Faisal Islam: Why the UAE's exit from Opec is a big deal

Key developments are emerging from the global stage. Faisal Islam: Why the UAE's exit from Opec is a big deal 12 hours ago Share Save Add as preferred on Google Faisal Islam Economics editor Getty Images It is a very big deal that the United Arab Emirates (UAE) has announced its abrupt exit from Opec , the Organisation of Petroleum Exporting Countries. The Emiratis were members even before they became a nation state in 1971. Opec is the organisation of mainly Gulf oil exporters, which for many decades controlled the price of crude oil by decreasing or increasing production and allocating quotas across its membership.

It had a vital role in 1970s oil crises, which in turn transformed global energy policy. While Opec production is dominated by Saudi Arabia, the UAE had the second highest spare production capacity. In other words, it was the second most important swing producer, capable of increasing production to help ease prices.

The Details

Indeed it is precisely this that led to long-term reconsiderations of the UAE's position. Put simply, the UAE wanted to use the considerable capacity it has invested in. Opec quotas limited its production to 3-3.

5 million barrels per day. Opec membership sacrifices, in terms of lost revenues, were being made disproportionately by the UAE. However, the timing of this move hints at consequences from the Iran war.

The pressure cooker in the Gulf has impacted the UAE's relationship with Iran and may affect its already strained relationship with Saudi Arabia. As for Opec, this is a big blow at a time when significant questions are being asked about its long-term coherence. It's not just that the UAE, when it can get its oil fully back on the market by sea or pipeline, is likely to target 5 million barrels per day production.

What Experts Say

Saudi Arabia might respond with an oil price war that the UAE's more diversified economy could withstand, but other poorer Opec members might not. Much depends on the Saudi response. Leading Emirati officials talk of new pipelines from the UAE's oil fields in Abu Dhabi, bypassing the Strait of Hormuz, and heading to the underused port of Fujairah.

There is already one pipeline in heavy use today, but more capacity will be needed to cope with increased production and a permanent change to the fluidity and cost of tanker traffic in the Gulf. For now, of course, during a double blockade of sea traffic in the Strait of Hormuz, this is not the main event in oil markets, affecting the prices of oil, gas, petrol, plastics and food. While the world understandably focuses on oil at $110 per barrel, this is, however, a reason not to discount the chance that it could be closer to $50 sometime next year - if the mess in the Strait is sorted, for example, in time for the US midterm elections later this year.

Opec is less important to world oil markets than it was in the 1970s , with the 85% share of internationally traded oil it had then more like 50% today. Oil is also less critical to the world economy than it was in the 1970s.

The development has drawn wide international attention, with diplomatic circles watching closely.