The United Arab Emirates' exit from OPEC has officially taken effect, and experts say the US government will welcome the move for its potential to curb the oil-producing cartel's pricing power.
While the UAE's withdrawal, which went into effect on Friday, had been long rumored, the timing was unexpected. Rachel Ziemba, adjunct senior fellow at the Center for a New American Security, a US think tank, wrote: "The exit was a surprise in timing (at least to me), but in some ways has been brewing for some time. It prompts the question whether there will be more competition than cooperation in the region and what the governance of the energy markets will look like."
The UAE has publicly complained about OPEC quotas, which limit oil production for all member countries. It is one of the few OPEC members that has invested in boosting production over the past few years but has not been able to get it to market in the volumes it wanted.
The move also comes at a time when the world is clamoring for new oil supplies. The Strait of Hormuz, through which 20 percent of the world's oil and gas transits, mostly from Middle East nations to Asia and Europe, continues to be blocked amid the US-Israel war on Iran, sending oil prices soaring.
With oil demand shooting up, the UAE is ready to step in with higher supplies and lower prices. Adnan Mazarei, nonresident senior fellow at the Peterson Institute for International Economics (PIIE), told Al Jazeera: "This is going to increase oil production once things normalize [in the strait] by about 2 million barrels per day, which will pull down some pricing pressure depending on how demand does compared to global prices. The US would welcome a weakening of the OPEC and OPEC+. They do have some ability to set prices, and a decline in that power will be welcomed by the US."
On Thursday, global oil benchmark Brent crude futures rose as high as $126.41 a barrel before settling down $4.02. Also on Thursday, the average price for one gallon of petrol hit $4.33, close to double from $2.98 a day before the US and Israel launched their attack on Iran. With the war now in its third month, there has been no respite for consumers as prices continue to soar, fueling inflation and stressing wallets.
US President Donald Trump is concerned about the issue ahead of mid-term elections in November, with his Republican Party at risk of losing seats. A Reuters/Ipsos poll suggested 34 percent of Americans approve of Trump's performance, down from 36 percent. Trump reiterated that prices will drop with the end of the war: "The gas will go down. As soon as the war is over, it'll drop like a rock."
One of the few winners in the current oil squeeze – US oil and gas producers who have enjoyed "unusual profits" since this war began – will likely see some pressure on those profits as and when the UAE supply hits the market. Another winner is the US petrochemical sector, one of the dominant global players alongside China and Saudi Arabia.
For now, the UAE's move is "a future sign and signal – one of openness to trade and interest in helping the world restock," Ziemba said. It also comes on the heels of a request for a currency swap line it made to the US last month, which experts have said was a "fundamentally political move." Mazarei said: "It signals the UAE's political and economic closeness to the US, and this was a significantly political move."
The UAE's exit also opens the door for other OPEC members to follow suit, a scenario that would increase downward pressure on oil prices. Mazarei said: "There is a chance of other countries defecting. But if I had to bet, I'd say OPEC will survive, but in a weaker shape and effectiveness." He is also watching how the war in Iran will reshape the Gulf Cooperation Council (GCC): "The question is, will the GCC survive?"
Ziemba, too, is watching whether there will be more cooperation or competition in the region after the current conflict. The UAE's exit from OPEC "is one of many ways in which countries may be balancing – trying relationships for economic and security arrangements that may suit national interests," she said, adding that she expects the UAE to be "an important player."
Source: www.aljazeera.com