Declining influence: UAE exit signals Opec's waning grip on oil prices

The United Arab Emirates (UAE) has decided to leave the 12-member Organization of the Petroleum Exporting Countries (Opec), a cartel of crude oil-producing countries that has influenced the market for decades. The UAE, which is the third-largest oil producer among the Opec members, has also decided to pull out of the 22-member Opec-plus alliance. Reasons, economic and political, have been cited for the UAE’s decision to leave the cartel. On the economic front, it will give the UAE more freedom to build capacity and increase production over time. Clearly, the focus is more on volumes than on price. According to estimates, the UAE has the capacity to produce about five million barrels a day but was allowed to pump out only about 3.4 million barrels a day under the current Opec quota, which it believes is unfair.  Thus, it could quickly add to global supply, which will help bring down prices. On the political front, the UAE is reportedly dissatisfied with how the countries in the region handled Iran. It also faced a significantly higher number of attacks during the recent war. Higher revenue owing to higher oil volumes will help cover the damage suffered over the past two months.

 

The UAE’s exit has raised questions about the future of Opec and its ability to influence global oil prices. In any case, its influence in the global crude-oil market has declined in recent years, partly due to increasing oil production in the United States (US). There have been occasions when cartel members have pumped out more oil to keep prices at relatively low levels, aiming to make investment in US shale-oil production unviable. Nevertheless, oil production in the US has continued to increase. Now with the departure of the UAE, it is possible that some other Opec members will also want to leave to gain greater freedom in decision-making regarding investment and production. This could lead to a substantial reduction in prices of crude oil in the medium term. In any case, in the past, there have been instances where Opec members have not adhered to their given quota, which has affected the cartel’s ability to control prices.

 

However, the impact of the UAE’s departure from the cartel will be visible once the double blockade in the Strait of Hormuz is lifted. As things stand, there is no clarity on how long the impasse between the US and Iran will continue, which is significantly affecting the global economy. Reports suggest that the offers made by Iran are not acceptable to US President Donald Trump. With the US blockade of the strait, Mr Trump is trying to put economic pressure on Iran, which doesn’t seem to be working as of now. While the resumption of oil supplies from the region remains uncertain in the short term, Opec’s weakening should help bring down oil prices over the medium term in a sustainable manner.

 

Since India depends on imports for over 85 per cent of its crude-oil consumption, it will benefit from lower prices. The UAE is one of the top suppliers to India. Both countries can enter into longer-term contracts for higher volumes of oil, which would provide greater stability and predictability. The UAE is also expected to improve its pipeline capacity, which will help it avoid the Strait of Hormuz. However, in the near term, benefits will flow only after the crisis in West Asia is resolved. A lot will also depend on the terms of the resolution. If Iran is also allowed to sell oil freely, it would further improve availability with a favourable impact on prices for importers.