Did the UAE just trigger a once in a century shift in global energy markets? The United Arab Emirates on Tuesday said it was quitting OPEC by May 1st after 60 years as a member, dealing a blow to the cartel as the Iran war exposes discord among Gulf nations and Iran.
The exit of the UAE, one of the group's biggest producers with 15% of total exports, weakens OPEC's control over global oil supplies and widens a rift between the UAE and Saudi Arabia. Furthermore, the dissolution of OPEC greatly hinders Iran's ability to wield oil exports as economic leverage in the future.
The name of the game for OPEC is zero competition and artificial supply scarcity. OPEC was formed in the 1960s as a trade consortium of oil producers but it became an economic weapon in the 1970s to maintain pressure on the US and any other nations providing aid to Israel. This led to a stranglehold on 40% of the global oil supply and an initial explosion in gas inflation. Prices quadrupling at the pump, feeding into a decade long stagflation event.
Restricted exports became the status quo, and higher prices the norm in the decades since (with brief moments of relief). Iran, by extension, has long benefited from this bottleneck as an OPEC member. But the world of energy just changed dramatically.
An independent UAE no longer constrained by OPEC limits now has the ability to increase production from 3 million barrels a day to over 5 million barrels per day. The introduction of renewed competition is likely to inspire higher production rates in Saudi Arabia as well.
In his first public comments since the announcement, UAE Energy Minister Suhail Mohamed al-Mazrouei told Reuters in a telephone interview that the decision was taken after examining the country's energy strategies. He said the UAE had not discussed the issue with any other country. "This is a policy decision, it has been done after a careful look at current and future policies related to level of production," Mazrouei said.
He also said the world would demand more energy, implying the UAE would be positioned to meet that need. Meaning, the UAE is attempting to strategically jump ahead of the competition in a bid to flood markets with oil as the situation in the Hormuz winds down. Saudi Arabia has also stated intentions to boost production into 2027.
This suggests that the post-Iran war era will be a supply side bonanza with far lower energy prices over the course of the next two years. It could be a complete upending of the last 50 years of throttled markets.
The UAE is well positioned to weather the crisis in in the Hormuz with its Habshan–Fujairah (ADCOP) pipeline, which bypasses the Hormuz entirely and moves around 2 million barrels per day. The advantage allows them to lead the export pack when the war ends.
An inevitable ramp up in competitive production in the Gulf as well as fading opposition to increased drilling and refinement in the US will lead to long term energy security for the west. However, the short term view is less rosy. In the best case scenario, with the Hormuz reopened within the next two months, shipping through the strait will still need to recover until the end of 2026.
Gas prices would fall to around $3.50 per gallon by the end of the year, with prices dropping below $3 per gallon in 2027. Beyond 2027, the drop in prices will be significant; the breakup of OPEC's largest contributing members is an unprecedented market event with world changing ramifications.
The Iran war is a primary contributor to this shift, but in order to gain any benefits the Hormuz will have to reopen sooner rather than later. The greater strategic picture is the end of Iran's oil leverage, which the regime will seek to resist as much as possible.
Recent reports of a "tank top" and Iran's dwindling storage capacity make negotiations a priority for the regime, otherwise, the loss of oil wells caused by shutdowns and pressure damage could ruin their ability to export for years to come. It would seem that the UAE and other Gulf exporters are positioning for this eventuality.