Oil’s Buggy Whip Moment

The race to sell before demand disappears.

We pick up today building on yesterday’s dispatch, which focused on the UAE leaving OPEC on “read.”

The financial press made a lot of the Emirates’ exit from the oil cartel and what it means for (supposed) dollar dominance. Hint: It doesn’t mean what the media thinks it means.

But today we move on… to a second consequence of Abu Dhabi’s decision that has received almost no attention—and it may ultimately prove more damaging to American economic interests.

It starts with a simple question: Why now?

The UAE has been chafing under OPEC’s production quotas for years. The frustration is not new. What’s new is the urgency.

And to understand the urgency, you need to understand how Abu Dhabi’s leadership is actually thinking about the value of its oil reserves—because their logic, once you see it, has profound implications for every oil producer in the world, including the ones operating in the Permian Basin and across the US.

Johns Hopkins economist Steve Hanke, who served on the UAE’s Financial Advisory Council for six years, was blunt about what’s really driving Abu Dhabi’s calculus: “The war suddenly made job one for the UAE: take the money and run,” he told Fortune.

The reasoning is straightforward once you understand the underlying economics.

The UAE has watched green energy rise for years. It has invested heavily in solar, low-emission hydrogen, and sustainable aviation fuel—not out of environmental idealism, but out of cold financial logic. A country sitting on vast oil reserves understands that those reserves have a present value that declines as the world transitions away from fossil fuels.

It’s sort of like being a buggy-whip maker with a vast inventory of unsold buggy whips right when Henry Ford starts talking about this new-fangled thing called an “automobile.” What is your natural instinct if you realize Henry is right? You sell every buggy whip you possibly can before the buggy whip is no longer one of life’s necessities.

In oil terms, if you expect the price to fall in the future, the rational move is to produce everything you can today and pocket as much wealth as possible before the world stops being so dependent on oil.

That thinking led to the UAE’s strategy of “pump like hell today,” Hanke said. It’s the primary reason the UAE has been pushing OPEC since 2021 to raise its production quota by roughly 50%, to 5 million barrels per day, which is the upper end of the UAE’s production capacity.

Saudi Arabia, which dominates OPEC, told the UAE to effectively bugger off.

Now the UAE has removed the constraint entirely by simply walking away.

Here’s where problems begin to settle in for America…

The UAE is preparing for a world after the Iran war where oil demand is in long-term decline as green-energy rises up. The UAE also sees OPEC’s power to maintain production discipline will be weaker as countries rush to pump everything they can to recoup lost revenue.

If other Gulf producers reach the same financial conclusion—that you gotta pump pump pump to maximize profits before the oil era dies—what follows is effectively a global “pump like hell” moment across OPEC and beyond.

Every major producer will race to extract maximum value from a depreciating asset before the window closes.

That is a structural oversupply scenario.

And structural oversupply means lower oil prices.

Potentially much lower.

American consumers might well cheer that because of the lower gasoline prices it implies.

But that’s a hollow victory beyond the gas pump.

The average breakeven price for new shale oil wells in the US currently sits at approximately $70 per barrel, with industry projections showing that figure rising toward $95 per barrel by the mid-2030s as prime Permian wells—the so-called Tier 1 wells—deplete.

The most efficient operators can work closer to $60, and a handful of the most technologically advanced Permian producers have pushed breakevens into the $30-40 range.

But the industry average it exposed is what it is, and a sustained price environment at $50 per barrel would be enough to cause US rig counts to fall sharply, potentially cutting US crude supply by 700,000 barrels per day.

Anyone with grey hair in the oil patch has seen this movie before—twice—and they know how it ends.

Badly!

In the mid-1980s, Saudi Arabia, frustrated with carrying the burden of OPEC production cuts while others cheated, opened the taps to teach the cheaters a lesson. Oil collapsed from above $30 a barrel to under $10 by 1986.

And in that plunge, the Texas and Louisiana oil industries were devastated. Banks failed. The savings and loan crisis that followed cost American taxpayers roughly $160 billion (half a trillion dollars today).

Entire communities in West Texas, south Louisiana, and Oklahoma simply stopped functioning.

Then… the cycle repeated in the late 1990s, when a combination of Asian financial crisis demand destruction and OPEC overproduction pushed West Texas Intermediate—the US benchmark oil price—to below $11 a barrel.

Once again, the domestic industry contracted sharply. I remember this moment vividly. I was a writer covering the Texas oil patch from the Dallas bureau of The Wall Street Journal. I remember conversations I had in Houston, Laredo, and out to the west of Lubbock with oilfield owners who were having to shut in dozens of wells because they were losing money on every barrel of oil they produced.

Bankruptcies were as common as the West Texas heat.

It took the shale revolution of the 2000s and 2010s to rebuild the American energy sector.

The UAE’s break-up with OPEC does not trigger a price collapse tomorrow. The Strait of Hormuz is still effectively closed, constraining Gulf exports regardless of quota. But the war will not last forever. And when it ends, the UAE will be unconstrained and motivated to produce at maximum capacity into whatever price environment exists.

If others follow—Kazakhstan has already been mentioned as a potential next departure—the cartel that has managed global oil supply for decades fractures into a collection of individual producers, each rationally pursuing their own financial interests in a declining-demand world.

The result is a race to the bottom on price that punishes the highest-cost producers first.

And the most-significant high-cost producer in the world… is the American shale industry.

Washington spent this week congratulating itself on keeping the UAE in the dollar system, but what it missed is that the UAE’s actions are a direct threat to the American economy and the American energy industry.

As I wrote in yesterday’s dispatch: Not everything is as it appears.