If OPEC can’t manage oil markets, the world is in for a wild ride. The White House declared last week that President Trump finally “broke OPEC” after the United Arab Emirates withdrew from the cartel. That must have been satisfying. Trump has criticised OPEC for decades.
But Trump did not cause the breakup, and the White House’s celebrations may prove premature. For the moment, the UAE’s exit changes little. Over time, a weaker OPEC may mean not lower prices but greater volatility — more violent swings that households and businesses will struggle to absorb. Oil prices are poised to surge in the coming weeks as global inventories run dry. Washington should seize this moment to reduce America’s exposure to boom-and-bust oil price cycles that are primed to worsen.
Over the past decade, OPEC and a Russian-led bloc of other producers have restrained their oil output to prop up Brent crude prices, which, save for a crash during the COVID-19 pandemic, have hovered between $65 and $80 per barrel, occasionally spiking. Helped by that price floor, US oil output has surged by around five million barrels per day, a more than 50% increase. By contrast, when OPEC chose not to cut production in 2014, oil prices collapsed, and so did US investment in extracting its own petroleum. US producers know that if OPEC didn’t exist to stabilise prices, someone would have to invent it.
Indeed, the US did. After oil was discovered in Pennsylvania in 1859, prospectors swarmed to the region. Production soared, and from 1860 to 1862, oil prices crashed from $20 to as low as 10 cents per barrel — “the first of many epic price busts in oil’s history,” as Robert McNally writes in the book “Crude Volatility.” The boom-bust cycles became so destabilising that Texas, not known for favouring government regulation, imposed production limits enforced by armed troops on horseback.
As US oil demand exceeded supply and imports rose, Texas was eventually forced to scrap its quotas in 1972 — “a damn historic occasion,” as the chairman of the Texas Railroad Commission proclaimed at the time — and OPEC took up the mantle of the world’s oil market manager.
The UAE’s break with OPEC, after nearly 60 years in the bloc, has been years in the making. More than most OPEC producers, the UAE invested heavily to expand its production capacity, only to find itself constrained by quotas that limited the payoff. But the timing and manner of its exit — without first aligning with Saudi Arabia, OPEC’s de facto leader — cannot be understood through oil markets alone. It also reflects politics. Senior Emiratis have voiced their anger that regional partners such as Saudi Arabia did not stand more firmly with the UAE as it absorbed a disproportionate share of Iranian attacks over the past two months.
The UAE also probably chose to move now because its exit will have little impact under current circumstances. At any other moment, the break would have sent oil prices sharply lower, on the assumption that the UAE would boost output and Saudi Arabia might follow. But with the Strait of Hormuz closed, neither can increase production even if it wanted to. Once the Strait reopens, OPEC members will need to produce at high levels to offset the months in which they could sell little of their oil.
Over time, the UAE’s exit could make OPEC less effective at managing the oil market — adding barrels to the global supply when prices soar and removing them when prices crash. Saudi Arabia and the UAE have been the only OPEC producers with the spare capacity to substantially cushion price spikes. If the UAE produced full-on outside the cartel, that buffer would shrink. The Saudis have always played the largest role in this market steadying, but their willingness to cut their production may also fade if a major neighbour benefits from Saudi restraint without contributing cuts of its own.
More countries may exit OPEC, following the UAE, Angola, Ecuador and Qatar, all of whom have left since 2019. A less effective OPEC might seem a blessing when prices fall, but it would force the world to endure more frequent booms and busts.
The New York Times