The United Arab Emirates' sudden departure from the Organization of the Petroleum Exporting Countries (Opec) after six decades has sent shockwaves through global energy markets. This move, announced on Tuesday, is expected to weaken the alliance that, under Saudi Arabia's leadership, has helped stabilize oil prices for generations. The conflict in the Middle East has now claimed Opec as its latest casualty, raising fears of a new price war between Gulf oil giants.
Rising Oil Prices and Market Volatility
Global oil prices surged to a four-year high on Thursday, exceeding $126 per barrel. However, as the region grapples with ongoing conflict, a fresh battle may be brewing in international oil markets, potentially leading to greater volatility for years to come. For now, the UAE's intention to ignore Opec production quotas and pump as much crude as it desires remains theoretical due to Iran's blockade of the Strait of Hormuz. Similarly, Riyadh's ability to leverage its vast oil reserves in response is currently constrained.
But in a postwar standoff between the two Gulf oil heavyweights, the real risk of a price war looms, which could cause global energy markets to plunge with unpredictable economic consequences. Michael Tamvakis, a commodities professor at Bayes Business School in London, warned: "Saudi Arabia will fight back with a vengeance. This decision flies in the face of the kingdom's authority, and the Saudis will want to teach them a lesson. In a world where oil starts flowing again through Hormuz and oil prices start deflating, there will be a race to maximize oil export volumes to keep revenues."
Potential Saudi Retaliation
In this race, Saudi Arabia is expected to aggressively market its oil to Asian buyers, which also rely on the UAE, by offering discounts on its crude and fuels. While the UAE has traditionally held the upper hand in marketing refined oil products to Europe, Saudi Arabia may fight back and try to capture market share, Tamvakis added. Saudi Arabia is the world's largest oil exporter, but the UAE is a formidable rival as the cartel's third-largest producer. The UAE held its production below 3 million barrels per day in 2024 at Opec's behest, but it could ramp up to between 4.5 million and 6 million barrels per day once flows resume through the Strait of Hormuz.
Both countries have some of the lowest production costs globally and a fiscal imperative to generate state revenues needed to prepare their economies for a low-carbon future. Dieter Helm, a professor of economic policy at the University of Oxford, likened the looming price war to the oil market crashes in the 1980s and 2014, which led to hundreds of thousands of job losses and political instability in oil-rich economies. "Oil prices are likely to fall further and faster as the war ends," Helm said. "Higher prices encourage more output, and the world is awash with both oil and gas reserves."
New Market Challengers
The surge in market prices triggered by the war in Iran is expected to fuel the rise of new oil market challengers in the Americas. The longer the Gulf's exports are throttled by the conflict, the greater the opportunity for the United States, Brazil, and Guyana to increase their share of the global market at the expense of the Middle East. Meanwhile, economies are accelerating plans to reduce their reliance on fossil fuels, which could hasten the start of the market's decline.
A postwar market defined by new oil supplies and uncertain demand would be less than ideal for Gulf states as they resume exports. They are likely to pump as much crude as possible to help repair war-ravaged economies in the region and reclaim their market share, so lower prices over the long term are probable. This scenario represents the antithesis of Opec's stated agenda. Since the 1960s, the cartel's power has rested in its ability to respond as a united group to the ebb and flow of the oil market to help stabilize prices.
Historical Context of Opec's Fraying Unity
When oil supplies become tight, Saudi Arabia and its allies have been able to open their taps to cool rising prices. Conversely, when an oversupply of crude causes prices to plunge, Opec stands ready to curtail its output to prevent a market crash. However, signs that the alliance was beginning to fray became more apparent in recent years as upheavals in the global market challenged Saudi Arabia's grip and led to bitter price wars in retaliation.
In 2020, Opec executed its deepest production cuts months after the COVID-19 pandemic forced the global economy into an unprecedented shutdown that erased millions of barrels of oil demand in weeks. The group's decision to withhold 9.7 million barrels of oil per day represented a 10% cut to global oil demand. But the deal was struck only after Saudi Arabia waged a short-lived price war in response to Russia's refusal to trim its own output, causing prices to collapse to a 20-year low and compounding the economic pain of the pandemic.
It was not the first time that Riyadh had sacrificed market prices to restore its market dominance. In 2014, as the unrestrained flow of oil from the US shale boom threatened to overwhelm the market, Saudi ministers became increasingly frustrated with Opec members that flouted the agreement to hold production in check to steady market prices. The kingdom responded by increasing its own production, triggering one of the deepest and longest oil price routs in history to drive higher-cost rivals to the edges of the market. Smaller members of the Opec cartel were collateral damage, and the economic scars could mean some are wary of any postwar limits on their output.
Kim Fustier, a senior analyst at HSBC Investment, noted: "The loss of a core Gulf member weakens Opec's credibility. If the remaining group is unable to compensate for UAE volumes through collective discipline, price management could become harder to enforce."
