UAE exit from Opec shakes up alliance

VIENNA, Austria — The decision by the United Arab Emirates (UAE) to leave the Organization of the Petroleum Exporting Countries (Opec) oil cartel shook up the 65-year-old alliance that produces some 40 percent of the world’s crude oil and exerts major influence over the price of energy around the globe.

Following its exit in May, the UAE said in an announcement on Tuesday, it plans to carry on with its long-held goal of increasing crude production “in a gradual and measured manner, aligned with demand and market conditions.”

Right now, that’s academic as far as oil prices go, since Iran is still blocking the Strait of Hormuz, which means much of the oil from Persian Gulf producers such as the UAE cannot be exported. But the departure could have long-term effects on oil prices.

READ: UAE out: OPEC will have less leverage over world oil supplies

Demand destruction

Opec was formed in Baghdad in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. It has 12 members—counting the UAE—that hold more than 80 percent of the world’s proven oil reserves.

Other members are Algeria, Equatorial Guinea, Gabon, Libya, Nigeria, and the Republic of the Congo.

The group, headquartered in Vienna, aims to regulate oil prices by coordinating increases or decreases in production.

The goal has been to keep prices high enough so member governments can balance their budgets and reap the benefits of their natural resources—but not so high as to cause a recession in consuming countries or to halt energy-consuming activity, a phenomenon known as demand destruction.

That approach has sometimes drawn pushback from leaders in the United States, where the price of gasoline is highly political. President Donald Trump at one point accused Opec of “ripping off the rest of the world,” and his predecessor Joe Biden also badgered Opec to produce more oil.

The creation of Opec signaled a change from a world in which Western companies dominated the oil market to one where the countries with the reserves took more control over their resources and profits.

At times, Opec’s production moves have had large effects on the global economy. In 1973, its Arab members imposed an oil embargo on the United States and other countries that supported Israel during the Yom Kippur War. Oil prices quadrupled, and long lines appeared at American gas stations.

In 2016, Opec joined with another 10 oil-producing countries, the largest of which is Russia, to form an alliance known as Opec+.

Fragmented landscape

The UAE is seeking more independence in how much oil it sells. Cartels keep prices higher, but they restrict members’ earnings and market share against noncartel members. There has been long-standing friction between the UAE and Saudi Arabia, the biggest Opec producer and de facto leader of the cartel.

One reason for producing more now: Experts think oil consumption will peak in coming years as the world transitions to renewable energy sources that do not emit carbon dioxide, the greenhouse gas that fuels climate change.

That means barrels underground could be worth more today than they might be later, when oil consumption declines, so restraining production might mean losing out on profits.

The UAE’s withdrawal removes one of Opec’s few members with the ability to quickly increase production—the mechanism through which the cartel manages oil prices, said Jorge Leon, head of geopolitical analysis at Rystad Energy.

“A structurally weaker Opec, with less spare capacity concentrated within the group, will find it increasingly difficult to calibrate supply and stabilize prices,” Leon said. “The net effect points to a more fragmented supply landscape and a potentially more volatile oil market over time as Opec’s capacity to smooth imbalances diminishes.”