Image source, Getty Images
The United Arab Emirates’ (UAE) sudden departure from the Organization of Petroleum Exporting Countries (OPEC) is a significant development. Emiratis had been part of OPEC even before the formation of the United Arab Emirates in 1971.
OPEC mainly comprises Gulf countries that export oil. For decades, the organization has influenced crude oil prices by adjusting production levels and setting quotas for member states. During the oil crisis of the 1970s, OPEC played a major role in shaping global energy policies.
While Saudi Arabia holds dominance over OPEC production, the UAE possesses the second-largest additional oil production capacity. This made the UAE the second most important “swing producer,” capable of increasing output to lower prices.
For this reason, the UAE reconsidered its position, aiming to utilize its production capacity in line with its investment.
According to OPEC quotas, the UAE’s daily oil production was limited between 3 million to 3.5 million barrels. Compared to other members, the UAE faced more significant revenue losses.
However, the UAE’s decision to exit OPEC appears connected to the Iran conflict. Tensions in the Gulf region have affected UAE-Iran relations and could worsen its ties with Saudi Arabia.
Possible Impact
The stability of OPEC is now under question, and the UAE’s exit is a significant blow to the organization.
If the UAE can openly supply oil to the market via sea routes or pipelines, it plans to produce up to 5 million barrels per day. Saudi Arabia may respond by lowering prices. Although the UAE’s economy could withstand a ‘price war,’ weaker OPEC members might struggle.
Much will depend on Saudi Arabia’s response.
Image source, Getty Images
Senior UAE officials have revealed plans to transport oil extracted from their fields in Abu Dhabi through a lesser-used pipeline to the Fujairah port, bypassing the strategic Strait of Hormuz.
Currently, only one main pipeline is in use, but increasing production will require expanding its capacity. Changes might also occur in the traffic and costs of oil tanker movements in the Gulf.
Although the Strait of Hormuz is currently subject to separate blockades by Iran and the United States, the UAE’s departure from OPEC is not an immediate major event for global markets. It will not instantly affect prices of oil, gas, petrol, plastics, or food commodities.
Global attention is currently on oil prices reaching around $110 per barrel. However, lifting of the Strait of Hormuz blockade next year could reduce the price to nearly $50 per barrel. US midterm elections are scheduled towards the end of this year.
‘Everything Can Change’
Compared to the 1970s, OPEC’s influence in today’s global oil market has diminished. Back then, OPEC members produced about 85% of the oil in international markets; now, that figure has dropped to around 50%.
Oil is no longer as critical to the global economy as before. While OPEC remains important, it no longer holds a monopoly.
I recall a quote from former OPEC leader and Saudi Arabia’s former oil minister Sheikh Yamani: “Even if the stone runs out, the Stone Age did not end; the oil age will not end because oil runs out.” This reflects how alternative energy sources continue to replace hydrocarbons.
The UAE’s move can be viewed as a sign of the world’s decreasing reliance on oil. Other indicators reinforce this trend—for example, China’s investments in electrification have helped it mitigate the impact of rising oil and gas prices.
China’s shift to electric cars, trucks, and trains has reduced oil demand by about 1 million barrels daily. If electric vehicle adoption grows globally, oil demand may stabilize.
Therefore, it seems logical to extract and profit from oil resources quickly before demand significantly decreases. The UAE’s strong economy and partial diversification through financial services and tourism support this strategy.
Much will depend on how tensions in the Gulf region evolve and the ‘new normal’ that emerges.
The UAE’s exit from OPEC could trigger a cascading effect, exerting substantial pressure on Saudi Arabia.
Once oil tankers resume transit in the region or the UAE establishes new pipelines, Emirati oil could reach the market in larger quantities than before, potentially freeing the UAE from OPEC’s production commitments.
While the UAE’s departure has little immediate impact on current sea route blockades, the situation could change significantly in the future.
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