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The world once quaked at the power of Opec. The 1973 oil embargo on the US by Arab exporters almost quadrupled the crude price. The cartel’s influence has long been waning due to oil’s declining share of the global energy mix and Opec’s declining share of world output thanks to the US shale revolution and rising production in countries such as Canada, Brazil and Guyana. The departure of the United Arab Emirates gives the impression of an organisation now in its twilight. It highlights, too, how the US-Israeli war on Iran is reshaping energy markets and the Gulf — and how the multilateral organisations that, for better or worse, have dominated the world for much of the postwar period are unravelling.
The UAE has, in truth, been looking for a way out of Opec for years. The Emiratis have invested billions in raising their production capacity to 5mn barrels per day by 2027. So they have chafed against quotas that have often restricted their production to a little over 3mn b/d — even if they have long “cheated” on those quotas.
Abu Dhabi’s dissatisfaction reflects a broader clash: between oil price hawks such as Saudi Arabia, Opec’s de facto leader, which has been trying to defend higher prices to balance its budget, and the UAE and some others who would prefer to maximise volumes and market share before a long-term decline in demand. Tensions between Riyadh and Abu Dhabi have been exacerbated by discord over regional policies, as they supported different sides in Sudan’s civil war and rival factions in Yemen.
The war in Iran has created both an opportunity and a further incentive for the UAE to leave. The paralysis of Gulf oil exports due to Iran’s closure of the Strait of Hormuz means it could announce its departure without rattling the global oil market. Leaving now also enables Abu Dhabi to take full advantage of the Strait’s reopening, when it comes, even if that crashes the price. Assuming this energy shock, like previous ones, spurs a further global long-term shift away from fossil fuels, it is free to pursue its favoured approach of chasing volume.
Opec cannot, of course, be written off. The UAE exit is a fundamental fracture but Opec has survived the departures in recent years of Qatar, Angola and Ecuador. Its remaining members still sit on almost 75 per cent of global proven crude reserves, with extraction costs that most non-Opec countries cannot match — positioning it well for a world of falling demand.
Yet even after the creation of Opec+ taking in new members such as Russia, the cartel’s continuing ability, if not to set prices then at least to manage the market, has relied on its capacity to co-ordinate the “core” Gulf producers. The Iran war has already driven a deeper wedge between Iran and its Arab Gulf neighbours. The UAE’s exit from the cartel represents further disintegration.
Abu Dhabi might have decided co-operation with its neighbours was vital to the regional postwar recovery. Instead, it seems to have prioritised its own interests, and a chance to curry favour with the US (which, it emerged last week, is considering providing currency swap lines to the UAE and Gulf allies hit by the fallout of the war). Any weakening of Opec is likely to be seen as a win by the Trump White House — although if it creates more volatile prices and a market oversupply, US shale oil will suffer.
How the Gulf and global energy order are further redrawn will depend on when and how the Iran war ends. But the opportunistic exit of the UAE, the only other Opec producer with significant spare capacity, leaves Saudi Arabia as the primary swing producer trying to hold together a fractious alliance. Abu Dhabi has opted to pump all it can now rather than leave reserves to become stranded assets. Some others may yet decide to do the same.
