The sudden announcement of the departure of the United Arab Emirates (UAE) from OPEC is a fact of great relevance. The Emiratis were members of this organization even before becoming a nation-state in 1971.
While OPEC production is dominated by Saudi Arabia, the UAE had the second largest excess production capacity. In other words, it was the second member with the greatest capacity to increase production quickly and help moderate prices.
Indeed, it was precisely this that led to long-term reconsiderations of the UAE’s position. Simply put, the UAE wanted to take advantage of the valuable capacity it had invested in.
OPEC quotas limited its production to between 3 and 3.5 million barrels per day. The sacrifices of member countries, in terms of lost revenue, fell disproportionately on the US.
However, the timing of this measure points to consequences derived from the war with Iran. The tense situation in the Persian Gulf has affected the UAE’s relationship with that country and could affect its already tense relationship with Saudi Arabia.
As for OPEC, this is a serious blow at a time when important questions are being raised about its long-term coherence.
It is not just that the UAE, when it can return all its oil to the market by sea or pipeline, will probably aim for production of 5 million barrels a day. Saudi Arabia could respond with an oil price war that the UAE’s more diversified economy could withstand, but that other poorer members of the group might not.
Much depends on the Saudi response.
New pipelines
Senior Emirati officials talk of new pipelines from Abu Dhabi’s oil fields, which would bypass the Strait of Hormuz and head towards the currently underused port of Fujairah.
There is already one pipeline in full use today, but more capacity will be needed to cope with increased production and a permanent change in the fluidity and cost of oil tanker traffic in the Gulf.
For now, of course, during a double blockade of maritime traffic in the Strait of Hormuz, this is not the main development in the oil markets, affecting the prices of oil, gas, gasoline, plastics and food.
Although it is understandable that the world is watching the price of oil at US$110 per barrel, precisely for this reason it should not be ruled out that it could fall to close to US$50 at some point next year.
This could happen if the chaos in the Strait of Hormuz is resolved in time, for example, before the US midterm elections, scheduled for later this year.
OPEC was created in 1960 in Baghdad, Iraq, to defend the interests of a group of oil-producing countries from the power and influence of American and European oil companies.
The idea for creating the group came from Venezuela, the only one of the five founding members that was not located in the Persian Gulf.
Currently, it is made up of 12 countries: five from the Middle East, six from Africa and one from South America (Venezuela).
These members control 38% of the world’s oil supply and have 79.5% of proven reserves, according to the organization’s official data from 2022.
For decades, OPEC had enormous influence on the price of crude oil.
It works like a cartel: an alliance between companies or countries that produce the same good that agree to coordinate their production and prices for their own benefit, without the need to compete with each other.
Depending on the production they agree to, they have managed to manipulate oil supply and prices for years.
However, its influence has waned over the decades.
How important is OPEC?
OPEC is less important to world oil markets than it was in the 1970s, as its then 85% share of internationally traded oil has fallen to more like 50%.
Oil is also less critical to the world economy than it was in the 1970s. OPEC has influence now, but not a monopoly. He cannot, so to speak, blackmail the world.
I remember OPEC leader, former Saudi Arabian Oil Minister Sheikh Yamani, telling me: “The Stone Age did not end because the world ran out of stones. The Oil Generation will not end because the world ran out of oil.”
This heralds a world in which hydrocarbons will be replaced by other energy sources.
One way to interpret the UAE’s action is as a sign of this less oil-dependent world, and there have been other clues in the current maelstrom: China’s investments in electrification have helped cushion the economic blow of rising oil and gas prices.
By some estimates, China’s electrification of cars, trucks and trains has reduced oil demand in the world’s second-largest economy by a million barrels a day. Global oil demand could stabilize as this trend accelerates around the world.
From this point of view, it makes sense to raise as much money as possible from reserves as quickly as possible before demand plummets. The UAE has financial power and a partially diversified economy, thanks to financial services and tourism.
Much will depend on what the new normal will be if hostilities in the Persian Gulf cease, and also the date on which this occurs.
The UAE’s exit from OPEC could trigger a domino effect, with Saudi Arabia now facing appreciable pressure.
When oil tankers return to spherical through the Strait, or if the UAE redoubles its efforts to build new pipelines, Emirati oil will flow like never before, unrestricted by commitments to OPEC.
It will have little effect on current lockdowns. But I could change everything later.
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