Endgame for OPEC?

How the most powerful commodity cartel in history lost its grip on the world.

By Harral Burris

The United Arab Emirates (UAE), an early member of the Organization of the Petroleum Exporting Countries (OPEC), left this powerful cartel on May 1. The move frees it to pump oil without production quotas. For years, the country had been frustrated by OPEC caps that kept its output well below capacity. The leadership knows the hydrocarbon age is drawing to a close, and it wants to sell as much oil as possible while demand remains strong.

The UAE has seen this end coming for at least a couple of decades. It has spent that time turning its once-sleepy capital, Abu Dhabi, into a financial center and a playground for the mega‑rich. Its sovereign wealth funds have grown so large that financial stability and free trade now matter more than maintaining rigid oil quotas.

The immediate effect on oil prices is difficult to gauge because of supply disruptions linked to the war in Iran. Still, once shipping and trade routes normalize, the UAE could add roughly one million barrels per day to the global market, sharply weakening OPEC’s ability to control global supplies and prices.

The UAE’s departure is one of the most significant blows to OPEC’s credibility since its founding. It combines the loss of a major producer with a clear demonstration to other members that leaving is relatively easy and potentially profitable.

So how did it come to this? How did the most powerful commodity cartel in history unravel? The simple answer is that it is hard to control production and pricing for a commodity that is no longer scarce. All the members know that. The UAE’s actions just made it obvious.

OPEC was founded in Baghdad in September 1960 by five initial members: Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. OPEC’s creation was a direct response to the abuses and price gouging of a group of private oil companies known as the “Seven Sisters” (BP, Gulf Oil, Shell, Chevron, Exxon, Mobil, and Texaco), which effectively controlled global production, pricing, and distribution.

For the first twelve years of its existence, OPEC was more a forum for airing grievances than a lever of power. The major oil companies still set prices, and the organization struggled to coordinate among members with very different national interests.

That all changed in October 1973. In retaliation for U.S. support of Israel in the Yom Kippur War, Arab members of OPEC imposed an oil embargo on the United States and other supporters of Israel. The results were stunning and immediate. Oil prices quadrupled almost overnight, from around $3 to $12 per barrel. Americans waited in line for gas and the global economy slid into crisis. The political shock reverberated for decades. Then, as now, the world woke up to the fact that oil is a geopolitical weapon and that countries sitting on large reserves wield power that exceeds their military capabilities.

In 1979, the Iranian Revolution removed one of the world’s largest oil producers from the market. Panic buying and supply disruptions sent prices soaring again, from $13 per barrel in 1978 to $34 by 1980. Adjusted for inflation, that $34 would be around $135 in 2026 dollars. Combined with the nine‑year Iran‑Iraq War that began in 1980, the second oil shock reinforced OPEC’s stranglehold on the global economy.

In the early 1980s, at the peak of its influence, OPEC controlled about 60% of internationally traded oil, and its members accumulated dollars at an unprecedented rate. The era of the rich oil sheik had begun. For a decade, the organization seemed to have permanently shifted economic power from the consuming nations of the West to the producing nations of the Middle East, Latin America, and Africa.

But in economics and geopolitics, over-performance rarely lasts. High oil prices did exactly what economic theory predicts: they incentivized conservation and encouraged the search for new oil fields. Cars got smaller and more efficient, industry became less energy‑intensive, and the Seven Sisters, along with a cohort of smaller producers, found new oil around the world.

As global non‑OPEC oil supply increased, OPEC assigned production quotas to members to keep prices elevated. As you might expect, cheating was endemic. Every member had an incentive to produce above its quota. As production increased and prices softened, the temptation to cheat grew, further weakening prices and intensifying the urge to over-produce.

In 1986, after enduring years of cheating by smaller members, Saudi Arabia gave up and opened the taps. Oil prices collapsed from $27 to under $10 per barrel, devastating OPEC members such as Mexico, Venezuela, and Nigeria, that had borrowed heavily on the assumption that high prices would last. It became obvious that the cartel could no longer set prices at will.

After the Gulf War in 1991, prices stabilized as Iraq’s oil left the market, but massive new wells in the Gulf of Mexico and efficiency gains in existing fields capped prices. From then on, OPEC functioned less as an all‑powerful price setter and more as a swing producer, using Saudi spare capacity as a buffer to keep prices within a target band.

The shale revolution upset that balance for good. Advances in horizontal drilling and hydraulic fracturing (fracking) unlocked vast reserves of tight oil in formations such as the Permian Basin and the Eagle Ford in Texas, and the Bakken in North Dakota. U.S. production rose from five million barrels per day in 2008 to over thirteen million per day in 2019 – the largest and fastest increase in oil output in history. The days of the classic OPEC cartel were numbered.

The shale revolution created a situation OPEC had never faced: a highly elastic, price‑responsive competitor. Unlike conventional oil fields that take years to develop, shale producers can drill wells in weeks, ramping production up or down in response to price and demand. That acts as a cap on oil prices. When prices rise sufficiently, U.S. shale production expands, adding supply and pushing prices back down. When prices fall, U.S. shale production reverses, removing excess capacity from the oil market.

OPEC’s traditional strategy of cutting production to raise prices now carries a self‑defeating consequence. A price above roughly $50 per barrel tends to incentivize more U.S. shale production, undermining any price recovery. From that point on, OPEC looked less like a disciplined cartel and more like a collection of unhappy countries that didn’t particularly like one another.

Here lie the seeds of the UAE’s recent defection. Today’s OPEC is a shadow of its former self. Its share of global oil production has fallen from about 60% during its 1970s heyday to less than 40% today, and that share continues to shrink as U.S. production remains near record levels.

Nor is the UAE the only member that wants to extract as much oil as possible while the market remains robust. The cartel faces an existential threat from the global energy transition. Electric vehicles, renewable energy, and improved efficiency are likely to bring peak oil demand into the near future. Members face the prospect of their reserves becoming progressively less valuable, creating a race to monetize assets before they are stranded.

Countries that built their economies around oil revenue – Venezuela, Nigeria, Iraq, Russia, and others – face an increasingly difficult future. Competition from shale and the energy transition mean the era of reliable, high oil prices is over. The oil weapon that OPEC wielded so effectively in 1973 no longer has the same bite. Consuming nations now have more energy options than ever before.

OPEC’s arc from revolutionary force to diminished cartel is one of the great stories of late 20th and early 21st-centuries. It reshaped the global economy, transferred trillions of dollars from consuming nations to the Global South, and demonstrated that resource‑rich countries can wield outsized geopolitical clout.

Those days are largely over. The evidence is visible in any driveway: my old 1969 Corvette got 8 miles per gallon; a 2026 model gets roughly 25 miles per gallon on the highway, and Ferrari is rolling out an electric roadster. The UAE’s departure does not herald OPEC’s collapse so much as ratify it.

As Bob Dylan sang in another troubled time: “The times they are a-changin’.” In Abu Dhabi, they clearly have been for a while. We must all adjust.

Hal is a retired investment professional with 40 years of experience in money management. The interface between geopolitics and global investments has always been his area of specialization. History has always been one of his interests and passions, in fact, that’s how Hal and Jeremi became friends in Madison, Wisconsin.