Why is the UAE leaving OPEC (and OPEC+)?

From a short-term perspective, the United Arab Emirate’s surprise exit from OPEC can be read as the confluence of many developments: the relentless expansion of the UAE’s own production capacity over the last ten years (in percentage terms, no other OPEC member has been as hamstrung by OPEC quotas as the UAE); the prospect of a looming and profitable supply gap; a war in which no other country (bar Israel) has been in the crosshairs of fellow OPEC member Iran as relentlessly as the UAE; the perhaps unavoidable reassertion of Saudi Arabia from student of the UAE’s economic model to regional power; and Russia’s role in the war next door.

From a longer-term perspective, however, this decision reflects far more than a bundle of grievances reaching breaking point.

Consciously or not, it reflects a strategic reaction to a fundamental shift in the workings of the global oil market — one which may not be all that far away.

If global oil demand peaks or plateaus, the game will change, and OPEC members who can produce oil cheaply but are bound by quotas will be among the losers. As the logic goes: in a shrinking market, for any exporter to keep volumes just constant requires, by definition, an increase in market share. The normal way to increase market share is price competition. In a shrinking market, in other words, the low-cost producer rules. A cartel which is not a monopoly cannot protect its members from this dynamic — quite the opposite: it handicaps the low-cost members the most.