Explained | Impact of United Arab Emirates leaving OPEC

At a time of heightened tensions and soaring oil prices, the United Arab Emirates' decision to leave the Organisation of Petroleum Exporting Countries—more commonly known as OPEC— has sent shockwaves across the world.

Though UAE’s state news agency cited the country's "longer-term economic vision" as the reason for its departure, analysts deduce there is a little more than what meets the eye in this scenario.

The current blockade of Strait of Hormuz due to the US-Iran war has sent the crude world in a tailspin. Many countries became a collateral in this conflict, as they witnessed a sharp rise in petrol prices along with a major shortage in LPG.

With peace talks in Pakistan bearing no fruit, the oil markets are set to be unpredictable and volatile for quite a while. In a time like this, UAE breaking partnership with an alliance which has lasted more than half a century begs one to ask the question: Why did UAE take this decision?

UAE: An important member

Founded on the principle of countering the Western countries' dominance of dictating prices to oil-producing countries, OPEC's main aim was to ensure member states received stable returns for their products.

Though, the alliance's production is dominated by Saudi Arabia, UAE had the second highest spare production capacity— pumping around 3.6 million barrels a day of oil, or some 3 per cent of global supply.

Thus, it was the second-most important producer on the table that could have helped ease the prices.

What does OPEC do

OPEC's role is akin to that of a central bank. It controls the supply management of oil and attempts to manage oil prices by regulating production limits and setting strict quotas for each of its member countries.

It acts as a protector in the volatile global market. When the demand is high, it imposes quotas on its member states to protect the market from oversupply. On the other hand, during times of shortage, it allows member states to increase production so the prices don't skyrocket.

US-Iran war

The US-Iran war played a major role in UAE's exit from OPEC. With the Strait of Hormuz—responsible for a fifth of the world’s oil transport— closed, the traffic at the chokepoint has almost stopped.

Moreover, with Iran being a founding member of OPEC, UAE finds itself between a rock and a hard place.

The gulf nations have always looked towards the nation as a guarantor of their regional security. But, recent events saw Gulf states becoming a victim of the US-Iran war—which also damaged their production facilities and sites— and in turn straining ties with the Western neighbour.

By exiting OPEC, UAE will get the freedom to use its own oil supply to forge new ties outside of the current circle.

UAE officials had long floated the idea of quitting the cartel, complaining that quotas had unfairly limited their ability to export oil.

The country, which has been aiming to boost its production capacity to 5 million barrels a day by 2027, is now expected to pump more to serve its own interests. 

UAE officials decided to leave OPEC so they would have more freedom to meet consumer demand, the country’s energy minister, Suhail Al Mazrouei, said in an interview with The New York Times.

“The world needs more energy, the world needs more resources and UAE wanted to be unconstrained by any groups,” Al Mazrouei said. The UAE wanted to exit at a time that would cause minimal disruption to oil markets, he added.

“We will remain as a responsible producer,” Al Mazrouei said.

Impact on oil prices

According to New York Times, the price of Brent crude oil, the main international benchmark, pulled back after the announcement but was still trading more than 2 per cent higher than it was Monday.

Oil has risen more than 50 per cent since the start of the war and the effective closure of the Strait of Hormuz.

The loss of the UAE, could create ​disarray and weaken the group, which has usually sought to show a united front.