By Michael Lynch
Does the United Arab Emirates' withdrawal from OPEC mark a major change for the cartel and will it have an impact on oil markets? Many consider this scenario likely, either because other states will decide that they must leave or because a price war will break out in retaliation for this move. Both explanations could mean that OPEC's influence is limited or even that the cartel will disintegrate.
Of course, rumours of OPEC's demise have flared up. The organization remains inactive or uninvolved for long periods when the market is in equilibrium or, less commonly, when it does not have reserves to increase its production. Member states do not violate quotas when they do not have additional available production capacity.
When the price of oil collapses, as happened in 1986, 1998, 2014 and 2020, there are many who believe that the cartel has failed, as so many other times in the past. But each time OPEC regenerates and restores the price to the desired levels, although often below it before the "plunge".
Previous withdrawals from the cartel, such as those of Indonesia or Ecuador (twice), did not raise concerns; Indonesia has become a net importer, while Ecuador has never been a major export power. Other states, notably Iraq in the late 1980s, Venezuela in the 1990s and Iraq again today, have breached their quotas, but they have not raised the issue of leaving the organization: if the cooperative does not oblige you to pay your contributions, there is no incentive to leave.
However, the case of the UAE is somewhat different. It is an important producer and exporter of oil, with a supply - before the war in the Middle East - of 3.5 million barrels per day and a production capacity of 4.3 million barrels per day, exceeding by at least twice the production of member states outside the Gulf. It also has the ability and intention to increase its production by at least 1 million tons per day by 2027, a performance greater than any other producer could achieve.
This amount in a year will have a significant effect on the market, not counting the effects of the war in Iran. Before the war, world production exceeded by 2 million barrels of demand, with most of the surplus being absorbed by China for its strategic stockpiles or accumulating in floating warehouses because US sanctions made it difficult to sell.
When the war in Iran ends, production will be restored—at least after a few months—in the Gulf region, and may not be below pre-war levels. Given the current economic uncertainty, this means that the market will return to a state of surplus. If the sanctions imposed on Iran are lifted, the surplus will strengthen slightly. The addition of 1-1.5 million barrels per day from the United Arab Emirates, and the potential economic downturn and/or decline in demand will mean a notable surplus. If sanctions against Iran are lifted, then the amount of oil stored in floating tanks will not increase as last year.
It seems likely that by the end of 2027 at the latest, the global market will show a serious surplus and prices will be threatened with a fall. At that point, the remaining OPEC members will have to either reduce quotas again or let prices fall. Given the political tension between Saudi Arabia and the Emirates, the scenario of the Saudis unilaterally reducing production to support the price of oil, as they have done in the past, does not seem very likely.
It would most likely be a significant drop in prices and pressure on the United Arab Emirates to cut production, perhaps to a higher level than before the war, but well below the 5 million barrels per day that the UAE has proposed as a target. Of course, the Gulf State has huge financial reserves and could survive a long fall in oil prices; Its ability to resist political pressure from all its neighbours may be its biggest problem.
However, the economic part may prove to be the most convincing argument for the UAE to rejoin OPEC or at least to become a de facto member of OPEC+, accepting a new quota, albeit informally. OPEC's strength stems from its ability to secure higher oil prices for its members, even if this sometimes requires reducing their production. In recent decades, it has been rare for quotas to require a reduction in production of more than 10%, which, in cases of price collapses such as in 1998, has led to an increase in prices of at least 50%. This is the convincing logic behind the organization's success, and it will likely prevail again if a new price war breaks out.
With the war in Iran over and the global economy recovering, the pre-war price of $65-70 a barrel may prove unsustainable, especially if the United Arab Emirates, Iraq and Venezuela increase production. However, this will not become apparent until global reserves are rebuilt and the demand situation is clear. Until then, the attitude taken by the UAE and its willingness to ignore pressures to limit production could lead to large price fluctuations.
Forbes
