Explained: The UAE’s exit from OPEC, and its possible impact on global oil prices

What is OPEC, and when did the UAE join the group?

Founded in September 1960 at the Baghdad conference in Iraq, OPEC was originally established by five founding members, namely Iran, Kuwait, Iraq, Saudi Arabia and Venezuela.

Prior to its formation, Western multinational oil companies (often referred to as the Seven Sisters) largely dictated the prices paid to oil-producing nations. Created to counter this dominance, OPEC’s agenda was to coordinate the petroleum policies of its member states to ensure that they received stable returns for their products.

The UAE formally joined the alliance in 1967, six years before the OPEC oil embargo was imposed on nations like the United States and the Netherlands due to their support of Israel in the Arab-Israeli war. With oil prices nearly quadrupling in this period as a result, OPEC steadily gained geopolitical leverage while extending membership to countries like Algeria and Nigeria.

In 2016, OPEC+, a wider alliance that onboarded 10 major non-OPEC producers (led by Russia) was created. A response to the US’s booming shale oil production, OPEC+ produced roughly 40% of the world’s crude oil and accounts for 60% of internationally traded petroleum, according to the US Energy Information Administration (EIA).

OPEC’s central role in global markets

Undertaking a role resembling that of a central bank for the global oil market, OPEC’s primary tool is its power over the supply management of oil. OPEC attempts to manage oil prices by regulating production limits and setting strict quotas for each of its member countries.

This means that a member state may or may not be able to hit its peak oil production capacity, depending on OPEC-assigned limits. Designed to protect the market from oversupply during times of reduced global demand, these quotas ensure members collectively pump less oil to prevent a crash in per-barrel pricing.

Conversely, it also affords them the luxury of increasing production during supply shortages, ensuring that prices do not skyrocket. Given these countries’ heavy dependence on oil revenues, such mandates allow them to protect their domestic budgets from unforeseen shocks.

Role of the Iran War

The UAE’s decision is likely intertwined with the security concerns in West Asia.

With the recent US-Iran war, Abu Dhabi’s immediate oil-related concerns are centred around the Strait of Hormuz, which has seen the number of ships passing through reduced to a trickle. Responsible for roughly a fifth of the world’s oil transport before the war, the conflict has also directly resulted in targeted attacks on the supply dynamics of Gulf oil countries, with oil refinement and production facilities damaged.

More importantly, with Iran a founding member of OPEC, the alliance’s consensus-based decision-making restricts the UAE’s ability to secure its exports. Furthermore, the Gulf nations (including the UAE) have historically relied on the US as a guarantor of their regional security, but its recent inability to prevent the Gulf from being collateral damage in their war has undermined this relationship.

Exiting OPEC removes diplomatic constraints on the bloc, allowing the UAE to independently use its massive oil supply as leverage to forge new strategic partnerships and secure its own defence arrangements outside of traditional Western channels.

Larger economic concerns

Beyond the war, too, the UAE had reasons to exit the grouping. The country has historically seen its production limits capped at only a portion of its capacity. The UAE Energy Minister, Suhail al-Mazrouei, told Reuters that “A careful look at current and future policies related to level of production” spurred the decision to leave.

Backed by a $150 billion investment, the state-owned Abu Dhabi National Oil Company (ADNOC) had set a target of increasing the country’s maximum sustainable crude oil production per day to five million barrels by 2027. OPEC’s strict quotas have seen the UAE underutilising both its infrastructure and natural deposits.

This is also tied to the region’s vision of shifting away from fossil fuels to a knowledge-based economy. Racing to diversify its economy, the UAE has expanded into sectors such as education and technology in the hopes of attracting (and retaining) top talent from around the world. Ironically, doing so requires pumping out more oil to accumulate the capital required to transition towards a post-oil economy.

Impact on oil pricing

The UAE’s exit will significantly weaken OPEC. It undermines the organisation’s influence, which relies on collective member action and control over the majority share of global spare capacity. This refers to the maximum volume of crude oil production that OPEC nations can bring within 30 days and sustain for a minimum of 90 days.

Essentially, it is the unused production capability of OPEC reserves, which have generally been held by Kuwait, Saudi Arabia and the UAE. Considering the technological advancements made by the UAE aimed at maximising production, OPEC will undoubtedly face pressure to match its new competitor.

Basic economics dictates that this competition will exert downward pressure on oil prices and lead to increased volatility, adding to the strain felt by the US-Iran war. In the short term, downward pressure reduces the price per barrel for oil-importing countries like India. On the other hand, it could also eventually lead to a wider pool of oil-supplying countries for India to choose from.

In the future, it also raises the possibilities for other OPEC nations, such as Saudi Arabia, to follow suit and abandon their own quotas.