelligence. As long as those elements are in place, a substantial share of that supply can be taken out.
– Is it fair to expect that, once the hostilities between Iran, the United States and Israel are over, sanctions on Iranian oil would also be lifted?
– I would imagine that would only be possible if the Americans felt they had secured a deal they could really live with. Without that, I don’t think they would. It is possible, but I would be surprised at this stage. There is also an economic incentive at play. If there is an issue around the level of oil supply, you might consider lifting sanctions as part of a broader deal with China. That would give Iran more room to export to China. I can see how that could work as a possible strategy, but I suspect the Americans would want quite a lot in return for it.
