THE United Arab Emirates (UAE) has opted out of the Organization of Petroleum Exporting Countries (OPEC), the cartel that controls the ebb and flow of oil in the global market.
The decision to leave OPEC “reflects a policy-driven evolution aligned with long-term market fundamentals,” explained Suhail Al Mazrouie, the UAE’s energy minister.
Tactfully, there was no mention of the UAE’s long-standing disagreements with Saudi Arabia over production caps. The UAE has been calling on OPEC to raise its production quota, saying it prevents Emiratis from expanding capacity. Saudi Arabia maintains that the quotas give OPEC the leverage to dictate the price of oil it sells to the rest of the world.
Before the war broke out in February, the UAE was producing oil at 4.8 million barrels per day (bpd). OPEC, however, caps UAE’s output at 3.2 million bpd.
The UAE has a major reason to export more oil: It leads the Gulf in economic growth, and was projected to hit 4.8 percent last year.
To fuel this growth, it must retool its development strategy by channeling its petrodollars toward market flexibility, and exploring long-term energy investments.
The UAE feels it is ready for the policy shift. Abu Dhabi alone pumped about 3.4 million bpd, or about 3 percent of the world’s crude supply before it became a target of Iranian missiles and drones, forcing it to shut down some of its production facilities.
To understand the dynamics at play, we need to dive into the origins of OPEC. In September 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela established an alliance that could bring some degree of stability to the world oil market.
The organization didn’t have an auspicious start. Each member state wanted to churn out as much oil as it could. Flooding the market, however, could mean lower prices. It took years before an acceptable balance was reached.
As OPEC gained economic clout, it attracted more members. Within the next decade, the UAE and four other states signed up.
The group first wielded its power as a cartel during the 1973 Yom Kippur War. To punish the United States for backing Israel in fighting Egypt and Syria, OPEC clamped an embargo on oil sales to the US and four other countries.
The embargo reduced the flow of oil to almost a trickle, and pump prices to spurt. OPEC reveled in its capability to manipulate the market.
The UAE’s breakaway diminishes OPEC’s aura of dominance. At the same time, it erodes Saudi Arabia’s role as the cartel’s godfather.
The announcement made no mention of the political convulsions within OPEC. But it drew a flurry of speculations about its impact on fuel prices across the globe.
Some experts believe UAE’s departure from OPEC will have a minimal effect on the market for now, when the Gulf states are still trying to navigate their way out of the conflict that involves mainly the US and Israel against Iran, and when the Strait of Hormuz is still hostage to negotiations that have been adrift, with no clear outcome in sight.
Local analysts are split over whether the UAE’s decision benefits the Philippines through lower pump prices. Former Energy undersecretary Jay Layug said it depends on how the UAE will fare as an independent oil exporter.
“If it will produce more supply without following the output limits of OPEC production and offer reduced prices to capture a bigger chunk of the market, then it may be good for the Philippines,” Layug said.
Jetti Petroleum president Leo Bellas said the UAE’s exit could push up prices in the short term.
Peter U., associate professor at the University of Asia and the Pacific, said that if the UAE becomes an independent exporter, “it now won’t be constrained by OPEC quotas and can now sell more oil to the world market if it wants to. This may mean lower oil prices in the future in the global market.”
It’s too early to determine which way the wind will blow. But already, there are signs that the era of cartelized oil production may be coming to an end.
