The importance of biofuels has mainly been discussed in terms of their potential to reduce carbon emissions and thus combat climate change, but in a world of uncertain oil supplies, their potential as a means of overcoming supply shocks is increasingly significant.
Russia’s 2022 invasion of Ukraine was one such shock, causing a surge in oil prices as many nations sought to slash their use of Russian oil and gas to curb funding for Vladimir Putin’s war machine.
Now, a different war has created a major crisis as Iran has closed the straits of Hormuz and the USA has responded by blockading Iranian ports. The upshot is a growing number of tankers stuck in the Gulf, unable to take their oil around the world.
With further disruption caused by attacks on refineries by Iranian drones and by America on Iranian facilities, even the reopening of the straits of Hormuz will not immediately restore supplies to pre-war levels.
Why Is The UAE Leaving OPEC?
All this has occurred even before another announcement that could be a game-changer for the role of Middle Eastern countries in producing and trading oil.
Since 1960, up to a dozen countries, mostly but not all in the Middle East, have been working in concert through the Organisation for Petroleum Exporting Countries (OPEC). This cartel has worked together to rake in the export cash while keeping domestic fuel prices low.
However, the organisation now faces losing one of its more significant members, following the announcement by the United Arab Emirates (UAE) that it is quitting the cartel.
According to analysts, the reasons behind the decision include:
- A desire to increase production after substantial recent investment and not be constrained by OPEC quotas
- Concerns that some other members have not fully complied with quotas
- One of the world’s lowest ‘break-even’ production costs, meaning it can still be profitable even when world prices are weak
The measure may have some short-term global benefits in lowering oil prices and it raises the question of whether OPEC will hold together. The US government will be very happy if it does not, as less cartel control could increase oil supplies and keep prices down.
Why Is The UAE Embracing Biofuel Production?
However, this is not all about fossil fuels. Some might be surprised if there is an increase in the use of biofuel vacuum relief valves across the UAE, but the fact is that the country’s energy sector investment strategy has included ramping up its biofuel production capacity.
It established a new national Biofuels policy in May last year, with the prime minister and ruler of Dubai, Sheikh Mohamed Bin Rashid, stating that the cabinet had agreed the framework for “encouraging the production and consumption of locally produced biofuels”.
The statement also noted that the policy would ‘contribute to environmental protection and public health, fostering sustainable development, and reducing the effects of climate change’.
If the country is not only looking to increase oil production but also to encourage biofuels, this suggests that the UAE may be looking to expand its economy using both sources.
What Impact Have Biofuels Had On OPEC?
The relationship between biofuels and OPEC has been a complicated one, as highlighted by a University of California study published in the early 2010s. This noted that the introduction of biofuels had a different effect in the context of a cartel than it would in an open market.
It concluded the following:
- The introduction of biofuels had less of an impact on price in OPEC countries than elsewhere
- Crude oil production and consumption were down in OPEC countries
- However, overall fuel consumption (including alternatives to crude oil) rose
It also noted how the arrival of biofuels affected OPEC pricing policies, with the fall in oil revenues being mitigated “by increasing domestic fuel consumption, but reducing exports more than implied by the introduction of biofuels under the competitive model”.
What that suggested was that the arrival of biofuels did not pose an existential threat to OPEC or its members’ economies.
However, the fact that the UAE was getting on board with biofuel production before making its decision to leave OPEC suggests that there was at least some recognition of the benefits of diversification even among countries with the most abundant crude oil reserves.
Now that the UAE has left OPEC, the impact on its economy of biofuels will be closer to market competition model projections than the distortions of cartel practices. This alone could offer more opportunities for biofuel, not least as the UAE embraces it.
The wider ramifications may depend on the future of OPEC, if indeed it has one. But while some countries will cling to their vital oil revenues, others may follow the lead of the UAE, if not in leaving OPEC, then in taking the strategic decision to embrace biofuel production.
