Far-reaching effects of UAE’s OPEC exit

The United Arab Emirates’ (UAE’s) exit from the Organization of the Petroleum Exporting Countries (OPEC) and OPEC+, starting May 1, is a decision with far-reaching consequences that will not only rejig but also potentially unsettle multiple global equations.

Abu Dhabi’s choice is driven by both geoeconomic and geopolitical imperatives. The United States-Israel war on Iran has seriously dented the UAE’s image as a safe haven for global trade, finance, and tourism in a troubled region.

A boost in oil production — something that it could not do as an OPEC member — can help the UAE if these sectors fail to quickly recover. The UAE accounted for about 13 per cent of OPEC’s production capacity, and its exit from the Saudi Arabia-dominated cartel undermines Riyadh’s power in setting global oil prices. This move could even embolden other OPEC members to question Saudi Arabia’s authority.

The UAE is not the first OPEC member to leave, but never before has a major oil producer exited the cartel. By withdrawing from OPEC, the UAE will be free to increase its oil output, make investments accordingly, and also be better prepared for any future uncertainties in the Strait of Hormuz.

The UAE’s decision can be seen as a larger move by it to carve an independent policy that puts its ‘national interests’ first. This rift can further weaken unity in the Gulf countries. A fragmented Arab world will suit Tel Aviv’s regional dominance and expansionist ambitions.

For the US, a diminished OPEC cuts both ways. It is good news for Washington, as several US presidents, including Donald Trump, have expressed their displeasure over OPEC’s excessive powers; and, the bad news is that the UAE’s move will ultimately challenge the reign of the petrodollar.

Abu Dhabi’s ‘request’ to Washington that it consider a currency swap line to secure US dollar liquidity in the event of the war prolonging and ‘suggestion’ that it may use the Chinese yuan to trade oil if its dollar reserves shrink, show other oil-producing nations that the petroyuan threat works in Washington.

The UAE is asserting autonomy and is positioning itself as a middle power, potentially aiming even to eclipse Saudi Arabia. While they align on many policies, Abu Dhabi and Riyadh are increasingly on opposite sides in conflict zones, be it in Yemen, Sudan, Somalia, among others. Differences have emerged on even how to counter Iran’s offensive in West Asia.

If, and when, global oil output spikes — in the short term, much of it will depend on developments in the Strait of Hormuz — there could be a glut of oil in the market that could bring down prices; this could be good news for India and other oil-importing nations. However, the interim instability could usher in market unpredictability, driving away future investments.