The United Arab Emirates has withdrawn from the oil-producing cartel Opec, a move that has sparked speculation about the future of the organisation. The decision, which takes effect on May 1, was announced amid global attention on Iran and the Strait of Hormuz. Brent Crude oil prices have risen for seven consecutive days, trading above $114 per barrel at the time of writing.
Opec's Declining Influence
Opec now controls roughly 25 per cent of the world's oil supply, down from more than half in 1973 when it used the 'oil weapon' against supporters of Israel. Despite this decline, the cartel still matters to the oil market, at least for now. The UAE was the fourth largest member, producing 4 per cent of global supply but 12 per cent of Opec's output and 15 per cent of its quota-bound production. It was also one of the few members with spare capacity to adjust output as needed.
Prior to the Iran war, most Opec members were producing near their technical maximums, quotas notwithstanding. The UAE had been chafing against its quotas, having invested heavily in expanding capacity. Now, it can produce freely without quota constraints, which could pressure prices if a glut develops.
Impact on Saudi Arabia
The UAE's departure heaps pressure on Saudi Arabia, the only other member with significant spare capacity and willingness to act to support prices. Saudi Arabia has long been pivotal in Opec's price-support efforts, but it previously had help from the UAE. The Gulf-based core members—Kuwait, Iraq, Algeria, Libya, Nigeria, Congo, Equatorial Guinea, Gabon, and Venezuela—are not benefiting from soaring prices due to Iran's closure of the Strait of Hormuz, which has been more effective in raising prices than any recent Opec intervention.
Saudi Arabia and the UAE have used pipelines to keep some oil flowing, but not enough to offset the disruption. The war may spur further investment in such infrastructure.
Future of Opec
The question now is whether other members will follow the UAE. Opec Plus, formed in 2016 and including Russia, accounts for 59 per cent of global production. Members agreed to cut 1.2 million barrels per day in 2023 to support prices, but the US Energy Information Administration expected non-Opec supply growth to limit price increases. Most members are at or near capacity, so there is little cost to remaining in the club for now. However, when supplies are fully restored and a glut emerges, Opec's relevance will be tested.
Saudi Arabia still has power to influence the market, but the UAE's ability to pump freely could contribute to downward pressure and volatility. No one is sure of the UAE's maximum capacity or when prices might fall again. When they do, Saudi Arabia and its former club members will be left to glower at their former ally, while some quietly cheat on their quotas. The Saudi-led oil empire is holding for now, but it is crumbling.
