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Is UAE abandoning economic logic by extracting more oil? It’s reacting to a big industry shift

The UAE’s decision alters oil’s future trajectory. Rather than a gradual decline dictated by scarcity, there may be a phase of heightened production, followed by abrupt adjustments.

For decades, the economic principles governing oil have been largely influenced by a concept known as Hotelling’s rule. The rule implies that owners of finite resources, such as oil, should refrain from selling their reserves in haste. Instead, they should retain some of the resources, anticipating an increase in their value over time. In this context, oil is perceived not merely as a commodity but as a form of stored wealth.

This rationale hinges on a critical assumption: the future must consistently reward patience. If prices are expected to rise steadily, then deferring sales should be as profitable as selling immediately and investing the proceeds. As a result, in theory, production should gradually decline, with producers withholding supply to capitalise on higher future prices. However, this assumption is currently under scrutiny.

The United Arab Emirates (UAE) appears to be operating under the premise that the traditional rules are no longer applicable. Rather than reducing production, the UAE is increasing its capacity to around 5 million barrels per day by 2027, up from the current level of roughly 3.5 million barrels per day. This is not a minor adjustment; it represents a significant departure from the notion that patience will yield financial rewards.

When the future stops rewarding patience

To comprehend the significance of the UAE’s transition, it is essential to examine the developments within oil markets. Over the past two decades, global oil production has consistently increased, escalating from about 75 million barrels per day in 2000 to over 100 million barrels per day in........

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