UAE Exit from OPEC Marks Strategic Shift in Gulf Oil Politics

It is a very big deal that the United Arab Emirates (UAE) has announced its abrupt exit from Opec, the Organisation of Petroleum Exporting Countries. The Emiratis were members even before they became a nation state in 1971. Opec is the organisation of mainly Gulf oil exporters, which for many decades controlled the price of crude oil by decreasing or increasing production and allocating quotas across its membership. It had a vital role in 1970s oil crises, which in turn transformed global energy policy. While Opec production is dominated by Saudi Arabia, the UAE had the second highest spare production capacity. In other words, it was the second most important swing producer, capable of increasing production to help ease prices. Indeed it is precisely this that led to long-term reconsiderations of the UAE's position. Put simply, the UAE wanted to use the considerable capacity it has invested in. However, the timing of this move hints at consequences from the Iran war. The pressure cooker in the Gulf has impacted the UAE's relationship with Iran and may affect its already strained relationship with Saudi Arabia. As for Opec, this is a big blow at a time when significant questions are being asked about its long-term coherence. It's not just that the UAE, when it can get its oil fully back on the market by sea or pipeline, is likely to target 5 million barrels per day production. Saudi Arabia might respond with an oil price war that the UAE's more diversified economy could withstand, but other poorer Opec members might not. There is already one pipeline in heavy use today, but more capacity will be needed to cope with increased production and a permanent change to the fluidity and cost of tanker traffic in the Gulf. For now, of course, during a double blockade of sea traffic in the Strait of Hormuz, this is not the main event in oil markets, affecting the prices of oil, gas, petrol, plastics and food. While the world understandably focuses on oil at $110 per barrel, this is, however, a reason not to discount the chance that it could be closer to $50 sometime next year - if the mess in the Strait is sorted, for example, in time for the US midterm elections later this year. Opec is less important to world oil markets than it was in the 1970s, with the 85% share of internationally traded oil it had then more like 50% today. Oil is also less critical to the world economy than it was in the 1970s. Opec has leverage now, but not a monopoly. It can't hold the world to ransom, as it were. I recall being told by the Opec figurehead, former Saudi Oil Minister Sheikh Yamani: "The Stone Age did not end because the world ran out of stones. The Oil Age will not end because the world runs out of oil." This foretells of a world where hydrocarbons are substituted by other energy sources. One way to read the UAE's action is as a sign of this world of reduced oil reliance, and there have been some other clues in the current maelstrom: China's investments in electrification have helped cushion the economic blow from rising oil and gas prices. By some calculations, the electrification of China's cars, lorries, and trains has reduced oil demand in the world's second biggest economy by 1 million barrels a day. Global oil demand could plateau as this trend accelerates around the world. In this view, it makes sense to raise as much money from oil reserves as quickly as possible before demand craters. The UAE has financial firepower and a partly diversified economy, through financial services and tourism.