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Earlier this week, on the 27th of April, the United Arab Emirates officially announced that it would be leaving the Organization of Petroleum Exporting Countries, a group that was the most powerful oil pricing cartel in the world. The Emirates announced that this was because their capacity to produce oil had far exceeded their artificially mandated supply quota, and because they were angry with their OPEC neighbors for not doing more to defend them from Iran during the ongoing conflict. Or at least that was the story. Although, how it holds up does need to be addressed. The UAE had up until Tuesday been a member for over 60 years and was one of the organization's first members outside of
the original founding five. Not to mention the fourth largest producer of oil, accounting for around 12% of the group's total production. To put it mildly, this is a major and very public blow to a group that has already been losing influence and relevance for some time now. Even before the UAE's announcement, OPEC had gone from supplying more than half of the world's oil to less than a quarter. Today, the USA alone produces half as much as their collective output. So this additional departure from their control means a lot more than just a bad headline. Understanding these simple market dynamics reveals that every barrel that is produced outside of this cartel hurts
more than the last. Which means that as their share of global supply has shrunk, they have less control over global oil markets, all while imposing more control over their members. And this also opens the door to the much bigger discussion of if the UAE is just the first domino in something that could turn into a much larger feedback loop. As countries leave, the group has less pricing power to offer. So more countries leave so the group has less power. Oh, and while we are on the subject, it's probably also worth looking into the potential quid proquo nature of this move in relation to a financial bailout the UAE has been discussing with the USA. So what is the current state of OPEC's true market
power today? How much will the UAE's departure impact this power? And finally, what were the potential motivations behind this move? AI is everywhere. It's in every earnings call, most meetings. It's even a common topic in most of our ideation meetings at EE. Since this is the slowest AI will ever progress, it can be really easy to feel fear associated with this new technology. That's where Outskill, today's video sponsor, comes in. Outskill is an AI focused education platform designed to help you actually apply AI in your work. But they go beyond just a passive course. They dive head first into actual skills that can
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10 million people across the world have already attended this and rated it 4.9 out of five on Trustpilot. Just click on that link in the description or scan the QR code and stay updated by joining their WhatsApp community. The first thing worth noting is that OPEC is at its core an organization that works by putting a quot on how much its members can produce. It limits the supply coming from its members because all other things been equal. Less supply means higher prices through pretty basic market forces, which means the group as a whole gets to maximize revenues while also targeting a price range that keeps them dominant. We'll get into the dominant side of this in a minute, but
for now, just keep in mind that this entire system only works if the cartel actually has enough market share to move the global oil price. If they only control a small fraction of supply, holding back their own production effectively leaves money on the table for everyone else because someone outside of the cartel will simply produce that barrel instead. And that is a problem because OPEC really doesn't have the share it used to. The group has gone from controlling more than half the world's oil supply at its peak to less than a quarter today. Additional sources of crude have become far more varied, especially in North America, where the shale boom transformed the United States from a long declining oil producer into
the single largest producer in the world. Importantly, this loss of market power is not linear. Going from a 50% market share to a 45% share hurts pricing dominance far more than going from 25% to 20%. Now, OPEC in the past was actually quite careful to manage this by really threading the needle on prices. Extracting oil in the Gulf as well as in places like Venezuela is extremely cheap compared with extracting it from the North Sea or the Peran Basin. Saudi conventional crude can be lifted out of the ground for as little as $4 a barrel. Shale oil in West Texas typically needs prices closer to $50 or $60 a barrel to be commercially viable because the wells deplete fast and have to be constantly redrilled. This already
relatively high break even price has also come down significantly from where it was when the shale revolution first kicked off as the industry has expanded and fine-tuned their processes which means that OPEC could have in theory kept the price of a barrel just low enough that those higher cost fields weren't really worth developing in the first place. If they had done that consistently they probably would have maintained a much larger share of global supply but they didn't. The American oil industry had been in a long slow decline for decades. Then in the mid-200s, prices climbed high enough that suddenly drilling into shale rock with horizontal wells and hydraulic fracking became
economic. That kicked off the shale boom and once the wells were drilled and the supply chains were built, that production has not gone away. Now, beyond just being another unaligned competitor dumping supply into their carefully manipulated global market, North American oil in particular was uniquely threatening. The oil shock of the early 1980s, along with several other conflicts in the Middle East, did more than just push up prices. They demonstrated to oil importing nations that depending too heavily on the Gulf was a strategic vulnerability and that energy independence was worth a major upfront investment. So as countries built out their own oil industries, alternative supplies kept coming online
and every barrel that came online outside of OPEC was a barrel that the cartel could no longer control. Now the group did try to recapture this expanding supply which is also why they launched a spin-off as OPEC plus to bring in non-members like Russia in an attempt to claw back some of that influence they had lost. But OPEC plus has its own coordination problems. The more producers they brought into the cartel, the more national interest they had to balance and the more disagreements they had over who should cut production and who shouldn't. Russia in particular has repeatedly produced above its agreed quotas during the past few years, which has made it harder for the rest of the group to take coordinated action seriously. This is of
course made a lot easier by the fact that they have to hide a lot of their oil exports in the gray market anyway. So actually policing this cooperation is really hard. Now, at least publicly, it was these disagreements about who got to produce how much that was the primary reason for the UAE bowing out earlier this week. All of these additional members to the oily suicide squad also didn't solve the bigger issue that OPEC was initially set up with the explicit intention to challenge Western oil dominance. And since it has been Western oil in particular that has regained its market share over recent decades, the group is ultimately trying to win a fight against a growing opponent by
strangling themselves. So the question is against this already shrunken backdrop, how much damage does the UA leaving actually cause? The first and most obvious effect is supply. The UAA accounts for roughly 12% of OPEC's total output, but that share has been artificially capped. Their official quotota under the OPEC cartel sits at around 3.2 million barrels per day, and the country has been arguing for some time that it could produce significantly more if it wanted to. Some industry estimates suggest the UAE could push capacity towards 5 million barrels a day within a few years if it stops holding back. That is a meaningful amount of new supply showing up in global markets and it shows up exactly the moment that OPEC
needs the opposite. Which means the UAE leaving doesn't only take their existing supply out of OPEC's coordination. It potentially adds a lot of new supply to global markets all outside of OPEC's influence. Now to be fair, this is kind of where the modern public narrative around this move breaks down a little bit, especially given the timing. Because sure, in theory, the UAE has a lot of oil and it has modern and well-managed infrastructure to extract it beyond its current OPEC cap of about 3.2 million barrels a day, but that's not happening at the moment. It's cut off from exports through Hmuz, and a lot of its infrastructure has been badly damaged. So, if all they wanted to do was export more oil, they picked exactly
the wrong time to make this move. Ryan Grim, a regional expert on these issues, has spoken a lot about this strange little paradox in his own reporting, so we'll leave a link to his stuff. But ultimately, it's pretty clear that this was primarily motivated to geopolitically stick it to the other members of the group who have either been actively bombing them or not doing enough to defend them. So yeah, in the short term, supply probably won't be an immediate issue for global oil prices. But the bigger problem is the signal it sends to the rest of the members. If the UAE can walk away and eventually make more money by producing closer to its actual capacity, every other member in the cartel is going to start running the
same calculation. Membership in OPEC also comes with some geopolitical baggage. members are expected to coordinate on policy, take meetings, and at least pretend to be aligned. So, if the revenue advantage isn't there, the incentives to leave start adding up beyond simple supply autonomy. There is also the question of OPEC's broader image. Over the past several years, the group has been trying to compensate for its declining relevance by expanding into OPEC plus, bringing in additional producers, and presenting itself as a wider coalition. But if a key member is now publicly walking out the front door, prospective new members are going to ask why they should bother walking in. And this is happening at a particularly bad
time as OPEC members are now in some cases literally fighting with one another. The UAE being the first out the door could easily turn into a stampede where every member starts looking out for itself, which could unfortunately also create more instability in the region. OPEC, to put it generously, has its problems, but it has been one of the few remaining reasons these countries have to at the very least pretend to work together. A cartel only works because every member benefits from corporation. It's a pretty classic prisoners dilemma. If one party leaves, they can produce more and capture more revenue, but only as long as everyone else keeps holding their production
back. The whole arrangement is fragile in the same way any corporation problem is fragile because individual incentive points one way and the group incentive points the other. When OPEC controlled 50% of the market, the maths was pretty easy. The pricing benefit of staying in the cartel was huge and the cost of cheating was a fall in prices that nobody could really absorb. But at 25% with the UAE leaving, the maths gets a lot less obvious. Each remaining member has now been asked to hold back its own production while watching former members and non-members produce as much as they want. Which means that as the group shrinks, the incentive to leave grows and the incentive to stay falls. That is
the feedback loop people are worried about. and it's very much consistent with how cartels have historically broken down. There is also the relationship inside the cartel between Saudi Arabia and the smaller Gulf producers which has been quietly fraying for years. The UAE in particular has been frustrated that production cuts tend to fall disproportionately on countries with spare capacity which is to say on the UAE while Saudi Arabia retains the role of swing producer and gatekeeper. So the leadership dynamic itself has become a reason to leave and this is the kind of grievance that other golf producers like Q8 or Iraq are likely to recognize in their own situation which is one of the reasons the domino concern has been taken
seriously in the first place. Now of course the other angle worth looking at is the relationship between the UAE and the USA. The UAE in particular has spent a lot of energy over the past decade trying to rebrand its economy away from oil. Dubai and Abu Dhabi have positioned themselves as business hubs, tourist destinations, and increasingly as financial centers. That strategy depends on stability, foreign investment, and a steady inflow of foreign currency. As the conflict continues, both its oil revenues and business hub revenues have effectively ground to a halt. The war in Iran has been a serious blow to all of that. At exactly the same time, it has hit oil exports moving through the
straight of Hormuz. We actually have video on the UAE economy coming soon, so we don't want to go too far into that here. But the important point is the UAE is by most measures running short on the dollar reserves it needs to keep its economy and its currency peg functioning while these revenue streams are disrupted. In the weeks before the OPEC announcement, the United States was reportedly in talks to effectively shore up the UAE through a currency swap line in a manner not too dissimilar to the arrangement the US has been providing to Argentina. For the UAE, what this really does is give it access to dollars to defend its peg and pay for imports without having to burn through its own
reserves or sell down its assets. That is an enormous backs stop in the middle of a wartime energy crisis. It is also the kind of arrangement that is rarely free. Currency swap lines from the US Treasury and the Federal Reserve come with implicit conditions, including alignment on broader foreign policy, and they have historically been used as a diplomatic tool as much as a financial one. Now, to be fair, the UAE almost certainly didn't leave OPEC purely because of this. The structural reasons we've been talking about, including quota frustrations, disagreements with Saudi Arabia, and the Iran war itself, all predate the swap discussions. But it is reasonable to think that bailout
conversations may have influenced the timing. If you're a country with a mostly uncooperative oil cartel on one side and a financial lifeline from Washington on the other, leaving an organization the US has, broadly speaking, been at odds with for decades is a relatively cheap way to demonstrate alignment. So, putting all of this together, the picture is reasonably clear. OPEC is no longer the dominant force in global oil that it used to be, and the UAE leaving is not really the cause of that decline. It is more the consequence of it. The cartel had already lost most of its pricing power before this week, and the UAE simply ran the numbers and concluded that the costs of membership had started to outweigh
the benefits. The real risk now to the group itself is that other members run those same numbers and reach the same conclusion. If they do, OPEC's relevance will keep eroding and global oil prices will increasingly be set by a much messier and less coordinated mix of producers, including the United States, Russia, Brazil, and Canada. Now, of course, for almost everybody else in the global economy, this is overwhelmingly a positive thing. More competition and more diversified supplies, all other things being equal, means lower prices, fewer supply shocks, and less influence in the hands of a small group of countries that can and have used it as a geopolitical weapon. Now, obviously,
this goes beyond purely economics, but if you want more context on this situation and how it is affecting oil trade throughout the European Union, click this video right here. Oh, and we also have a newsletter where we do smaller, more niche stories. If you're still watching this video, it should be right up your alley. Click the link in the description to sign up. Thanks for watching, mate. Bye.
