Why Are Countries Abandoning OPEC?

Earlier this week, on 27th April, the United Arab Emirates officially announced that it would be leaving the organization of petroleum exporting countries, a group that was the most powerful oil pricing cartel in the world. The Emirates announced that this was because their capacity to produce oil had far exceeded their artificially mandated supply quota and because they were angry with their OPEC neighbours for not doing more to defend them from Iran during the ongoing conflict. Or at least, that was the story. Although how it holds up does need to be addressed. The UAE had up until Tuesday been a member for over 60 years and was one of the organisations first members outside of the original founding five, not to mention the fourth largest producer of oil accounting for around 12% of the group's total production. To put it mildly, this is a major and very public blow to a group that has already been losing influence and relevance for some time now. Even before the UAE's announcement, OPEC had gone from supplying more than half of the world's oil to less than a quarter. Today, the USA alone reduces half as much as their collective output, so this additional departure from their control means a lot more than just a bad headline. Understanding these simple market dynamics reveals that every barrel that is produced outside of this cartel hurts more than the last, which means that as their share of global supply. When you need to build up your team to handle the growing chaos at work, use indeed sponsor jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a $75 sponsor job credit at indeed.com/podcast. That's indeed.com/podcast. Terms and conditions apply. Need a hiring hero? This is a job for indeed sponsor jobs. As shrunk, they have less control over global oil markets or while imposing more control over their members. And this also opens the door to the much bigger discussion of if the UAE is just the first domino in something that could turn into a much larger feedback loop. As countries leave, the group has less pricing power to offer, so more countries leave, so the group has less power. Oh, and while we are on the subject, it's probably also worth looking into the potential quid pro quo nature of this move in relation to a financial bailout the UAE has been discussing with the USA. So, what is the current state of OPEX true market power today? How much will the UAE is departure impact this power? And finally, what were the potential motivations behind this move? The first thing worth noting is that OPEX is at its core an organization that works by putting a quota on how much its members can produce. It limits the supply coming from its members because all other things been equal, less supply means higher prices through pretty basic market forces, which means the group as a whole gets to maximize revenues while also targeting a price range that keeps them dominant. We'll get into the dominant side of this in a minute, but for now, just keep in mind that this entire system only works if the cartel actually has enough market share to move the global oil price. If they only control a small fraction of supply, holding back their own production effectively leaves money on the table for everyone else because someone outside of the cartel will simply produce that barrel instead, and that is a problem because OPEX really doesn't have the share it used to. The group has gone from controlling more than half of the world's oil supply at its peak to less than a quarter today. Additional sources of crude have become far more varied, especially in North America, where the shower boom transformed the United States from a long declining oil producer into the single largest producer in the world. Importantly, this loss of market power is not linear. Going from a 50% market share to a 45% share hurts pricing dominance far more than going from 25% to 20%. Now OPEX in the past was actually quite careful to manage this by really threading the needle on prices. Extracting oil in the Gulf as well as in places like Venezuela is extremely cheap compared with extracting it from the North Sea or the Permian Basin. Saudi conventional crude can be lifted out of the ground for as little as $4 a barrel. Shale oil in West Texas typically needs prices closer to $50 or $60 a barrel to be commercially viable, because the wells deplete fast and have to be constantly re-drilled. This already relatively high-break-even price has also come down significantly from where it was when the shale revolution first kicked off as the industry has expanded and fine-tuned their processes. Which means that OPEX could have, in theory, kept the price of a barrel just slow enough that those higher-cost fields weren't really worth developing in the first place. If they had done that consistently they probably would have maintained a much larger share of global supply, but they didn't. The American oil industry had been in a long slow decline for decades. Then in the mid-2000s, prices climbed high enough that suddenly drilling into shale rock with horizontal wells and hydraulic fracking became economic. That kicked off the shale boom and once the wells were drilled and the supply chains were built, that production has not gone away. Beyond just being another unaligned competitor dumping supply into their carefully manipulated global market, North American oil in particular was uniquely threatening. The oil shock of the early 1980s, along with several other conflicts in the Middle East, did more than just push up prices. They demonstrated to oil importing nations that, depending too heavily on the Gulf, was a strategic vulnerability and that energy independence was worth a major upfront investment. As countries built out their own oil industries, alternative suppliers kept coming online and every barrel that came online outside of OPEC was a barrel that the cartel could no longer control. Now, the group did try to recapture this expanding supply, which is also why they launched a spin-off as OPEC+ to bring in non-members like Russia in an attempt to claw back some of that influence they had lost. But OPEC+ has its own coordination problems. The more producers they brought into the cartel, the more national interest they had to balance and the more disagreements they had over who should cut production and who shouldn't. Russia, in particular, has repeatedly produced above its agreed quotas during the past few years, which has made it harder for the rest of the group to take coordinated action seriously. This is, of course, made a lot easier by the fact that they have to hide a lot of their oil exports in the grey market anyway, so actually policing this corporation is really hard. Now, at least publicly, it was these disagreements about who got to produce how much that was the primary reason for the UAE bowing out earlier this week. All of these additional members to the oily suicide squad also didn't solve the bigger issue that OPEC was initially set up with the explicit intention to challenge Western oil dominance, and since it has been Western oil in particular that has regained its market share over recent decades, the group is ultimately trying to win a fight against a growing opponent by strangling themselves. So the question is, against this already shrunken backdrop, how much damage does the UAE leaving actually cause? The first and most obvious effect is supply. The UAE accounts are roughly 12% of OPEC's total output, but that share has been artificially capped. Their official quota under the OPEC cartel sits at around 3.2 million barrels per day, and the country has been arguing for some time that it could produce significantly more if it wanted to. Some industry estimates suggest the UAE could push capacity towards 5 million barrels a day within a few years if it stops holding back. That is, a meaningful amount of new supply showing up in global markets, and it shows up exactly the moment that OPEC needs the opposite. Which means, the UAE leaving doesn't only take their existing supply out of OPEC's coordination, it potentially adds a lot of new supply to global markets, all outside of OPEC's influence. Now, to be fair, this is kind of where the modern public narrative around this move breaks down a little bit, especially given the timing. Because, sure, in theory, the UAE has a lot of oil, and it has modern and well managed infrastructure to extract it beyond its current OPEC cap of about 3.2 million barrels a day. But, that's not happening at the moment. It's cut off from exports through whole moves, and a lot of its infrastructure has been badly damaged. So, if all they wanted to do was export more oil, they picked exactly the wrong time to make this move. Ryan Grim, a regional expert on these issues, has spoken a lot about this strange little paradox in his own reporting, so we'll leave a link to his stuff. But, ultimately, it's pretty clear this was primarily motivated to geopolitically stick it to the other members of the group who have either been actively bombing them or not doing enough to defend them. So yeah, in the short term, supply probably won't be an immediate issue for global oil prices, but the bigger problem is the signal it sends to the rest of the members. If the UAE could walk away and eventually make more money by producing closer to its actual capacity, every other member in the cartel is going to start running the same calculation. Membership in OPEC also comes with some geopolitical baggage. Members are expected to coordinate on policy, take meetings, and at least pretend to be aligned. So, if the revenue advantage isn't there, the incentives to leave start adding after beyond simple supply autonomy. There is also the question of OPEC's broader image. Over the past several years, the group has been trying to compensate for its declining relevance by expanding into OPEC, plus bringing in additional producers and presenting itself as a wider coalition. But, if a key member is now publicly walking out the front door, prospective new members are going to ask why they should bother walking in. And this is happening at a particularly bad time as OPEC members are now, in some cases, literally fighting with one another. The UAE being the first out the door could easily turn into a stampede where every member starts looking out for itself, which could, unfortunately, also create more instability in the region. OPEC, to put it generously, has its problems, but it has been one of the few remaining reasons these countries have to at the very least pretend to work together. A cartel only works because every member benefits from cooperation. It's a pretty classic prisoner's dilemma. If one party leaves, they can produce more and capture more revenue, but only as long as everyone else keeps holding their production back. The whole arrangement is fragile and the same way any corporation problem is fragile because individual incentive points one way and the group incentive points the other. When OPEC controlled 50% of the market, the maths was pretty easy. The pricing benefit of staying in the cartel was huge and the cost of cheating was a fall in prices that nobody could really absorb. But, 25% with the UAE leaving, the maths gets a lot less obvious. Each remaining member is now being asked to hold back at its own production while watching former members and non-members produce as much as they want, which means that as the group shrinks, the incentive to leave grows and the incentive to stay falls. That is, the feedback loop people are worried about, and it's very much consistent with how cartels have historically broken down. There is also the relationship inside the cartel between Saudi Arabia and the smaller golf producers, which has been quietly fraying for years. The UAE, in particular, has been frustrated that production cuts tend to fall disproportionately on countries with spare capacity, which is to say, on the UAE, while Saudi Arabia retains the role of swing producer and gatekeeper. So, the leadership dynamic itself has become a reason to leave, and this is the kind of of Bravins that other gold producers like QA, or Iraq, likely to recognise in their own situation, which is one of the reasons the domino concern has been taken seriously in the first place. Now, of course, the other angle worth looking at is the relationship between the UAE and the USA. The UAE, in particular, has spent a lot of energy over the past decade, trying to rebrand its economy away from oil. Dubai and Abu Dhabi have positioned themselves as business hubs, tourist destinations and increasingly as financial centres. That strategy depends on stability, foreign investment and a steady inflow of foreign currency. As the conflict continues, both its oil revenues and business hub revenues have effectively ground to a halt. The war in Iran has been a serious blow to all of that, at exactly the same time it has hit oil exports moving through the strait of Hormuz. We actually have video on the UAE economy coming soon, so we don't want to go too far into that here, but the important point is, the UAE is, by most measures, running short on the dollar reserves it needs to keep its economy and its currency peg functioning while these revenue streams are disrupted. In the weeks before the OPEC announcement, the United States was reportedly in talks to effectively shore up the UAE through a currency swap line, in a manner not too dissimilar to the arrangement the US has been providing to Argentina. For the UAE, what this really does is give it access to dollars to defend its peg and pay for imports without having to burn through its own reserves or sell down its assets. That is an enormous backstop in the middle of a wartime energy crisis. There's also the kind of arrangement that is really free. Currency swap lines from the US Treasury and Federal Reserve come with implicit conditions. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen, and helps reach people with the right skills, certifications, and more. Listeners of this show will get a $75 Sponsored Job Credit at Indeed.com/podcast. That's Indeed.com/podcast, terms and conditions apply. If you need a hiring hero, this is a job for Indeed Sponsored Jobs, including alignment on broader foreign policy, and they have historically been used as a diplomatic tool as much as a financial one. Now, to be fair, the UAE almost certainly didn't leave OPEC purely because of this. The structural reasons we've been talking about, including quota frustrations, disagreements with Saudi Arabia and the Iran War itself, all predate the swap discussions. But it is reasonable to think that bailout conversations may have influenced the timing. If you're a country with a mostly uncooperative oil cartel on one side, and a financial lifeline from Washington on the other, leaving an organisation the US has broadly speaking been it odds with for decades, is a relatively cheap way to demonstrate alignment. So putting all this together, the picture is reasonably clear. OPEC is no longer the dominant forcing global oil that it used to be, and the UAE leaving is not really the cause of that decline. It is more of the consequence of it. The cartel had already lost most of its pricing power before this week, and the UAE simply ran the numbers, and concluded that the cost of membership had started to outweigh the benefits. The real risk now to the group itself is that other members run those same numbers, and reach the same conclusion. If they do, OPEC's relevance will keep eroding, and global oil prices will increasingly be set by much messier, unless coordinated mixer producers, including the United States, Russia, Brazil, and Canada. Now of course, for almost everybody else in the global economy, this year's overwhelmingly a positive thing. More competition and more diversified supplies, all other things been equal, means lower prices, fewer supply shocks, and less influence on the hands of a small group of countries that can and have used it as a geopolitical weapon. Now, obviously this goes beyond purely economics, but if you want more context on this situation, and how it is affecting oil trade throughout the European Union, click this video right here. Oh, and we also have a newsletter where we do smaller, more niche stories. If you're still watching this video, it should be right up your alley. Click the link in the description to sign up. Thanks for watching, mate. Bye.