Faisal Islam - BBC economics editor
The UAE's announcement of its abrupt exit from the Organization of Petroleum Exporting Countries (OPEC) is a momentous event. The UAE was a member of this organization even before it became an independent country in 1971.
OPEC is an organization that includes mostly oil-exporting countries in the Gulf, and has worked for decades to control crude oil prices by reducing or increasing production and setting quotas for its members. It also played a pivotal role in the oil crises of the 1970s, which in turn changed global energy policies.
And while production within OPEC is largely dominated by Saudi Arabia, the UAE had the second-largest excess production capacity, the ability to increase production quickly after Saudi Arabia, which gives it an important role in easing pressure on prices.
And in fact, this was precisely the factor behind the UAE’s long-term reassessment of its position as it seeks to capitalize on the large production capacity it has invested in.
And OPEC quotas were restricting UAE production between 3 and 3.5 million barrels per day, meaning that the cost of membership in terms of lost revenue was relatively high for them.
However, the timing of this decision reflects the fallout from the Iran-related war, as the tense atmosphere in the Gulf has affected the UAE's relations with Iran, and may also reflect on its already tense relationship with Saudi Arabia.
And for OPEC, the decision is a major blow at a time of growing questions about the organization’s long-term cohesion.
And not only is the possibility that the UAE will raise its production to about 5 million barrels per day if it re-exports its entire oil through the sea or pipelines, but Saudi Arabia may respond by igniting a price war, a war that the UAE may endure thanks to its more diversified economy, while the weaker countries within OPEC may be unable to do so.
Much of the development depends on how Saudi Arabia responds.
Emirati officials are also talking about building new pipelines from Abu Dhabi's oilfields to carry oil to the port of Fujairah, bypassing the Strait of Hormuz.
And while a pipeline is currently in use, increasing production requires more energy to achieve a sustainable change in oil flows and transportation costs.
And in light of the current situation, and with the disruption of shipping in the Strait of Hormuz, this development is not the most important factor in the oil markets, which in turn affects the prices of gas, gasoline, plastic and food.
And while the world is currently focused on oil prices reaching around $110 a barrel, there is a possibility that prices will fall to around $50 over the next year, if the strait crisis is resolved in time, especially before the midterm elections in the United States.
And the importance of OPEC declined compared to the seventies of the last century, as its share of global oil trade fell from 85% to about 50% now, and oil is no longer as important as the previous world economy. OPEC still has leverage tools, but it no longer has a monopoly on the market.
He cites the former Saudi oil minister's statement: "The Stone Age is not over because the stones are running out, nor will the oil age end because it is running out," referring to the gradual shift towards alternative energy sources.
The UAE's move may be seen as an indication of this shift, especially with increasing investments in alternative energy, such as China's efforts to electrify transportation, which have contributed to reducing oil demand by about 1 million barrels per day.
And as this trend accelerates globally, oil demand may reach a stage of stabilization or saturation.
From this standpoint, it makes sense for producing countries to seek as much revenue as possible before demand falls.
The UAE has significant financial capabilities and a relatively diversified economy, encompassing sectors such as financial services and tourism.
In the end, much will depend on the shape of the regional order after the tensions in the Gulf end.
And the UAE’s exit from OPEC could lead to a “domino” effect, increasing pressure on Saudi Arabia.
And when oil tankers resume moving through the strait, or if the UAE expands pipeline construction, its oil could flow to markets more freely and without OPEC restrictions.
And while this decision will have little impact on the current blockade, it could bring about significant changes at a later stage.
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