DNA Explainer: Saudi Arabia-UAE oil rivalry pinching pockets of Indians, read how

The public fall-out between the two world's biggest oil-producing nations, the United Arab Emirates and Saudi Arabia 'has led to oil prices reaching a six-year high'. The bitter rift between these two nations arose over oil production quotas leading to talks coming to a standstill.

The 23 strong OPEC+ nations comprising Petroleum Exporting Countries and allied producers like Russia, had to postpone their negotiations indefinitely. Monday's OPEC meeting was cancelled and has yet to be rescheduled, leading to market uncertainty. 

The unusual public spat between the UAE and Saudi Arabia over the increase in output by OPEC has kept oil prices volatile.

How the rift started

The problem began last week when the UAE rejected a proposal by OPEC leaders, Saudi Arabia and Russia to extend output curbs for another eight months.

Saudi Arabia supports a plan for OPEC producers to increase oil output in stages by a total of two million barrels per day (BPD) from August through December 2021.

Saudi Arabia also wants to extend the remaining cuts until the end of 2022 instead of letting them expire as planned next April.

The UAE demanded that its own production quota be revised upward, a move that would allow it to increase output further.

The UAE said it could support raising production to two million BPD through the end of the year, but extending a cut in output beyond April would be 'unfair to the UAE'.

The UAE hopes that by increasing the supply now, on the back of the global economic recovery, it can increase the revenue needed to support its economic diversification plans.

Saudi Arabia is cautious that too much of an increase could put downward pressure on prices, stifling investment and leading to supply issues later on.

Effect of COVID-19 on UAE and Saudi Arabia

The Gulf's two leading economies were hit particularly hard by the COVID-19 pandemic.

The UAE's economy shrunk around 6% in 2020, while Saudi Arabia experienced a 4.1% contraction, according to the World Bank.

The collapse in oil prices accompanying lockdowns was a reminder of how much Gulf states still depend on petrodollars.

The OPEC countries are forecasting that peak oil demand could plateau and begin to decline by the late 2030s.

Hence these countries are under increasing pressure to diversify their economic models.