The UAE is breaking up the band

If you were heartbroken about Jane’s Addiction splitting up a few months ago, just wait until you hear this: The United Arab Emirates is leaving the Organization of Petroleum Exporting Countries (OPEC) as well as OPEC+ on May 1.

The bombshell announcement comes at an already tense moment for the global oil cartel: The partial closure of the Strait of Hormuz has disrupted supply, handicapped the group’s major producers, and caused friction among the nations.

In a written statement, the UAE’s Energy Ministry said the decision followed a “comprehensive review” and was in the national interest.

What’s really going on?

The UAE’s move is fundamentally about control. OPEC produces 40% of the world’s oil, and the UAE makes up over 12% of OPEC’s global supply as is its third-largest producer. But the nation has long been frustrated by its quota: The UAE has the capacity to pump about 4.8 million barrels per day, but can only produce 3.4 million under OPEC’s rules. Unencumbered by OPEC, the country can move towards its stated goal of producing 5 million barrels per day by 2027.

This triggers an existential crisis for OPEC. Its control rests on coordination among the world’s largest oil producers to agree on quotas. The UAE’s exit will make it more challenging for the cartel to set prices and manage supply.

Why now?

The exit is not purely money-math—geopolitics plays a huge part, too. The UAE’s decision follows missile and drone attacks from Iran, a fellow OPEC member. Saudi Arabia, which dominates OPEC, has evolved from an ally of the UAE into a rival. And according to the UAE’s Energy Ministry, the Iran war created the perfect moment to leave, because nations are already slashing production due to the closure of the Strait.

Another factor: The country has a geographical advantage. Because of where the UAE sits, it can export about half of its oil overland, making it less reliant on the Strait than other OPEC members. Once the nation is independent of OPEC, it can focus on expanding alternative export routes such as pipelines, according to the WSJ.

What this means for oil prices

In the short term, the move likely won’t make the oil shock from the war worse than it is already, because the OPEC nations are already cutting supply due to the closure of the Strait. And while in theory prices should drop once the UAE starts pumping more oil, it’s not that simple: Analysts still expect prices to keep rising as the war drags on.

Looking down the pipeline, this seriously further weakens OPEC, which had already seen its control of crude diminish as the US became a major oil producer.

“It’s the hardest blow ever,” Homayoun Falakshahi, a senior oil analyst at commodities data company Kpler, told the WSJ. “It raises the question about whether OPEC can survive.”—LB