Anna Mikulska: UAE’s OPEC Exit Is a Major Blow to Saudi Arabia

The United Arab Emirates said Tuesday it was leaving OPEC after nearly 60 years, dealing a significant blow to the oil producers’ group and its de facto leader, Saudi Arabia. The move comes at a moment of acute market disruption, with the Strait of Hormuz crisis already constraining global oil flows.

In this interview, Anna Mikulska, a researcher on global energy markets and geopolitical risk and head of analytics at CGCN Group, explains why the move was long anticipated but strategically timed, how it reflects deeper structural tensions inside OPEC, and what it could mean for oil prices, U.S. policy and the future balance of power in global energy markets.

MBN: Why did the UAE decide to leave OPEC at this particular moment? What can we expect in the immediate and medium terms, especially for the global oil markets?

Anna Mikulska: The announcement was sudden but not unexpected. The current disruption in the Strait of Hormuz simply created an opening to act.

If at any other given time the UAE exited OPEC, it would have right away a huge impact on oil markets. With the Strait of Hormuz closed, there is no visible market because nothing was flowing through the Strait of Hormuz. OPEC has been generally constrained by the Hormuz Strait crisis.

One thing to note is that the UAE is very different from other countries in OPEC. Even though it is an original OPEC signatory, it has developed a more diverse economy, much more like the states of the Organization for Economic Co-operation and Development (OECD), while other OPEC countries developed more as petro-states.

 

Abu Dhabi has developed a lot of oil and has been looking into selling it, but it has been constrained significantly by OPEC quotas. When you look at the 2023 Baker Institute study, you see that they estimate approximately $50 billion a year in additional profits that mostly Abu Dhabi could have gotten from not having to constrain their oil production and sales to their OPEC quota.

Geopolitically, the UAE has aligned itself more closely with OECD countries and grown increasingly uncomfortable with Saudi Arabia’s coordination with Russia. The creation of OPEC+, and Russia’s de facto inclusion, was a particular sore point Abu Dhabi saw as a liability for its relationship with the US.

In terms of geopolitics, the UAE  has associated themselves increasingly with the OECD countries.

The UAE wanted geopolitical flexibility and more and more have been uncomfortable with the Saudi alignment with Russia. So when OPEC+ plus was created, including when Russia had kind of entered as an additional member of the organization, that was something that Dubai and Abu Dhabi particularly didn’t like. They’ve seen this as a problem with their relationship with the US in particular.

– To what extent does this move show extremely deep structural strains within OPEC? 

– It’s a big deal that the UAE has left, even though it doesn’t necessarily have a direct impact on oil prices right now because of the Hormuz Strait crisis. But it’s a huge, huge impact. One of these relates to OPEC and OPEC Plus’s ability to control or influence oil markets through their members’ spare capacity.

The UAE is second after Saudi Arabia in  spare capacity for oil production, which basically means that its exit will impact OPEC’s ability to regulate prices. And that’s a huge deal, right? In fact, OPEC Plus was created because after the entrance of shale gas into the international oil markets, OPEC started losing the ability to influence oil markets through constraining production or flooding the markets with oil.

That’s why OPEC Plus was created. With the UAE’s exit, however, new challenges could emerge. This may become particularly problematic because, aside from Saudi Arabia and Russia, the remaining members are smaller producers or countries facing economic pressures and heavy reliance on oil and income from oil trade.

– Does the UAE’s departure signal a potential price war or retaliatory moves with Saudi Arabia? If so, what would be the impact on major oil-importing economies?

– It cannot be ruled out that Saudi Arabia at some point, be it after Hormuz reopens, might not shy away from an oil price war. Particularly if you look at what’s happening right now in the world, when there is not enough oil and then when the Strait of Hormuz opens, everybody will be rushing to get out as much oil as possible because they want to make up for their lost income.

If OPEC remained in place unchanged, it could help coordinate output and better balance how countries bring oil to market, reducing the risk of oversupply and a sharp price drop. But what counts as ‘very low’ prices varies for everyone. 

Each country has its own ideal oil price. Saudi Arabia, for example, bases its price on fiscal needs, meaning it requires a relatively high price to meet budget expenditures. The UAE, by contrast, can operate at lower price levels, giving it more flexibility to tolerate or even drive price reductions.

I would not be really surprised if there was some competition for markets and we could see potentially lower prices for a while. How it will resolve, it will all depend on the global economy. If we have a situation where Saudi Arabia and UAE are trying to fight it out, trying to fight for markets, we might see the prices being lower. The importers are happy to bring in much more, much more oil to fuel their economies, how much, it will depend.

If the current crisis persists, we’re likely to see increasing demand destruction, the longer it lasts, the deeper that effect will be. Demand will eventually recover, but more gradually. Lower oil prices could help support that recovery by stimulating economic activity, though the rebound is likely to be slower.

It’s very complicated and with the current market almost a moving target because we just don’t know what to expect.

– From your vantage point in Washington, what are you seeing in terms of U.S. foreign and domestic policy responses? And what do you think this ultimately means?

– This moves the UAE even closer to Washington, D.C. Washington, D.C. is effectively getting an additional ally who could help the U.S. counter any type of OPEC action. And as I’ve mentioned before, The UAE has been very Western-minded and quite supportive of the U.S. and vice versa. The U.S. has really helped the UAE even during the latest attacks by Iran. It’s an interesting and at this moment supportive relationship on both sides. 

– Who are the winners, who are the losers?

– There is an immediate loser, which is Saudi Arabia. Saudi Arabia is the main country in OPEC, is the leader in OPEC, and it has just lost its very important spare capacity sidekick, which makes OPEC another loser in that scenario. And then Saudi Arabia’s influence, both geopolitically and economically, is much weaker.

In terms of winners, I think that at least in the short term the UAE could benefit. Once the strait reopens, it will be able to capitalize on its production capacity. The UAE has significantly expanded its production capabilities through 2027, and will likely be able to sell more oil at price levels it is still comfortable with, especially compared to what OPEC membership would have allowed. This will be particularly important when the Strait of Hormuz reopens, because, as I mentioned, producers will be rushing to bring oil to market and capture demand, especially in Asia. If OPEC were still operating as it is now, the UAE’s response would depend on the quotas and overall framework set by the organization.

The UAE has a lot to gain, particularly when their economy has been hit hard. On the other hand,  high cost producers may face downside risk if UAE adds that supply and prices fall significantly. 

– What trend or misconception are you seeing that you think we need to be careful about?

– There is a lot that worries me about looking at issues. One thing that I’ve heard a lot is about the countries that have renewable power are doing better. There is little understanding of the nuance in that issue.

Renewables are great. As long as you have a high capacity factor, meaning as long as they perform well and for that you need specific conditions, lots of sun, all the time for solar and constant windy conditions for wind. 

Some countries have expanded renewables, but lack consistent solar or wind activity to sustain high utilization and steady output, which creates challenges. Countries like Spain and Portugal are doing well thanks to abundant solar resources, but Germany or Poland do not have the same advantage. And we see that in the prices. And even this is an oversimplification as market conditions and energy connections and exchanges add to the complexity.

I think we need to start looking at each country’s condition and what it can do to support its own energy security. In a world that’s increasingly de-globalised, where countries look for themselves rather than trying to create some overarching regime, you really need to be prepared.