The UAE leaves OPEC

The UAE leaves OPEC

Economics tells us that cartels are fragile things because a member can leave and become more profitable if facing an elastic demand curve. Such is true with the United Arab Emirates announcing that it is leaving OPEC. The UAE has been unhappy for a while with its oil and gas output throttled by OPEC – primarily Saudi Arabia. The U.A.E. has 4.8 million barrels a day of capacity but currently is capped at around 3.4 million barrels a day under OPEC’s quota system and not surprisingly it wishes to increase that production. While the Strait of Hormuz is closed, the UAE does have a pipeline from Habshan in Abu Dhabi to Fujairah on the Gulf of Oman that carries up to 1.8 million barrels a day. It is expected to invest heavily in additional pipelines to lessen even more its dependence on the strait.

The UAE is the most diversified of the Gulf states and is the financial center of the Gulf with its cities of Dubai and Abu Dhabi. Obviously, leaving OPEC will give the UAE freedom that it currently does not have. Moreover, the relationship between the UAE and Saudi Arabia has always been tenuous at best with the UAE often chafing over the Saudis influence and demands. 

Well before the announcement of its pending withdrawal from OPEC I knew something was up. Yousef Al Otaiba, the UAE ambassador to the United States had a remarkable letter in the Wall Street Journal. https://www.wsj.com/opinion/the-u-a-e-stands-up-to-iran-ec229761

In it he says too that Iran has fired more missiles and drones at the UAE than at any country including Israel. They have intercepted 95 percent of them saying “We have one of the world’s most effective defense shields” – thanks to the US. Obviously they believed that Iran would attack them. By why so vociferously? He said “We knew we would be Iran’s first choice of targets. Not only because we are so near, but because we are so different. The U.A.E. is a modern, progressive, prosperous Muslim society that delivers for its people. We empower women and welcome all faiths. The U.A.E. is the argument Iran can’t win, the idea it can’t accept.” He then goes on to say “The U.A.E. will endure. We will absorb this shock and accelerate economic diversification with new initiatives in artificial intelligence, renewable energy, life sciences and tourism. This includes the world’s largest data center complex, a new Guggenheim Museum and the Middle East’s first Disney theme park.” He concludes “We want Iran as a normal neighbor. It can be reclusive and even unwelcoming, but it can’t attack its neighbors, blockade international waters, or export extremism. Building a fence around the problem and wishing it goes away isn’t the answer. It would simply defer the next crisis.”  

The UAE is a low cost producer of oil and will be able to dramatically increase its revenues by leaving OPEC. This is what we mean by an elastic demand curve – a lower price yields greater revenues. This may be the beginning of the end for OPEC as other states can see that if they leave the cartel, they too can profit from it.

The UAE also left OPEC+ which includes Russia or as they say in Hindi

यूएई ने अचानक मचाई हलचल — OPEC और OPEC+ को छोड़ा