As the United Arab Emirates’ withdrawal from OPEC officially takes effect, experts say the US government will welcome the move as it could curb the pricing power of oil producing cartels.
The UAE’s withdrawal, which took effect on Friday, had long been rumored, but the timing was unexpected.
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“The withdrawal was a surprise in terms of timing (at least to me), but in some ways it had been in the works for quite some time,” wrote Rachel Ziemba, a non-resident senior fellow at the Center for a New American Security, a U.S. think tank.
“The question arises: Will there be more competition than cooperation in the region, and what will happen to the governance of energy markets?”
The UAE has publicly complained about OPEC quotas that limit oil production in all member countries. It is one of the few OPEC member countries that has invested in expanding production over the past few years, but has not been able to bring the desired volumes to market.
The move comes at a time when the world is seeking new oil supplies. The Strait of Hormuz, through which 20% of the world’s oil and gas flows, mainly from countries in the Middle East to Asia and Europe, remains closed amid the United States and Israel’s war against Iran, sending oil prices soaring.
As oil demand soars, the UAE is ready to step in by increasing supplies and lowering prices.
“Once the[Strait]situation normalizes, that would mean an increase in oil production of about 2 million barrels per day. Depending on how demand compares to global prices, that could reduce some price pressures,” Adnan Mazarei, a non-resident senior fellow at the Peterson Institute for International Economics (PIIE), a nonpartisan think tank in Washington, D.C., told Al Jazeera.
“The US would welcome a weakening of OPEC and OPEC+. OPEC and OPEC+ have some pricing power, and any reduction in that power would be welcomed by the US,” Mazarei said.
On Thursday, global oil benchmark Brent crude oil futures LCOc1 rose as high as $126.41 per barrel before settling at $4.02. Also on Thursday, the average price of a gallon of gasoline reached $4.33 ($1.13 per liter), nearly double the price of $2.98 ($0.78 per liter) the day before the US and Israel launched attacks on Iran, which responded with a blockade of the strait and attacks on energy infrastructure and US military bases in the region.
As the war enters its third month, there is no respite for consumers as prices continue to soar, fueling inflation and putting pressure on wallets.The issue is a concern for US President Donald Trump, whose party is at risk of losing seats ahead of midterm elections in November.
A new four-day Reuters/Ipsos poll completed on Monday found that 34% of Americans approve of President Trump’s performance in the White House, down from 36% in the previous Reuters/Ipsos poll conducted April 15-20.
President Trump reiterated his position that prices will fall once the war ends.
“The gas will go down. As soon as the war is over, it will go down like a stone,” he said Thursday.
Tradeable
One of the few winners in the current oil squeeze – US oil and gas producers who have enjoyed “extraordinary profits” since the war began – is likely to see some pressure on their profits once supplies from the UAE hit the market, Mazarei added.
The other is the US petrochemical sector, which is one of the world’s leading players along with China and Saudi Arabia.
PIIE said in a March report that petrochemicals, used in everything from fertilizers, solar panels, clothing and cosmetics to electric vehicles, electronics and medicine, are essential for food security, manufacturing and clean energy, making them the fastest growing source of oil demand.
Disruptions to oil flows caused by the Iran war have strengthened the role of the United States, which remains the largest oil producer.
“The United States is in a very advantageous position, and the more we gain access to Venezuelan oil, the better our position will be,” Mazarei said.
For now, Ziemba said the UAE’s move is “a sign of things to come, one of openness to trade and interest in helping feed the world.”
It also follows a request for a currency swap line from the United States last month, which experts said was a “fundamentally political move.”
“This was a significant political move because it shows the UAE is moving closer to the United States politically and economically,” Mazarei said.
The UAE’s withdrawal would pave the way for other OPEC members to follow suit, a scenario that would increase downward pressure on oil prices.
“Other countries could defect, but if I had to bet, OPEC would survive, but in a weakened form and effectiveness,” Mazarei said.
Mazarei is focused on how the Iran war will reshape the Gulf Cooperation Council (GCC), a regional alliance made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
“The question is, can the GCC survive?” he said.
Ziemba is also interested in seeing whether more cooperation or competition emerges in the region after the current conflict.
The UAE’s withdrawal from OPEC is “one of the many ways in which countries are trying to strike a balance and try to build relationships for economic and security agreements that serve their national interests,” she said, adding that she expected the UAE to become a “significant player” that includes its own and regional interests.
