The departure of the United Arab Emirates due to quotas restricting oil production threatens to jeopardize the existence of the entire cartel, which has lost relevance since the oil crisis of the 1970s.
It is a very significant development that the United Arab Emirates (UAE) has announced its abrupt exit from OPECthe Organization of Petroleum Exporting Countries. The Emirates were members even before becoming a nation-stateem 1971.
OPEC is the organization made up mainly of oil exporters from the Gulf, which for many decades controlled the price of crude oildecreasing or increasing production and distributing quotas among its members. It played a vital role in the oil crises of the 1970s, which in turn transformed global energy policy.
Although OPEC production is dominated by Saudi Arabia, the UAE had the second largest idle production capacity. In other words, they were the second most important equilibrium producer, able to increase production to help ease prices.
Indeed, this is precisely what has led to long-term reconsiderations of the UAE’s position. Simply put, the UAE wanted to utilize the considerable capacity in which they had invested.
OPEC quotas limited their production to 3-3.5 million barrels per day. The sacrifices arising from OPEC membership, in terms of lost revenue, were being made disproportionately by the UAE.
However, the timing of this decision suggests consequences of the war with Iran. The tension in the Gulf has affected the UAE’s relationship with Iran and could affect its already tense relationship with Saudi Arabia.
As for OPEC, this is a major blow at a time when significant questions arise about its long-term cohesion.
It is not just that the UAE, when it can fully resume supplying its oil to the market by sea or pipeline, will likely seek a production of 5 million barrels per day. Saudi Arabia might respond with an oil price war that the UAE’s more diversified economy could withstand, but other poorer OPEC members might not.
Much depends on Saudi Arabia’s response.
Senior UAE officials talk about new oil pipelines from the UAE’s oil fields in Abu Dhabi, bypassing the Strait of Hormuz and heading towards the underutilized port of Fujairah.
There is already a pipeline in heavy use today, but more capacity will be needed to deal with increased production and with the permanent change in the fluidity and cost of oil tanker traffic in the Gulf.
For now, of course, during the 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 the world is understandably focused on oil at $110 per barrel, this is nevertheless a reason not to rule out the possibility that it could be closer to 50 dollars sometime next year – if the situation in the Straits is resolved, for example, in time for the US mid-term elections later this year.
OPEC is less important to world oil markets than it was in the 1970s, with the 85% share of internationally traded oil it held at that time being today. something around 50%. Oil is also less crucial to the world economy than it was in the 1970s. OPEC has influence now, but not a monopoly. It cannot, so to speak, hold the world hostage.
OPEC leader, former Saudi Oil Minister Sheikh Yamani has already said: “The Stone Age did not end because the world ran out of stones. The Oil Age will not end because the world runs out of oil.” This foreshadows a world where hydrocarbons will be replaced by other energy sources.
One way to interpret the UAE’s action is as a sign of this world of less dependence on oiland there were other indications in the current turmoil: China’s investments in electrification helped cushion the economic impact of rising oil and gas prices.
According to some calculations, the electrification of cars, trucks and trains in China has reduced demand for oil in the world’s second largest economy by 1 million barrels per day. Global demand for oil could stabilize as this trend accelerates around the world.
From this perspective, it makes sense to raise as much money as possible from oil reserves as quickly as possible, before demand collapses. The United Arab Emirates has financial power and a partially diversified economy, through financial services and tourism.
Much will depend on what the new normal will look like when hostilities in the Gulf cease.
The UAE’s exit from OPEC could trigger a series of other chain effectsand there will now be considerable pressure on Saudi Arabia.
When oil tankers return to sailing through the Strait, or if the UAE steps up its efforts to build new pipelines, Emirati oil will flow like never before, unfettered by OPEC commitments.
This will have little effect on current lockdowns. But everything could change later.
