The United Arab Emirates (UAE) will leave the group of major oil exporting nations OPEC in May, after almost 60 years of membership.
The country announced this Tuesday that its decision would help it meet growing global demand for energy in the long term, after having made recent investments to increase its production capacity.
The Gulf nation’s Energy Minister stated that by becoming a country without binding obligations towards the group, it will enjoy greater flexibility.
The Organization of Petroleum Exporting Countries, OPEC, was created in 1960 by five countries – Iran, Iraq, Kuwait, Saudi Arabia and Venezuela – in order to defend the interests of the main oil exporters by coordinating production, thus ensuring stable income for its members.
The number of countries that make up the group has fluctuated over the years. However, in addition to the five founding members, it currently also includes Algeria, Equatorial Guinea, Gabon, Libya, Nigeria and the Republic of the Congo.
The United Arab Emirates joined in 1967 and by the beginning of this year was the third largest crude oil producer in the organization with about 3.4 million barrels per day. His departure will leave OPEC with 11 members. In addition, there are 10 other non-OPEC members within the broader alliance known as OPEC+ and of which the UAE will also cease to be a member.
The UAE’s departure represents a significant victory for US President Donald Trump, who has harshly criticized OPEC for “ripping off the rest of the world.”
“The beginning of the end”
Saul Kavonic, head of energy research at MST Monetary, stated that this fact marks “the beginning of the end” for the alliance.
“With the departure of the United Arab Emirates, OPEC loses about 15% of its capacity and one of its most disciplined members.”
The country’s decision comes as the World Bank has warned that the war in the Middle East has caused the largest loss of oil supply on record.
As a consequence, energy prices are expected to increase on average by about 25% this year, the institution said. On the other hand, it could take up to six months before maritime traffic through the strategic Strait of Hormuz returns to its pre-conflict levels.
“The poorest people – those who spend most of their income on food and fuel – will be the hardest hit,” said Indermit Gill, chief economist at the World Bank.
The UAE’s decision to leave OPEC will not have an immediate impact on global energy supply – due to the current closure of the Strait of Hormuz – but it could lead to an increase in production in the long term.
According to economists, the country has made large investments to boost its production capacity and has long wanted to increase its oil extraction.
David Oxley, chief climate and commodities economist at Capital Economics, said this exit could lead to lower oil prices but also greater volatility in the market for decades to come.
He added that, although the UAE is a smaller player, the repercussions could be major if other members decide to leave the group, or if countries such as Russia and Saudi Arabia choose to intensify their production.
Carole Nakhle, CEO of Crystol Energy and current secretary of the Arab Energy Membership, told the BBC that the UAE’s decision “has been in the making for a long time.”
“Abu Dhabi has pursued ambitious growth in its production capacity. However, it has often felt constrained by the group’s quotas, especially in the face of uneven compliance by some members,” he said.
Nakhle added that Iran’s actions as an OPEC member are likely to have reinforced the UAE’s decision.
According to the latest OPEC figures, the United Arab Emirates was producing 3.4 million barrels of oil per day in February this year (before the war in Iran began), while Saudi Arabia, the “de facto” leader of OPEC, produced 10.1 million barrels.
“Saudi Arabia will find it difficult to maintain cohesion with the rest of OPEC and will effectively have to shoulder most of the burden on its own when it comes to domestic compliance and market management,” Kavonic said, adding that other OPEC members could follow the same path.
“This represents a major geopolitical reconfiguration of the Middle East and oil markets,” he concluded.
“A decision that could change everything in the future”
By Faisal Islam, BBC News Economics Editor.
The sudden announcement of the departure of the United Arab Emirates from OPEC is a fact of great relevance. The Emiratis were members 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-largest producer with the greatest ability to increase production quickly to help moderate prices.
Indeed, it is precisely this that led to long-term reconsiderations of the UAE’s position. Simply put, they wanted to utilize the substantial capacity they have invested in.
OPEC quotas limited its production to between 3 and 3.5 million barrels per day. The sacrifices of OPEC members, in terms of lost revenue, were being made disproportionately by the United States.
However, the timing of this measure points to consequences arising from the war with Iran. The tense situation in the Persian Gulf has affected the UAE’s relationship with Iran and could affect its already strained 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 OPEC members might not.
Much depends on the Saudi response.
Senior Emirati officials talk of new pipelines that would run from the UAE’s oil fields in Abu Dhabi, bypass the Strait of Hormuz and head to the underused port of Fujairah.
One pipeline already exists and is currently in heavy use, but more capacity will be needed to cope with increased production and a permanent change in the flow and cost of oil tanker traffic in the Persian Gulf.
For now, of course, during a double blockade of maritime traffic in the Strait of Hormuz, this is not the main event in the oil markets, affecting the prices of oil, gas, gasoline, plastics and food.
While it is understandable that the world is focused on oil at US$110 per barrel, this is nevertheless a reason not to rule out the possibility of it approaching US$50 at some point next year, if the chaos in the Strait is resolved, for example, in time for the US midterm elections later this year.
OPEC is less important to world oil markets than it was in the 1970s, as its 85% share of internationally traded oil has fallen to more like 50% today. 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 Expertise 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 oil 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 and when hostilities in the Persian Gulf cease.
The UAE’s exit from OPEC could set off a chain reaction here, and there will now be substantial pressure on Saudi Arabia.
When oil tankers return to transit the strait, or if the US redoubles its efforts to build new pipelines, Emirati oil will flow like never before, unrestricted by OPEC commitments.
It will have little effect on current lockdowns. I could change everything later.
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