The United Arab Emirates said on Tuesday it would leave OPEC effective May 1, ridding the oil cartel of its third-largest producer and further weakening its influence on global oil supplies and prices.
The UAE’s decision has been rumored for some time, as it has pushed back in recent years against OPEC production quotas it felt were too low, meaning it was unable to sell as much oil to the world as it wanted.
“The UAE, which has invested heavily in recent years to expand power generation capacity, better be eager to pump more oil,” Capital Economics wrote in an analysis. “The ties that bind OPEC members together have loosened,” it said, especially after Qatar quit the cartel in 2019.
Regional politics are probably also at play. The UAE has an increasingly frosty relationship with Saudi Arabia, OPEC’s biggest producer, over political and economic affairs in the Middle East, even after both countries came under attack from fellow OPEC member Iran during the war.
Sources: US Energy Information Administration; OPEC.
OPEC oil production
OPEC accounts for about 40% of the world’s oil production, but its market power has been waning in recent years as the United States has increased production. While Saudi Arabia produced more than 10 million barrels of oil per day before the war, the US pumps more than 13 million barrels per day.
The United Arab Emirates, which became part of OPEC in 1967 through Abu Dhabi, produced about 3.4 million barrels of oil a day before the US-Israeli war with Iran began on February 28. Analysts estimate that its production capacity could reach around 5 million barrels per day.
Why did the UAE leave OPEC?
In a statement released on Tuesday through its state news agency WAM, the United Arab Emirates also said it would withdraw from the wider OPEC alliance, which Russia has contributed to stabilize world oil prices.
“This decision reflects the UAE’s long-term strategic and economic vision and evolving energy profile,” the UAE said in a statement.
“During our tenure in the organization, we have made significant contributions and made even greater sacrifices for the benefit of all,” it added, as reported by AFP.
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“However, the time has come to focus our efforts on what our national interest dictates.”
The UAE’s withdrawal removes one of the few OPEC members with the ability to quickly increase production, said Jorge Leon, head of geopolitical analysis at Rystad Energy. “A structurally weaker OPEC, with less spare capacity concentrated within the group, will find it increasingly difficult to calibrate supply and stabilize prices,” he said. Associated Press.
Saudi Arabia and the United Arab Emirates are increasingly at odds
Saudi Arabia and the United Arab Emirates find themselves increasingly at odds over economic interests and regional politics, particularly in the Red Sea region. Although they joined forces in 2015 to fight Yemen’s Iran-backed Houthi rebels, that alliance fell apart in late December when Saudi Arabia carried out airstrikes on an arms shipment it said was destined for UAE-backed Yemeni separatists.
When was OPEC formed?
The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Today, it has 12 member countries – including the United Arab Emirates – which together hold more than 80% of the world’s proven oil reserves. Other members include Algeria, Equatorial Guinea, Gabon, Libya, Nigeria and the Republic of Congo.
The main objective of the Vienna-based group is to manage and stabilize oil prices by coordinating changes in production levels among its members.
What was OPEC’s goal?
The goal was to keep oil prices at a level that allows member governments to fund their budgets and benefit from their natural resources, while keeping them low enough to avoid triggering a recession in oil-importing countries or reducing energy consumption, a situation known as demand destruction, the AP reported.
That approach has sometimes drawn pushback from American leaders, where the price of gasoline is highly political. US President Donald Trump at one point accused OPEC “robbing the rest of the world” and his predecessor, Joe Biden, also pushed OPEC to produce more oil, the AP reported.
Read also | Saudi Arabia begins shifting oil exports to Red Sea amid Hormuz disruption
OPEC says it aims to “coordinate and unify oil policies among member countries to ensure fair and stable prices for oil producers; efficient, economical and regular supply of oil to consuming countries; and a fair return on capital for those who invest in the industry”.
OPEC signaled a change
The formation of OPEC marked a shift from a global oil industry dominated by Western companies to one in which resource-rich countries gained greater control over their oil and revenues.
OPEC’s production decisions have significantly affected the world economy at various points. In 1973, its Arab members imposed an oil embargo on the United States and other countries supporting Israel during the Yom Kippur War, causing the price of oil to quadruple, leading to fuel shortages and long lines at gas stations in the US.
In 2016, OPEC expanded its cooperation to partner with 10 other oil-producing countries, including Russia, to form the broader OPEC+ alliance.
The United Arab Emirates has chafed at the cartel’s restrictions on production
The UAE is seeking greater independence in how much oil it sells. Cartels keep prices higher but limit members’ earnings and market share against non-cartel members. There has been long-standing friction between the United Arab Emirates and Saudi Arabia, OPEC’s biggest producer and the cartel’s de facto leader, the AP reported.
One reason to produce more now: Experts expect oil consumption to peak in the coming years as the world shifts to renewable energy sources that don’t emit carbon dioxide, the greenhouse gas that drives climate change. That means barrels underground could be worth more today than they might later when oil consumption falls, so production cuts could mean lost profits, according to the AP report.
OPEC could lose some of its influence on prices
The UAE’s withdrawal removes one of the few OPEC members with the ability to quickly increase production — a mechanism through which the cartel controls oil prices, Jorge Leon, head of geopolitical analysis at Rystad Energy, said, AP reported.
“A structurally weaker OPEC, with less spare capacity concentrated within the group, will find it increasingly difficult to calibrate supply and stabilize prices,” Leon said. “The net effect points to a more fragmented supply and potentially more volatile oil market over time as OPEC’s ability to balance imbalances declines.”
The departure will not add oil to the market while the strait is blocked
Iran is blocking Strait of Hormuza vital route used by oil tankers carrying about a fifth of the world’s oil and gas reserves. The disruption prevents large volumes of oil from Gulf producers such as Saudi Arabia and the United Arab Emirates from reaching international markets. As a result, oil prices have risen sharply in the short term, making them the most immediate factor causing price increases.
Read also | Why is the Bab el-Mandeb strait important and what happens when it is blocked?
If the United Arab Emirates achieves its goal of producing more oil after the war, it could accelerate a return to price levels more in line with pre-war prices, said Michael Brown, research strategist at Pepperstone FX brokerage, AP reported.
“As far as oil is concerned here and now, the only thing that matters is whether the Strait of Hormuz is open or closed,” he said. “It’s pretty much shut down at the moment, supply conditions are getting tighter day by day and we’re probably also seeing the benchmarks keep going up every day.”
What do the experts think?
Jorge Leon, an analyst at Rystad Energy, said its withdrawal may not have an immediate impact on oil markets, while supplies to Hormuz will remain suspended, the AP reported.
However, the UAE will now be able to increase output, which “raises wider questions about the sustainability of Saudi Arabia’s role as a central market stabilizer – and points to a potentially more volatile oil market as OPEC’s capacity to balance supply imbalances declines”.
Jamie Ingram, editor-in-chief of the Middle East Economic Survey, said OPEC is losing 13% of its production capacity due to the UAE’s exit, citing the International Energy Agency.
No immediate impact on global oil markets is likely
The UAE’s withdrawal from OPEC will not necessarily have any immediate effects on the markets. That’s because the world’s oil supplies are severely limited by the war in Iran, which has closed the Strait of Hormuz, the waterway through which a fifth of the world’s oil supplies are transported – including much of the UAE.
Global oil prices surged on Wednesday amid fears of supply disruptions. Brent crude oil climbed from a low of $70 a barrel before the Middle East conflict to above $110, market data showed.
Angola was the last OPEC member to leave the cartel in 2024.
(With input from agencies)
