UAE exit from OPEC just latest blow to cartel, whose global might was already undermined by US oil

The United Arab Emirates' decision this week to leave the Organization of the Petroleum Exporting Countries (OPEC) is just the latest departure and yet another sign that the cartel’s decades-long grip over global energy markets is drifting further into the history books.

The UAE has ambitions to increase its oil and gas production, and this has brought it into conflict with other members of the cartel, primarily Saudi Arabia. The production quotas the group set were aimed at keeping prices higher, and that worked well when the Middle East was the primary energy producer in the world. 

The U.S. shale revolution spoiled that framework by launching the country to the top position as the world’s largest oil and gas producer. This shift in the global energy picture is in large part the story of privatized industries outcompeting state-owned ones. 

Not-so-big oil 

The members of OPEC, formed in 1960, are nations with nationalized energy industries, and that provides an easy system by which the cartel can direct production levels in its bid to keep prices high. 

Unlike the OPEC system of producer-focused industries, the U.S. system is consumer-driven. There are over 9,000 independent, small producers that account for 85% of U.S. oil and gas production. All of them are in competition with each other to produce the most oil for the least amount of money. 

In the spring of 2014, as the American shale boom was coming to the end of its infancy, American benchmark oil prices were over $100 a barrel. They began to fall in summer, and by November, they were approaching $60 a barrel. 

American oil producers faced much tougher geology, and the technology to crack open shale layers deep below the surface – called hydraulic fracturing, also known as “fracking” – took years to develop. But the competition between producers drove innovation and efficiencies, allowing the U.S. to transform shale production into a competitive force on the global market.  

In 2014, shale producers needed at least $76 a barrel to cover the cost of drilling and completing wells. As oil prices fell toward the end of that year, OPEC, primarily Saudi Arabia, decided not to cut production in response to the falling prices, likely in an effort to drive American producers out of business. By 2016, prices plummeted to under $40 a barrel and an oil bust followed. 

Ditching OPEC

U.S. shale producers persevered, and after a few years of decline, domestic production began to rise again, and America’s oil industry, including conventional production, overtook all other oil-producing nations. 

The UAE has been investing in its oil and gas industry in a bid to drive up production, even if it means lower prices for the hydrocarbons it produces. The goal has brought the country into conflict with OPEC’s vision. 

The UAE argued in a statement announcing its departure from OPEC that “a stable global energy system depends on flexible, reliable, and affordable supply. The UAE has invested to meet evolving demand efficiently and responsibly, prioritizing stability, affordability and sustainability.” 

Gabriella Hoffman, director of the Center for Energy and Conservation at Independent Women’s Forum, told Just the News: “I think they said, ‘We’ve had enough. We can grow without OPEC.'"

Fractured cartel

Wood Mackenzie, a global research and consultancy group, said the UAE’s departure represents the “most significant fracture in [OPEC's] 66-year history.” 

Over the past decade, the cartel has lost members – Indonesia in 2016, Qatar in 2019, Ecuador in 2020, and Angola in 2023. But unlike the previous departures, the UAE has not only the ambitions to increase production, it also has the reserves to support that ambition and the money to invest in that goal. 

The country has invested heavily since 2010 to increase its production, rising from 2.65 million barrels of oil a day to 4.65 million barrels a day last month. The tension between the UAE and the cartel has been brewing for some time, especially against Saudi Arabia. The Saudis, which are aligned with Russia, wanted to keep oil prices up to $100 a barrel, even if that meant curbing output, Bloomberg’s Javier Blas explained. 

In July 2021, a clash between the UAE and the Saudis ended up forcing the adjournment of a meeting of OPEC+, which includes the broader membership in the cartel. The UAE backed down under pressure from Saudi Arabia, and the UAE’s humiliation has simmered ever since. 

While the conflict in Iran, Blas argues, provides the UAE cover for its departure, the main drive is that it can’t produce more oil while being a member of the cartel. The country has its sights set on producing 5 million barrels a day by 2027, and Blas predicts that, now that it’s getting up from under the OPEC thumb, it will set even higher targets soon for 2030. 

America’s Petroleum Exporting Countries

The UAE’s departure is likely going to inspire more of its members to consider going it alone. Venezuela is a likely candidate for being the next member to leave. While the government of Delcy Rodriguez is supportive of OPEC, the country’s opposition party is not. If the next election puts the party in power, Venezuela will likely leave the cartel. 

This could create an opportunity for more alliances between oil-producing countries of the Americas. An American OPEC couldn’t function like the OPEC cartel. If U.S. oil companies colluded to restrict production to keep prices high, they’d be violating anti-trust laws, and convincing thousands of companies to get on board with the scheme isn’t plausible. 

There could, however, be more coordination between the oil-producing countries in North and South America – primarily the U.S., Canada, Mexico and Venezuela.

 Tim Stewart, president of the U.S. Oil and Gas Association, told Just the News earlier this month that more collaboration with like-minded countries would help insulate producers in North and South America from choke points in the Middle East, like the Strait of Hormuz.

Hoffman with the Independent Women’s Forum said that there could be free-trade agreements and that sort of thing to help facilitate the West’s producers and provide more effective opposition to OPEC’s machinations. 

‘May the best producer win’

What is clear is that OPEC’s existence as an effective force to keep energy prices high to the benefit of oil producers at the expense of consumers is largely in the dustbin of history at this point. 

OPEC+ countries combined produce approximately 59% of global oil production. As more countries leave the cartel, it could find itself in competition with its former allies, who would be free to produce as much as they can manage. 

That will mean much lower energy costs for the globe’s consumers, and OPEC’s remaining members will have to reconsider their business strategies. 

“I think people want to see competition, and may the best energy producer win,” Hoffman said.