Why the UAE’s exit from Opec is a big deal

A very big event announced by the United Arab Emirates (UAE) Sudden exit from OpecOrganization of Petroleum Exporting Countries. The Emirates were members even before becoming a nation state in 1971.

OPEC is an organization composed primarily of Gulf oil exporters that has controlled the price of crude oil for decades by reducing or increasing production and distributing quotas to its members. It played a vital role in the oil crises of the 1970s, which changed global energy policy.

While Saudi Arabia dominated OPEC production, the UAE had the second highest spare production capacity. In other words, it was the second most important swing producer that was able to increase production to help ease prices.

In fact, this is exactly what has led to a re-evaluation of the UAE’s position in the long term. Simply put, the UAE wanted to utilize the significant capacity it had invested in.

Opec quotas limited production to 3-3.5 million barrels per day. OPEC membership sacrifices were being made disproportionately by the UAE in terms of lost revenue.

However, the timing of this move points to the consequences of the Iran war. The pressure cooker in the Gulf has affected the UAE’s relations with Iran and could also affect its already tense relations with Saudi Arabia.

As for Opec, this is a major blow at a time when significant questions are being asked about its long-term viability.

It’s not just that the UAE is likely aiming for production of 5 million barrels per day once it can bring its oil fully back to market via sea or pipeline. Saudi Arabia could respond with an oil price war that the UAE’s more diversified economy could withstand, but other poor OPEC members might not.

Much depends on the Saudi response.

Leading Emirati officials are talking about new pipelines running from the UAE’s oil fields in Abu Dhabi across the Strait of Hormuz to the underused port of Fujairah.

There is already a pipeline in heavy use today, but more capacity will be needed to cope with increased production and the permanent change in the fluidity and cost of tanker traffic in the Gulf.

Of course, for now, this is not the main event that affects the prices of oil, gas, petroleum, plastic and food in the oil markets during the period of double blockade of maritime traffic in the Strait of Hormuz.

While the world is understandably focused on oil at $110 a barrel, this is a reason not to ignore the possibility of oil approaching $50 a barrel next year; if the turmoil in the Bosphorus is resolved, for example, in time for the US midterm elections later this year.

OPEC’s importance for world oil markets is decreasing than in the 1970sWith an 85 percent share of internationally traded oil, today it has a share of over 50 percent. Oil is also less critical to the world economy than it was in the 1970s. Opec now has influence but is not a monopoly. In a sense, he can’t hold the world to ransom.

I remember former Saudi Oil Minister Sheikh Yamani, a leading figure in OPEC, saying: “The Stone Age did not end because the world ran out of stones. The Oil Age will not end because the world ran out of oil.” This heralds a world where hydrocarbons are replaced by other energy sources.

One way to read the UAE’s action is as a sign that the world’s dependence on oil is decreasing, and there are other clues in the current maelstrom: China’s investments in electrification have helped cushion the economic blow from rising oil and gas prices.

By some calculations, the electrification of China’s cars, trucks and trains has reduced oil demand in the world’s second-largest economy by 1 million barrels per day. As this trend accelerates worldwide, global oil demand may stagnate.

In this view, it makes sense to raise money from oil reserves as quickly as possible before demand shrinks. The UAE has financial firepower and a partially diversified economy through financial services and tourism.

Much will depend on what the new normal will be like if hostilities in the Gulf end.

The UAE leaving OPEC could lead to more dominoes falling here and there will now be considerable pressure on Saudi Arabia.

When tankers flow through the Bosphorus again, or when the UAE redoubles its initiatives to build new pipelines, Emirati oil will flow like never before, unconstrained by OPEC commitments.

It will have little impact on existing blockades. It might change everything later.