The United Arab Emirates (UAE) recently announced its exit from the Organization of Petroleum Exporting Countries (OPEC). The rationale was to expand oil production above its OPEC quota. This aligns with and reinforces the view that OPEC controls oil prices by adjusting its production quotas, as a cartel would.
But the geological and technical realities of oil extraction do not allow production rates to be rapidly increased or decreased without significant tradeoffs. Oil production cannot be varied like water flowing from a spigot.
As a result, OPEC production quotas are for show. They are not enforced. Cheating is rampant. For example, the UAE exceeded its monthly production quota in 69 percent of the months between 2017 and 2022 (Table 2).
Additional evidence that OPEC does not control oil production comes from a comparison of UAE and US one-month and three-month production volatility. The UAE’s production profile is similar to the United States’ profile, with its thousands of decentralized producers (Figure 1). In fact, since 1993, its production variation is statistically indistinguishable (Table 3) from the variation of US production.
If OPEC does not control oil production, what does it do? OPEC is a political club that uses the appearance of oil production control to rally against the “West.” The UAE’s exit from OPEC is a signal that antagonism toward the “West” is of less importance now than foreign policy differences with Saudi Arabia.