The global energy landscape is changing rapidly, and consumers around the world could feel the impact of this change eventually. Recently, after nearly sixty years of being an OPEC member country, the United Arab Emirates (UAE) has announced that it is no longer an OPEC member country. Not only does this change in membership signal a significant change in OPEC policy; it also suggests that there may be a fundamental shift in the functioning of global oil markets moving forward.
OPEC, or the Organization of the Petroleum Exporting Countries, has traditionally coordinated member countries’ production levels to try to keep ongoing crude oil prices stable. OPEC and its expanded partner organization, OPEC+, together control approximately one-half of worldwide crude oil production. By managing supply of crude oil, OPEC has historically been able to manage prices through a balance of crude oil producers’ revenue and stability of the international crude oil market. The significant decline of OPEC’s power in the last several years due to low crude oil prices and slow crude oil demand will be further compounded by the loss of the UAE as an OPEC member country.
Why the UAE exit matters for OPEC’s control
As one of OPEC’s and OPEC+’s largest crude oil producers, the UAE has significant amounts of excess crude oil production capacity, second only to the Kingdom of Saudi Arabia. This excess production capacity is important, as it provides the ability for oil producers around the world to ramp up crude oil production quickly in case of a supply disruption and reduce production levels during periods of low crude oil prices. With the UAE’s exit from OPEC, the responsibility for balancing the continuing decline in OPEC’s ability to manage international crude oil production has now shifted to Saudi Arabia.
The change described by analysts as creating a “lone stabiliser” issue for Saudi Arabia. Now, they will have to be the primary stabilising force in the global oil market while also attempting to round up compliance with the other producers to their production quotas. Consequently, the lack of cooperation from the UAE makes it more difficult for the organisation to enforce its discipline and increases the level of risk associated with fragmentation within the organisation.
From a structural standpoint, this decision sends a message to all of the other OPEC producers that if a major producer can withdraw from the organisation and implement their own production strategy, it is likely that other producers within the organisation may want to consider doing the same. Over time, this could mean a gradual decline in the influence of the organisation, ultimately resulting in a more competitive and less co-ordinated marketplace.
Oil prices: short-term stability, long-term pressure
Oil prices are likely to remain stable in the short term due to the continued impact of geopolitical tensions and disruptions in major shipping channels like the Strait of Hormuz. However, the long-term impact of the UAE’s decision to develop oil reserves to their full potential (more than one million additional barrels per day) could generate downward price pressure globally on oil and create a sustained reduction in oil prices from $5 to $10 per barrel to consumers through less expensive gasoline and lower inflation rates.
This situation introduces a degree of risk into the current situation. If several nations choose to break the current limits set by OPEC, this could cause the market to shift to much more aggressive competition over market share than there is today. The scenario occurred between 2014 and 2016 when increased supply led to a significant drop in Oil prices. Although consumers benefitted from the change, oil-producing countries experienced significant fiscal stress as a result of the decline in price.
Geopolitics and competition within the Gulf
The UAE is not responding solely to economic considerations; it is also responding to expanding geopolitical dynamics in the Gulf. The competition between the UAE and Saudi Arabia has also grown in many areas, including investments, trade and influence in the region.
Both countries want to make their economies more diverse and reduce their dependence on oil revenues. Because of this desire, each country (the UAE and Saudi Arabia) has become very proactive in securing global business and investment in their respective countries. Therefore, the UAE’s decision to leave OPEC, is in part, viewed as a way to secure their production capacity and market share, and not be limited by OPEC’s agreements.
There is also a more substantial geopolitical calculation as well. With the increase in global efforts to decarbonise the economy, oil-producing countries know that they most likely will experience peak demand for their oil in the next few decades. This provides a compelling reason for oil-producing nations to extract from their reserves and to sell as much oil as possible.
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What this means for the global energy order
With the UAE leaving OPEC there is now an essential question about whether we are seeing a transition to a more disaggregated oil marketplace. While it may still be too early to officially announce the demise of OPEC, the organisation is undoubtedly going through a transition.
If other member states choose to exit OPEC in a similar manner, the oil marketplace may evolve to adopt much more decentralised pricing mechanisms (as opposed to those that are created based on co-ordinated production decisions), creating more uncertainty around pricing but also limiting the ability of any one group to exert control over prices.
In addition to the stated uncertainties created by this disaggregation, the movement towards this is indicative of the increasing complexity of global energy policy. The future of oil isn’t just going to be determined by supply and demand, but also by competing geopolitical interests, changes in technology and the global move toward alternative types of energy.
A turning point, not an endpoint
The UAE’s decision to exit OPEC does not destroy OPEC, but it does represent a milestone for OPEC and the oil industry. It also indicates that oil-producing nations are changing their priorities in the context of energy policy and are becoming more independent in their energy policy decisions.
For oil consumers, the eventual impact of this on fuel prices and inflationary trends is not certain. Policymakers and markets, this event highlights a broader truth: the post-WWII era of shale oil and OPEC is over.
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