UAE Quits Opec: What This Means for Global Supply Chains

The United Arab Emirates (UAE) has announced its departure from Opec after six decades in the group. 

This comes at a time of great instability with oil prices and supply chains, leaving business leaders and citizens alike wondering what this means for them.

For now, many analysts are seeing this as a positive development – with a potential of growing market stability.

Opec's standing

After six decades of membership, the United Arab Emirates (UAE) has exited from Opec, the Organisation of Petroleum Exporting Countries. For decades, the organisation has controlled the price of crude oil, utilising the increase or decrease of production, as well as allocating quotas across its membership.

The organisation, formed in 1960, is predominantly made up of Gulf oil exporters, with the five first members being Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The aim of the organisation is to ensure efficient, economic and regular supply of oil to consumers, maintaining a steady income for producers and a fair return on capital.

The UAE joined Opec in 1967, becoming the fourth biggest oil producer in the organisation but the second most important swing producer as it had the second highest spare production capacity. The member countries are intended to have co-ordinated and unified petroleum policies. As such, it was a vital organisation amid the 1970s oil crises. 

The UAE was a significant player within Opec, with the ability of increasing production in order to lessen prices amid oil crises. This led to the disproportionate losses to UAE revenue. Now, the region is exiting from the organisation in order to have greater control of its own resources.

"This ​is a policy decision, it has been done after a careful look at current and future policies related to level of production," UAE Energy Minister Suhail Mohamed al-Mazrouei told Reuters. 

Changing capacity

This shock departure comes at a time of oil supply chain instability, with conflict in Iran impacting prices and demand for oil. After being limited by a quota production of 3-3.5 million barrels of oil per day, the UAE is likely to target 5 million barrels per day according to BBC reporting. 

Concerns about this focus on a potential oil price war between Saudi Arabia and UAE, which could impact less economically stable Opec members. 

A main movement for the UAE oil-to-market pipeline could be the bypassing of the Strait of Hormuz – a main trade route for oil tankers – and utilising new pipelines from the UAE oil fields to the port of Fujairah, which sits on the eastern coastline of UAE.

This could lead to instability to efficiency within the Gulf, as increased capacity will impact cost of tanker traffic and streamlined operations. 

"The UAE's decision to leave OPEC means that production volumes will push up much closer to capacity levels - once there is greater freedom to export," explains Edward Bell, Chief Economist and Head of Research at Emirates NBD on LinkedIn. 

"As far as near-term impact on oil market balances, not much. Exports through the Strait of Hormuz are still minimal while pipeline capacity has a hard upper limit."

The departure will take effect on 1 May, but analysts state that the near-term impact will be limited. With the ongoing disruption and Iranian threats, oil markets are still mostly concerned with US-Iran conflict. At present, analysts believe this uncertainty is the main disruptor to price stability and resource availability. 

Looking ahead

Though Opec was a necessary organisation in the 1970s, hosting a share of 85% of internationally traded oil, it has less of an importance to global oil markets today. Now, its share is closer to 50%. Moreover, the instability has diluted the market power that Opec still holds, putting the organisation at the mercy of the very volatility it was intended to help manage. 

With the ongoing electrification of the world, oil is less critical today than it was then. Though still a vital resource, there is a larger turn away from oil and move towards renewable energies and electric vehicles. As the electrification push reduces global oil demand daily, there could be a global plateau. 

UAE's move away from Opec at this time allows it to get ahead of the plateau, with the ability to control its on price flow and production capabilities. It could allow for more streamlined oil flow in the long-term, or it could mean that the pressure falls even more significantly on Saudi Arabia.

Analysts currently point to this departure strengthening UAE's own position as well as working towards market stability.