OPEC To Become A Ceremonial Organisation

Chennai: After UAE’s exit from the OPEC, other members will start moving out making the Organisation of the Petroleum Exporting Countries (OPEC) a “ceremonial” organisation. When the countries are no longer bound by the production quota, supply of oil will improve, but the war and the restoration of infrastructure will keep crude oil prices elevated for the next 12 months, finds Anindya Banerjee, Head, Commodity and Currency Research, Kotak Securities.Before we start talking about this latest development, our viewers would like to understand the emergence of OPEC and its importance in the oil trade. OPEC was essentially formed as a cartel of oil-producing countries to maintain price stability in the market and prevent sharp fluctuations. Before the 1970s, intense competition among producers led to frequent boom-and-bust cycles. To address this, member countries agreed to production quotas, ensuring coordinated supply management. From a geo-economic perspective, OPEC gained prominence in the late 1960s and early 1970s, particularly after the US de-pegged the dollar from gold and linked it to global energy trade. This effectively created sustained demand for the dollar, evolving into what is now known as the “oil-for-dollar” system. Major oil producers like Russia and the US are not part of this group. Why did they remain outside, and how has their relationship with OPEC evolved? OPEC was largely dominated by West Asian producers, particularly Arab nations and Iran. The US, as the issuer of the global reserve currency, did not need to participate in oil production coordination, as it effectively controlled purchasing power through the dollar. Russia, then part of the Soviet Union, remained outside due to geopolitical rivalry with the US and could not align with a dollar-linked framework. Of late, how has the relationship with OPEC changed? Has there been a shift in power dynamics? As the US turns inward economically and geopolitically, the global system is gradually moving towards multipolarity. This shift is reflected in energy trade, where transactions are increasingly happening in multiple currencies instead of just the dollar. Countries like India, UAE, China, and Russia are already experimenting with bilateral trade in local currencies. At the same time, the traditional security arrangement—where the US provided military protection to Gulf nations—has weakened. Recent disruptions and attacks in the region, along with challenges in securing trade routes like the Strait of Hormuz, have led some Gulf countries to reassess their reliance on the US. Iran is also a member of OPEC. What was its position when it faced US sanctions? Before sanctions intensified around 2010, Iran exported roughly 3.5 to 3.7 million barrels per day. This later fell sharply to about 0.5 million barrels per day due to restrictions. OPEC, being tied to the dollar system, could not counter US or EU sanctions. Other members like Saudi Arabia and the UAE increased production to offset Iran’s reduced exports, thereby gaining market share. While Iran remained in OPEC, its influence within the group diminished significantly. We have seen members like Qatar exit OPEC in the past. What drives such decisions? Qatar exited OPEC in 2019 primarily because it is a major natural gas producer rather than an oil-focused economy. Its exit had limited impact on oil markets. However, the UAE’s case is far more significant. With nearly 5 million barrels per day—about 4 per cent of global supply—its departure has deeper implications for both OPEC and global oil dynamics. Why did the UAE decide to leave OPEC? One key reason is the increasing shift towards bilateral energy deals rather than multilateral frameworks. The UAE has been expanding trade arrangements with countries like China, often in local currencies rather than dollars. Additionally, the US no longer has the fiscal capacity to extend extensive military or financial support to Gulf nations. With rising regional instability, countries like the UAE are now compelled to fund reconstruction and security independently, making OPEC’s constraints less viable. This move could trigger similar decisions by other members, including Saudi Arabia, gradually reducing OPEC to a ceremonial entity. How has the quota system become a liability for members like the UAE? Quota systems have historically been a source of friction within OPEC, with members occasionally exceeding their limits. While the cartel held together because the cost of leaving was higher than staying, that balance is now shifting. Even before the current conflict, forecasts indicated that non-OPEC supply growth would outpace global demand, making it difficult for OPEC to balance markets despite production cuts. Now, disruptions in the Strait of Hormuz have significantly reduced supply and drawn down global inventories. Once normalcy returns, demand will surge—not just for consumption but also to rebuild inventories—creating an incentive for producers to maximize output rather than adhere to quotas. What impact will the UAE’s exit have on crude oil supply and prices? In the immediate term, the impact is limited due to ongoing disruptions in key supply routes. However, once these normalize, increased production without quotas could put downward pressure on prices. That said, for the next 12 months, strong demand for rebuilding inventories—both commercial and strategic—will keep prices elevated. Over the longer term, as more producers ramp up output and possibly exit OPEC, prices are likely to soften. In the near term, how could crude oil prices move? If disruptions continue, prices could spike to as high as $150 per barrel, surpassing previous peaks. If supply routes reopen sooner, the shock may be less severe. Over the next year, prices are likely to stabilize in the $70–$80 per barrel range for Brent crude, with temporary spikes depending on geopolitical developments. Beyond this period, could prices fall further? Yes. The long-term outlook for oil remains bearish due to abundant supply and increasing production capacity. Once infrastructure is restored and supply chains normalize, prices could fall below $60 per barrel. With the rise of renewable energy and electric vehicles, what is the future relevance of OPEC? The world is not running out of oil but is gradually reducing its dependence on it. The shift towards alternative energy sources is accelerating, especially in response to recurring energy crises. Oil-producing nations are aware of this structural shift and are investing in diversifying their economies to reduce reliance on hydrocarbons. This transition further weakens the long-term relevance of OPEC. Will the UAE’s exit have any broader geopolitical impact on the Gulf region? It is unlikely to create major tensions within the region. Gulf countries maintain strong relations among themselves and are aligned on broader goals such as diversifying trade partnerships and reducing dependence on the dollar. The move is more reflective of changing global economic structures than of regional discord.



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