The UAE’s Opec exit was both inevitable and rational

It is significant that Abu Dhabi joined Opec from the moment the emirate exported its first barrel of oil in 1967, four years before the birth of the UAE itself. For 59 years the UAE was a member of Opec enduring an era of multiple shocks, wars, revolutions, recessions, banking crises, oil price wars, supply shocks, embargoes and the pandemic.

Saudi Arabia has been the ultimate power broker within the group and its swing producer, the de facto central bank of black gold. The kingdom has the world’s lowest drilling cost, highest long-life proven reserves versus export volumes and almost all of Opec’s excess capacity. This means that Saudi Arabia alone could move the price of oil by enforcing quota discipline on other members.

In fact, Saudi Arabia initiated three price wars which produced a ghastly plunge in oil prices in 2014, 2019 and 2020 because Riyadh misjudged the competitive threat from West Texan shale oil and was embroiled in a production dispute with Russia.

The economics of oil therefore meant that the UAE was at the mercy of Saudi-led price wars and quota discipline actions even though it was not a marginal producer of crude like other members who have exited such as Indonesia, Qatar, Angola and Ecuador.

After all, Abu Dhabi boasts the world’s seventh largest proven oil reserves, extraction costs below $10 a barrel, which is not much higher than Saudi Aramco, and a baseline Opec quota of 3.17 million barrels a day, making it the third largest producer in the group after Saudi Arabia and Iraq.

While a geopolitical rift between Riyadh and the UAE over Yemen is undeniable, the basic reason the UAE decided to leave Opec is that it has spent tens of billions in development costs to raise productive capacity to as high as 4.85 million barrels per day via Adnoc‘s epic exploration spree which has been ongoing since 2018.

Abu Dhabi has been dissatisfied with Opec since Saudi Arabia restricted its quota a full 30 percent below capacity at a time when Iraqi over-production has made a mockery out of the concept of quota discipline.

Meanwhile, Iran simply ignored Opec and put its fleet of ghost tankers to work to export every barrel it pumped to China.

Russia was also unwilling to make any sacrifices to maintain a price floor even when Brent fell to $60 earlier this year, as Vladimir Putin was determined to sell every barrel Rosneft and Lukoil produced in order to finance his war of attrition in Ukraine.

In this game of global energy brinkmanship, Abu Dhabi was forced to endure successive price crashes at the same time as one third of its productive capacity remained idle. It was on the receiving end of output, pricing and export decisions made in Riyadh, Moscow, Baghdad and Tehran over which it had no input, let alone influence.

Opec membership was costing the UAE at least $50 billion a year in lost petrodollar revenues.

The only thing surprising about the UAE’s decision to exit is that it did not happen much earlier. It took a horrific war and 3,000 missile or drone attacks from Iran finally to force Abu Dhabi to exit Opec.

The closure of the Strait of Hormuz has just created an optimal political moment whereby the UAE can leave without triggering another ruinous oil price crash.

The fate of the five founding members of Opec should temper those who believe that the UAE’s decision to exit undermines Gulf’s solidarity.

Iraq invaded and overran fellow founding member Kuwait in 1990. Venezuela is a de facto Trump satrapy and will be next to exit. Iran has just attacked every Gulf oil producer plus fellow Opec+ member Azerbaijan with its ballistic missile arsenal. Saudi and Russian interests in Iran are in deep conflict. Iraq is a de facto vassal state of the Islamic Revolutionary Guard Corps.

Opec’s five founders are definitely not Enid Blyton’s Famous Five happy family!

Opec is a cauldron of lethal geopolitical rivalries and Darwinian self interest. Abu Dhabi’s strategic autonomy doctrine means national interest is the sole lodestar of its energy policy.

In the game of nations, a petrostate must take the existential decisions of war and peace itself as well as pursuing an energy policy based on self interest.

This is not Machiavelli, simply the logic of survival in a Hobbesian world.

The energy transition made the Opec exit inevitable. Oil and gas is just one third of the UAE’s $540 billion economy and it is only a matter of time before peak demand leads to an inexorable decline in oil prices, Matt Simmons’s Twilight in the Desert predicts.

The 2 million barrels per day that is not currently exported could become a stranded asset if demand growth collapses.

Opec’s price floor is a cruel myth in a world where Brazil and Guyana alone produce 4 million barrels per day and West Texas has replaced Saudi Arabia as crude’s price setter.

The UAE’s Opec exit was thus both inevitable and rational.