The Starting Gun on Stranded Assets
By quitting OPEC, the United Arab Emirates (UAE) has sent a clear signal that long-term fossil fuel demand is in doubt – and that the scramble to offload stranded assets has begun. A commentary by J.Christopher Proctor, and Romain Svartzman
“Stranded assets” is a term used to refer to all the capital – natural, human and physical – that will no longer be relevant in a decarbonized world. These assets have long been understood as a potential risk of the ecological transition: as demand for fossil fuels declines, so too does the value of the machines, infrastructure, and know-how built around them, creating financial and geopolitical instability as these assets become unusable and therefore unsellable.
For instance, a 2023 IMF Working Paper assessed how rapid decarbonization could – in large part because of stranded assets – significantly impact the current account of fossil fuel exporting countries.
The trillion-dollar question is who will be left holding these assets when the music stops and they are well and truly stranded for good.
Last week the United Arab Emirates (UAE) shot the starting gun in what could end up becoming a grand race to offload stranded oil assets.
By pulling out of OPEC – and the broader OPEC+ grouping that includes Russia – the Emirates have declared loud and clear that they will not restrict supply in the face of a credible long-term decline in demand, which could eventually leave unpumpable oil in the ground somewhere.
Better, Abu Dhabi has apparently reasoned, to sell what they can now, diversify away from oil revenues, and let someone else risk ending up with unsold barrels tomorrow in the name of $100-a-barrel oil today.
A wake-up call on stranded-asset risk
Until now, it has been genuinely unclear how seriously markets and governments have taken the risk of large-scale fossil asset stranding.
Part of this uncertainty has reflected ambiguity around decarbonization timelines and the credibility of net-zero commitments. Part of it has also reflected persistent hopes in carbon capture and storage technology, which, if deployed at scale, could in theory allow fossil fuels to survive a net-zero transition. Together, these factors have made it easy to defer the hard question of who ultimately bears the cost.
What makes the UAE’s move particularly striking is its timing. It comes at what appears to be a low point in international climate cooperation, with the US having withdrawn from the UNFCCC and a range of other multilateral environmental agreements.
The EU, long a leader on climate mitigation, is itself at risk of backsliding on key commitments. And yet, even against this backdrop of weakening ambition, one of the world’s largest sovereign oil producers has apparently concluded that long-term fossil fuel demand is sufficiently in doubt to justify abandoning a decades-old supply management framework. That is a significant signal and could be a starting gun in a scramble to offload stranded assets.
Geopolitics as an accelerant
The immediate trigger for the UAE’s withdrawal was not a climate summit or a policy announcement, but a geopolitical shock: the US-Israeli attack on Iran and Iran’s subsequent retaliation against UAE infrastructure.
Previous analyses of stranded assets have focused on how the process of stranding could itself generate geopolitical tensions – as exporters compete for a shrinking pool of buyers and the trillion-dollar question becomes increasingly urgent.
What may have been underappreciated is the reverse dynamic: the role of geopolitical fragmentation in accelerating asset stranding in the first place. If conflict and instability are what finally convince major producers to break ranks on supply discipline, then we may be looking at a reinforcing feedback loop.
Geopolitical fragmentation accelerates stranding; stranding, in turn, makes coordination among producers and consumers harder; and harder coordination drives fragmentation further. It is a dynamic that deserves far more attention than it has received.
Price and financial stability implications
The financial consequences of this shift have yet to fully materialize. The most immediate effect (after an eventual end of the US blockade on Iran and the Iranian closure of the Strait of Hormuz) will likely be downward pressure on oil prices as UAE production ramps up, as has been widely discussed.
But the more consequential question may be a subtler one: does the UAE’s move – with its implicit acknowledgment that long-term oil demand will fall short of supply – begin to alter the valuation of fossil fuel assets more broadly?
And will it affect decisions about whether and how to rebuild damaged fossil infrastructure once the current conflict concludes?
These are precisely the kinds of potentially systemic risks that central banks should be tracking closely as potential threats to financial and price stability. As we have argued elsewhere, monetary and fiscal authorities cannot afford to treat energy, finance and geopolitics as separate domains. The UAE’s decision is a reminder of why.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
