The end of OPEC: what does it mean for the war in Iran and global energy prices?
Did the UAE just cause a rare shift in global energy markets? The United Arab Emirates said Tuesday it would leave OPEC by May 1 after 60 years of membership. This deals a blow to the cartel as the war in Iran exposes divisions between the Gulf states and Iran.
The departure of the UAE, one of the group's largest producers with 15% of total exports, weakens OPEC's control over global oil supply and widens the gap between the UAE and Saudi Arabia.Moreover, the dissolution of OPEC hampers Iran's ability to use oil exports as economic leverage in the future.
OPEC's game is zero competition and artificial scarcity.OPEC was founded in the 1960s as a trade consortium of oil producers, but became an economic weapon in the 1970s to keep pressure on the U.S. and other countries that were providing aid to Israel. This led to a stranglehold on 40% of the world's oil supply and an initial explosion in gasoline inflation.Prices at the pump quadrupled. This resulted in a decade-long stagflation, the confluence of inflation and stagnation.
Limited exports became the status quo and higher prices the norm in the decades that followed, with brief moments of relief.As an OPEC member, Iran has long benefited from this bottleneck as an OPEC member.However, the world of energy has changed dramatically in a short period of time.
An independent UAE, no longer constrained by OPEC limits, now has the ability to increase production, from 3 million barrels per day to more than 5 million barrels per day.New competition is also likely to increase production rates in Saudi Arabia.
UAE Energy Minister Suhail Mohamed al-Mazrouei told Reuters that the decision was made after researching various energy strategies. The issue was also not discussed with any other country. "This is a policy decision taken after a careful look at current and future policies regarding production levels," Mazrouei said.
He also said the world would demand more energy. The UAE could meet this demand.This means the UAE wants to be strategically ahead of the competition in an attempt to flood the market with oil as the Hormuz situation stabilizes.Saudi Arabia has also indicated its intention to increase production by 2027.
One scenario is that the post-Iran war era becomes supply-driven, with lower energy prices over the next two years. It could mark the end of the steering that has characterised the market for the past 50 years.
The UAE is well positioned to weather the Hormuz crisis with the Habshan-Fujairah (ADCOP) pipeline that bypasses the Hormuz completely and transports about 2 million barrels per day.This advantage enables them to lead the export group when the war ends.
A possible increase in competitive production in the Gulf and declining resistance to more drilling and refining in the U.S. could support long-term energy security for the West. The short-term view, however, is less rosy. Even if Hormuz reopens within two months, shipping through the strait would still need until the end of 2026 to recover. In this scenario, prices could fall significantly after 2027; the breakup of the largest OPEC members would be an unprecedented market event with far-reaching consequences.
The war in Iran is a major cause of this shift, but to gain any advantage, the Hormuz will have to reopen as soon as possible.In the larger, strategic picture, this means the end of Iran's negotiating power. The regime will want to resist this as much as possible.
Recent reports of Iran's "tank top" and declining storage capacity make negotiations a priority for the regime. Otherwise, their export capacity would be lower for years because of the loss of oil resources due to shutdowns and pressure damage.It seems that the UAE and other Gulf exporters are now positioning themselves for this eventuality.