UAE Leaves OPEC

he United Arab Emirates on Tuesday is quitting OPEC, dealing a massive blow to the oil producers’ group ​as an unprecedented energy crisis caused by the Iran war exposes discord among Gulf nations.

The exit of the UAE – one of the group’s biggest producers – weakens ‌OPEC’s control over global oil supplies and widens a rift between the UAE and its neighbour Saudi Arabia, effectively the leader of the Organization of the Petroleum Exporting Countries.

It’s a major blow to the oil cartel. Wall Street Journal explains the reasons:

The war in Iran has piled on more pressure by exacerbating rifts among the Arab countries at the core of the group and by closing the Strait of Hormuz, through which the group’s biggest producers export most of their oil, making it impossible for the group to influence the market during its biggest supply shock. The U.A.E. is in a relatively privileged position with the ability to circumvent the blockage in the strait by routing more than half of its oil exports across the country. Withdrawing from OPEC will give it more freedom to make investments to expand its output and adjust to the uncertain future of the waterway. The withdrawal of the UAE could be devastating to OPEC.

More from the Journal:“It’s the hardest blow ever,” said Homayoun Falakshahi, a senior oil analyst at commodities data company Kpler. “It raises the question about whether OPEC can survive” (Wall Street Journal).

New York Times explains the potential impact on prices: Its departure from OPEC means little for oil prices at the moment because the U.S.-Israeli war with Iran has forced producers across the Persian Gulf to slash production. But in the long term, the move could contribute to greater volatility since less oil will be subject to production controls (New York Times).

The UAE was the third-largest oil supplier in OPEC, after Saudi Arabia and Iraq (Bloomberg).

The short of it:
It will make the Strait of Hormuz considerably less relevant. John Spencer calls it a game changer: Iran’s massive strategic blunder was playing that card [weaponizing the Strait of Hormuz]– what @SecRubio called the economic nuclear weapon. Motivating all Gulf States to increase/create alternatives. Ultimately brining market stability and removing Iran’s option to use the strait as a weapon (Spencer).

Arab writer Ahmed Khalifa: After leaving OPEC, with its Fujairah pipeline bypassing the Strait of Hormuz, UAE can now ramp up freely potentially adding around 2 million extra barrels a day and helping break the high-price grip (Khalifa).

An earlier argument, also from John Spencer (on bypassing the Strait): The Strait of Hormuz is not an unavoidable fact of geography. It is a problem of infrastructure and strategy. The world has spent decades defending it. Now, the world needs to start investing in ways of bypassing it, and sustained risk should provide enough market pressure to accelerate those alternatives (Washington Post).