How the UAE's departure from OPEC could impact oil markets

[0:00] There seems to be little movement on the resumption of talks between the U.S. and Iran [0:04] to end the war that the Americans launched alongside Israel over two months ago. [0:09] There's also almost no movement through the Strait of Hormuz, the vital bottleneck that's [0:14] essentially cut off 20 percent of the world's oil and gas supply. Last week saw the fewest [0:19] crossings since the war began. Today, the United Arab Emirates announced it will leave OPEC, [0:25] the cartel that's largely controlled global oil supplies for decades, leading to more uncertainty [0:31] and questions about when the financial pain will stop. For Perspective, we're joined now by Karen [0:37] Young, a political economist and senior research scholar at Columbia University. Great to see you. [0:42] Thanks for being here. Thanks for having me. So the UAE has been rumored to want to leave OPEC [0:46] for some time now. Why now? Was the war in Iran the last straw? No, I think actually this timing is [0:52] probably the least disruptive because this doesn't change volumes that are going out tomorrow. The [0:58] UAE can't increase its production and get to market any faster because the Strait of Hormuz is blocked [1:04] and they're at capacity for the oil that's flowing through the pipeline through Fujaira. [1:09] So it doesn't change anything from a market and supply perspective. But yes, it's true within OPEC, [1:15] the UAE had the most stringent quota based on what it had capacity to produce and its quota was much [1:22] smaller. So it's been a point of tension, particularly with neighbor Saudi Arabia for quite some time now. [1:27] The UAE energy minister actually gave an interview to CNN International earlier today to try to explain [1:32] their decision. Here's part of what he had to say. We are totally at an uncomfortable level of [1:41] inventories that would require additional resources to fulfill it. So the world before the closure of [1:49] Hormuz is different than the world today. He was, of course, talking about global inventories and [1:54] shortages there. But he seems to be saying leaving OPEC will allow producers to ramp up production and [2:00] fill the shortages. Will it? Once the Strait of Hormuz is open, yes. And it would be helpful to see an [2:06] increase in production, particularly as we have to refill the shortages that have been part of the last two [2:12] months. But it won't be an immediate fix. And so I think the UAE motivation is that they've wanted to [2:19] expand production. They've invested about $150 billion into their oil and gas resources. And they [2:26] want to produce more gas with the oil. So this is something that nobody's really talking about. The more [2:32] oil that they drill offshore, there's gas associated with that oil. And there's a big demand for gas inside [2:38] the UAE for electricity generation. So this falls in line with some of their domestic industrial [2:43] ambitions as well. This is about broader ambitions for the UAE than beyond just the oil production. [2:47] That's right. It's for electricity generation for AI, for example. It's about their diversification [2:53] agenda inside the country and able to make decisions of their partnerships, who are their consumers of oil [3:00] and gas and renewables. How do they get to them? This matters a lot, I think, for their ability to supply [3:06] China with oil and perhaps gas as export in the future. [3:09] Meanwhile, they are as hamstrung as anyone else to get out oil supply while that strait is closed. [3:14] Talks with Iran appear to be at a stalemate. No sign of the strait reopening any time soon. [3:19] How do you look at that right now in terms of where global oil supplies are? [3:23] So this remains the largest supply shock to global oil markets and gas markets we've ever experienced. [3:29] And as we get farther along into this crisis, what's happening is that we don't have that oil getting [3:36] to market about 16 million barrels a day that's absent from the strait of Hormuz. But then countries are [3:41] drawing down on their inventories. This could be strategic stockpiles or what firms and commercial [3:47] entities hold. We're starting to draw into those inventories. And as we do, that means that the price has [3:53] to climb, right? Because it's not being replaced. It's not being refilled. So we're going to get more [3:57] price pressure as we have this kind of supply shortage. And eventually there'll be a reaction [4:03] to that. And that's what we call demand destruction. And that's where we start to feel the pinch, [4:08] not just in transportation, but in the fuels that are associated made from oil, anything like naphtha or [4:14] LPG, things that go into plastics, the petrochemical feedstocks, which is going to make everything we buy [4:20] and use basically more expensive. So let's be more clear on that from the consumer's point of [4:24] view here. Gas prices just hit a four-year high, right? We know consumers are already paying elevated [4:30] prices, not just at the pump, but in terms of airline tickets and the food prices that they pay, [4:35] in terms of the cost of shipping goods as well. What should they expect to see in the weeks and months [4:39] ahead? Gas prices are going to be higher. So particularly in transportation fuels, that's [4:44] gasoline, that's jet fuel, that's fuel for shipping, marine fuel, diesel, anything that's used in a [4:51] large construction project or in mining. All of those things become more costly. [4:56] And even if the strait was open tomorrow, there's a downstream impact, right? What are we looking at? [5:00] That's right. You know, one of the issues is that in order to restart the wells that have been shut in [5:07] could take several months. This could take three to four months in the case of Kuwait, [5:11] perhaps longer in Iraq. So getting back to normal is not a one-day thing. First, it's, you know, [5:18] getting ships into the Strait of Hormuz, having them load, having them then exit safely and getting [5:24] that volume of traffic that we had before February 28. And we're a long way away from that, particularly [5:30] if the Strait of Hormuz has mines and we require military escorts of ships. Getting back to the UAE [5:35] here, the decision they made here to leave OPEC seemed to say they put their national interests ahead [5:40] of being part of this legacy institution, which has controlled the global oil supply for 60 years [5:45] now, more than that. How do you look at that decision? Is this reducing the impact and influence [5:51] of OPEC overall? Well, you know, it's not uncommon. Countries can leave OPEC and rejoin. Ecuador has done [5:57] that. Qatar left OPEC. They're more of a gas supplier than an oil supplier anyway. Angola left OPEC. So it [6:04] doesn't rule out the potential of cooperation or even rejoining. But yes, it is a signal of independence [6:10] politically and economically that the UAE is thinking about the future after this war and the [6:16] independence and the kind of oil production, gas production, energy production and industrial [6:22] growth they want to have at home. Karen Young, always appreciate your time [6:26] and insights. Good to see you here. Thank you so much. Support journalism you trust. Support PBS News. [6:45] Donate now or even better start a monthly contribution today.