Topic: Discuss the main reasons why the UAE oil industry has experienced major difficulties in recent

years.
Would trade protection measures (e.g., tariffs and non-tariff barriers) on imports of oil and oil products solve
these difficulties?

Group 4C - Members:
Megha Gvalani H00173912
Namrah Shahid H00387474
Joshua Varghese H00391021

Word Count: 2,006

“The oil and gas industry is the lifeblood of the UAE’s economy since the commercialization of hydrocarbons in the
1960s.” (Aminjonov, 2020) The United Arab Emirates Economy is strongly fronted with the Oil and Gas industry
amassing at least 30% of the country’s GDP making it one of the main factors of the growth of the United Arab
Emirates economy,“With the advantage of enormous oil reserves and small, albeit growing, populations, the region
exports the majority of its oil production” (Dargin 2014), As per Al Sherif 2018 GCC and the United Arab Emirates are
suppliers of oil to at least half the world’s population, Which makes the economies of such countries highly
concentrated to the revenues of the oil industries. UAE being an oil-rich country and oil production at its forefront
even with steady diversification to other sources of income, Oil production still has the major share of the country’s
GDP. High oil prices strengthened the key macroeconomic indicators in the UAE. The recent empirical literature
suggests that the income from oil production is more likely to have a negative development impact and, in the
extreme case, it could lead to a decline in oil income at the end of the boom” (Haouas and Heshmati, 2014)

The United Arab Emirates boasts the world’s seventh-largest oil and gas reserves, representing 13.2% of the
production for the Middle East (International Trade Administration, 2022). In addition, for the year 2020, the country
was producing on average approximately 3.66 million barrels per day (mmbpd) with oil reserves of close to 100
billion barrels (Mordor Intelligence, 2022). The reliance of the country on natural resources is substantiated with
30% of its GDP being linked to the output of oil and gas for the year 2020 (OPEC, 2021).

In 1967 the UAE qualified as a full member of the Organization of the Petrol Exporting Countries – a collaborative
effort by 13 member countries as of 2022 that seeks to provide stabilization of oil prices in the market, harmonization
of petroleum policies, regular market supply, and secured income to the producing nations (OPEC, 2021). With
proper trade regulations, the Oil industry in the United Arab Emirates can sustain itself.

Studies have shown a steady decline recently with the UAE oil industry amidst the global pandemic which has
impacted the oil industry widely. Amidst the global pandemic and a shift towards sustainability the world has been
pushing away from the use of oil and oil products has further caused the UAE oil industry to falter. Price Wars
between countries have already been causing major issues in the oil supply. OPEC+ production cuts, which led to a
sharp contraction of oil exports and government revenue, constraining the performance of oil-liquidity-dependent
sectors. These points are discussed in-depth below:

Covid-19
The COVID-19 pandemic had forced down global demand for oil by an estimated 10-30% during the period March-
April’2020 and an annual reduction of 6-10% was forecasted by the ‘International Energy Agency’ (Soupa, Debarre
and Catanzariti, 2022). This only added to an existing oil over-supply crisis in the world causing oil prices to drastically
fall and linger around USD 20 per barrel (Rampone, 2022). As a result, the UAE’s forecasted budget for 2021 also
took a hit of roughly 5% from the previous year because of rapidly declining and settled low oil prices which
prompted the country to bring about oil production cuts in the economy which in turn impacted oil revenues
(Mordor Intelligence, 2022).

Price War: Russia and Saudi Arabia

The environment of low oil prices in recent years has caused the UAE government’s revenues to decline year on year
from making up approximately 41% and 29% of GDP in the years 2013 and 2015 respectively. The onset of the global
pandemic brought with it a war on oil prices between exporting giants Saudi Arabia and Russia which resulted in a
further collapse of crude oil prices. In addition, OPEC began to flood the global market with increased production of
cheap oil that was not met by the consistently falling demand, and within a span of four months; January to April
2020, the price of crude oil fell from USD 64 to USD 18 (Soupa, Debarre and Catanzariti, 2022).

This meant that for the UAE economy, the year 2020 saw real GDP effectively reduce by 6.1% which also contracted
government spending by 15% despite the implementation of quantitative easing mechanisms through monetary
policies (Devaux, 2021).

OPEC+ Resolution
By May 2020, the OPEC+ agreement announced oil production and output cuts as a measure to stabilize the market.
According to (FitchRatings, 2020) however, this would drive the GCC countries further into a fiscal deficit and force
contractions in GDP for these economies. Fiscal deficits for the year 2020 for the GGC countries were estimated at
around 15-25% of GDP. To balance these impacts, the UAE announced an economic stimulus amounting to slightly
over 10% of GDP in the form of monetary packages to support businesses (FitchRatings, 2020).

Shift to Renewable Sources of Energy

Given the recent volatile fluctuations in oil prices aggravated by the global pandemic, the UAE government has used
this as further incentive to diversify its portfolio by utilizing surpluses from oil revenues to support other, non-oil
industries (World Bank, n.d.).
UAE’s renewable energy market is estimated to grow at a rate of 7.5% CAGR for the period 2022-2027. This growth
has been backed by the increasing emphasis placed on the need for more sustainable methods of energy generation
as a response to global greenhouse gas concerns and the advancements made in solar power technology and
implementation (Mordor Intelligence, 2021). However, because of adopting diversification in sources of income, the
UAE has been the most vulnerable in the region to the effects of COVID-19 and sharp reductions in oil price have
resulted in the economy shrinking by roughly 5.3% in the year 2020 (Rampone, 2022).

By using the trade protection methods both through tariff and nontariff barriers, countries are looking to stabilize
themselves and find a workaround through these difficulties.

By putting up trade barriers, trade protection aims to limit imports. While trade openness and free trade are
increasingly in favor, protectionism continues to gain ground. The straightforward approach of lobbyists to gain more
money via tariffs is perhaps too unsubtle to succeed in the long run. In the view of protectionists, the issue is that
they must create a burning issue around which oil tariffs can be seen as an obvious solution.

As a result of the global economic crisis and the subsequent drop in demand, there is currently an oversupply of oil
in several parts of the world, causing fierce struggle for market segment and price conflicts. Essentially, there are 2
kinds of trade protection tools: tariffs and non-tariffs. In order to regulate trade, OPEC+ countries use tariff methods,
which include tools such as customs duties and tariff quotas. By regulating imports based on actual customs
protection, custom duties come into play. The world economy may suffer a significant decline due to these
measures, which could lead to more conflict. Import tariffs are used to control imports. In this way, the OPEC+
countries' quota for oil production is lowered, which will result in decreased output and potentially increased
struggles between the two main producers - Russia and Saudi Arabia - or the two major consumers - the United
States and China. To increase competitiveness on the globe's oil market, state regulation in individual OPEC +
members should aim to protect export interests and limit imports. Many domestic regulation methods are designed
to protect domestic markets from external opposition, which is why many of them are centered on regulating
imports. (Zhang, Hajiyev and Smirnov, 2021)

Almost all countries experience significant non-market barriers, because of weak contract enforcement, low levels
of safety, and low levels of transparency and accountability in customs and other trade measures, together with
areas where international trade regulation is postulated.

As reported by the UNCNAD report, non-tariff measures like voluntary state restrictions, licensing requirements,
quarantines, and quotas made up more than 50% of world trade in 2020 in the OPEC+ countries. (AMADEO, 2022)
In addition, there is an important point to note: OPEC+'s willingness to cooperate under the Charter increases the
chances that global demand for oil will slow amid increased supply from other countries, especially the United States.
For this reason, the parties to OPEC + should consider the interests of all participants in the global oil market to
ensure that their cooperation remains sustainable and effective market and political threats. Recent legislation,
including the No Oil Producing and Exporting Cartels Act (NOPEC), allows the Department of Justice to take antitrust
action against oil supplier associations with coordinated policies on oil production, supply, or prices, on the basis
that such associations intentionally limit production to manipulate prices. Considering the current decline in oil
demand amid the pandemic COVID-19, various estimates predict the market could reduce oil production due to low
business activity, and rethink business models that will concentrate on the domestic market and alternate energy
sources. Oil production, according to OPEC, helps the global economy recover from the pandemic, but investors are
investing in more promising assets than oil, which may be viewed as paradoxical. (Zhang, Hajiyev and Smirnov, 2021)

As of 2020, both tariff (customs duties, quotas, tariff escalation) and non-tariff barriers will exist (including license
requirements, quarantine, and voluntary state restrictions in OPEC and other countries). The OPEC + Agreement
requires the member states of the agreement to demonstrate flexibility in the current economic conditions while
pursuing a policy to reduce excessive oil reserves in the coming years, despite increased competition and a
complicated geopolitical environment.

Most oil and gas-dependent economies confront diversification resistance as they progress from one stage of
development to the next, a phenomenon is known as the “resource trap.” The fact that most diversification
investments are funded by oil income creates a catch-22 situation. While no normative criteria exist for how nations
should diversity along their development trajectories, some studies have offered valuable policy insights (Abdalla
Alfaki and El Anshasy, 2022)

“All resource-rich countries live in the perennial fear of the supply of the resource being exhausted. Clearly, this is
an eventuality that UAE will have to confront at some point in time in the future.” (Fernandes & Karnik, 2009) Limited
resources and depleting oil reserves may be a cause of concern that policymakers must focus on, diversification
would be the most logical step for the United Arab Emirates.

While the United Arab Emirates tries to diversify its economy by shifting the weight of the Oil and Gas industry to
non-oil and gas sources of income however which cannot determine if the economy would be able to profit a shift
to sustainability may not be able to show gains until much later in the future. Analyzing the volatile nature of the oil
industry as well as finding sustainable sources to profit the economy may be a cause of concern for the United Arab
Policymakers. While being one of the most volatile industries the United Arab Emirates Oil industry faced numerous
uncertainties analyzing or forecasting projected gains and losses while the world was facing a global pandemic
proved too difficult. Coupled with analyzing whether stricter regulations on Oil production from the OPEC+ may be
a boon for the United Arab Emirates in the long run.

“There is no reliable way to estimate the impact of the present and future cuts in petroleum revenues. History has
made it clear that any models can prove wrong, and almost invariably do. Much depends on assumptions, and even
the best economic model is inherently limited by the fact it cannot deal with political and security issues. (Cordesman
& Markusen, 2016). the United Arab Emirates policymakers must keep in mind other factors including political,
environmental as well as security issues while making policies for the oil and gas industry as economic models do
not factor into these issues. The volatile nature of the oil industry makes it difficult to keep up with the changes,
hence policymakers cannot rely solely on economic models.

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