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.
