UAE leaves Opec: History of the bloc and what Abu Dhabi's exit means

As war in West Asia marked two months on Tuesday, the United Arab Emirates (UAE) announced that it is leaving the 12-member Organisation of the Petroleum Exporting Countries (Opec) as well as the broader 22-member Opec+ alliance.

 

This decision comes amid an escalating global oil supply crisis triggered by the US attack on Iran on February 28 and subsequent blockade of the Strait of Hormuz by Tehran.

 

The UAE’s move, which comes into effect from May 1, could have serious consequences on the global energy markets. The West Asian nation has been a part of the Opec alliance since 1967 and is the fourth-largest oil producer in the bloc, with a capacity of around 4.8 million barrels per day.

 

 

What is the Opec alliance?

 

Headquartered in Austria’s Vienna, the Opec alliance was established during the Baghdad Conference in September 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. For the first five years, the alliance’s headquarters was based in Geneva, Switzerland.

 

The five founding members of Opec were later joined by Qatar in 1961, Indonesia and Libya in 1962, the UAE in 1967, Algeria in 1969, Nigeria in 1971, Ecuador in 1973, Gabon in 1975, Angola in 2007, Equatorial Guinea (2017); and the Republic of Congo (2018). As of now, four nations, namely Qatar, Indonesia, Ecuador, Angola, are no longer a member of the alliance, with the UAE joining the list soon.

 

A wider alliance, Opec+, was formed in 2016 led by Russia, that onboarded 10 major non-Opec producers as a response to the decreasing crude prices due to US’s booming shale oil output. Countries that joined the fold included Russia, Mexico, Kazakhstan, Oman, Azerbaijan, Bahrain, Brunei, Malaysia, Sudan, and South Sudan.

 

Why was Opec formed?

 

During the 1950s and 1960s, the world was going through a transitional period of decolonisation and new sovereign nations were coming into existence in the developing world. At the same time, the global oil market was being dominated by ‘seven sisters’ — private multinational companies controlling 85 per cent of the supply chain. These seven companies, which still exist in one form or another, were Anglo-Persian Oil (now BP), Royal Dutch Shell, and five American firms — Standard Oil of New Jersey (Exxon), Standard Oil of New York (Mobil), Standard Oil of California (Chevron), Gulf Oil, and Texaco.

 

In a bid to reclaim their oil resources from former colonisers, Opec was founded in Baghdad. Its formation also came in response to a decision by the Seven Sisters to reduce the prices of the crude oil they supplied.

 

During the formation of Opec, the five members agreed to certain terms that broadly dictated pushing back against the oil companies' unilateral control over pricing, halting further price changes and restoring rates to pre-August 1960 levels. Moreover, the members also agreed that if any oil company retaliated against one member nation for enforcing these decisions, no other member would capitalise on that pressure by accepting better export deals or pricing offers in its place.

 

What does the UAE's exit mean for Opec?

 

A key ally of the US, the UAE's departure from Opec is likely linked to growing security concerns in West Asia. The ongoing US-Iran war and closure of the Strait of Hormuz, which is responsible for almost one-fifth of global oil supply, has led to a massive slowdown in maritime traffic, disrupting supply chains and rattling energy markets worldwide. Additionally, attacks on oil refining and production facilities across the region have further contributed to volatility.

 

Moreover, Opec’s agreements cap the UAE’s oil output at 3.2 million barrels per day, even as the country has the capacity to produce closer to 5 million bpd. Exiting the bloc means that the UAE can freely expand its oil production output and capitalise on the opportunity created by the US-Iran war.