UAE exit from ...
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However, even if the UAE were to immediately ramp up production to its full 4 million barrels per day, it would still be unable to export more than current levels. At present, exports are conducted through the pipeline running from Fujairah, which bypasses the Strait of Hormuz and has a maximum capacity of around 1.8 million barrels per day. This pipeline represents the UAE’s effective export ceiling.
As a result, there is currently a gap of roughly one million barrels per day between export capacity and last year’s export levels, forcing the UAE to cut production as storage capacity is also limited.
Looking ahead, if export constraints and tensions in the Strait of Hormuz are resolved, the UAE could bring on stream its spare capacity within a relatively short period and reach full production of 4 million barrels per day. Exports could then rise to around 3.3 to 3.4 million barrels per day.
Even then, this is not a particularly large volume in global oil markets and might reduce prices by only one to two percent.
In the longer term, even the addition of another one million barrels per day would likely have a limited impact—at most around a two percent effect on prices. However, from a macroeconomic perspective, this could still be significant. Even a three to four percent shift is meaningful in economies where inflation remains below five percent. Politically, a producer that was previously constrained by OPEC quotas would now operate under US influence, effectively becoming a tool for market management.
What impact will this move have on OPEC’s cohesion and its ability to manage global oil supply? Could this lead to a weakening of OPEC’s role and encourage similar actions by rivals?
OPEC’s functioning can be compared to what is often referred to as a “standing spectator” scenario. In a sporting event, if a few individuals stand up to watch the game, it benefits them individually. But if everyone does so, the collective outcome is worse.
A similar dynamic applies here. If a limited number of countries leave OPEC, it can be advantageous for them. OPEC continues to manage and stabilize the market, while those outside the organization are free to maximize production and benefit economically and politically. However, if all members were to follow suit, a destructive competition would likely emerge, with each country striving to maximize output, ultimately driving prices down and harming them all.
The UAE’s move fits this “standing spectator” analogy. Its exit is unlikely to significantly affect market prices, but by no longer adhering to OPEC constraints, it can maximize its production—especially at a time of elevated prices—and capitalize on the situation.
More broadly, OPEC has weakened in recent years. This is partly due to Saudi Arabia’s alignment with the United States, and partly due to Russia’s presence. Given the current state of the shale oil market, OPEC may need to make its decisions less predictable. Instead of consistently increasing supply when prices rise and cutting output when prices fall, it may need to adopt less foreseeable strategies so that competitors such as shale producers cannot easily factor in its behavior in their planning.