Analysis: Why would the UAE's withdrawal from OPEC have far-reaching impacts?

Author: Faisal Islam, BBC Economics Editor

The United Arab Emirates (UAE) suddenly announced its withdrawal from OPEC, a decision of significant impact. In fact, the UAE was a member of the organization even before its founding in 1971.

OPEC mainly consists of oil-producing countries in the Gulf region, which for decades has influenced crude oil prices through production adjustments and quota allocations to member countries. The organization played a key role during the oil crises of the 1970s, which also reshaped global energy policies.

Although Saudi Arabia holds the dominant control over OPEC’s production, the UAE possesses the second-largest spare capacity within the organization. In other words, this country is the second important “regulatory producer,” capable of increasing output to ease oil price pressures.

It is this factor that has prompted the UAE to reconsider its long-term position within OPEC. In short, the UAE aims to leverage its already invested large capacity.

OPEC has set the UAE’s daily production limit between 3 million and 3.5 million barrels. As an OPEC member, the UAE has borne a disproportionate loss in oil revenue.

However, this move’s timing also hints at the consequences of the Iran conflict. The ongoing escalation of tensions in the Gulf region has affected UAE-Iran relations and could further impact Iran’s already tense relationship with Saudi Arabia.

For OPEC itself, this is undoubtedly a heavy blow, especially as doubts about its long-term cohesion have already begun to surface.

Moreover, once the UAE can fully restore oil market supply through maritime shipping or pipelines, its target daily output could reach 5 million barrels. Saudi Arabia might respond by launching a price war. Given the UAE’s more diversified economy, it may be able to withstand this, but other poorer OPEC members might not.

Much will depend on Saudi Arabia’s response.

Several senior UAE officials have discussed new oil pipelines, starting from Abu Dhabi’s oil fields, bypassing the Strait of Hormuz, and heading to the currently underutilized port of Fujairah.

One pipeline is already operating at high capacity, but to accommodate future production growth and the permanent changes in Gulf region tanker traffic flow and costs, greater pipeline capacity is needed.

Of course, with the current maritime traffic blockade at the Strait of Hormuz, this is not the primary factor affecting the oil market, nor is it the main driver of oil, natural gas, gasoline, plastics, and food prices.

While global attention remains focused on oil prices at around $110 per barrel, it is not impossible that next year prices could approach $50—especially if the chaos in the strait is resolved and the timing coincides with the U.S. midterm elections later this year.

Compared to the 1970s, OPEC’s importance to the global oil market has significantly declined. Back then, about 85% of international trade oil came from OPEC; today, that figure is close to 50%. Oil is no longer as critical to the global economy as it was in the 1970s. OPEC now wields some influence but no longer monopolizes the market. It cannot manipulate the world as it once did.

I recall hearing from OPEC’s former Saudi oil minister, Sheikh Yamani, who said: “The Stone Age didn’t end because the world ran out of stones; the oil age won’t end because the world runs out of oil.” This suggests that in the future, other energy sources will replace hydrocarbons.

From this perspective, the UAE’s actions can be seen as a sign of the world reducing its dependence on oil. In the current turbulence, some other clues have emerged: China’s investments in electrification help buffer the economic impact of rising oil and gas prices.

According to some estimates, the electrification of China’s cars, trucks, and railways has reduced this second-largest global economy’s daily oil demand by about 1 million barrels. As this trend accelerates worldwide, global oil demand may stabilize.

Under such a view, it makes sense to cash out from oil reserves as soon as possible before demand declines significantly. The UAE has strong fiscal reserves and has achieved some economic diversification through financial services and tourism.

When hostilities in the Gulf region cease and what the new normal will look like largely depends on this.

The UAE’s withdrawal from OPEC could trigger further domino effects and put considerable pressure on Saudi Arabia.

When tankers once again pass smoothly through the Strait of Hormuz, or when the UAE doubles down on new pipeline projects, the scale of UAE oil flow will be unprecedented and no longer constrained by OPEC commitments.

This move has little immediate impact on the current blockade, but afterward, everything could change.