Author: Faisal Islam, BBC Economics Editor

The United Arab Emirates (UAE) has suddenly announced its withdrawal from the Organization of the Petroleum Exporting Countries (OPEC), a significant decision. In fact, the UAE was a member of the organization even before its establishment in 1971.

OPEC is primarily composed of oil-producing countries in the Gulf region, which for decades has influenced crude oil prices through production adjustments and allocation of quotas to member countries. The organization played a crucial role during the oil crises of the 1970s, which also changed global energy policies.

Although the production dominance in OPEC rests with Saudi Arabia, the UAE has the second-highest spare capacity within the organization. In other words, this country is the second important "swing producer" capable of increasing output to alleviate price pressures.

This has prompted the UAE to reassess its long-term position within OPEC. In short, the UAE hopes to leverage the significant capacity it has invested in.

OPEC has limited the UAE's daily output to between 3 million and 3.5 million barrels. As an OPEC member, the UAE has borne a disproportionate loss of oil revenue.

However, the timing of this move also suggests the consequences brought about by the war in Iran. The ongoing escalation of tensions in the Gulf region has affected the relationship between the UAE and Iran, and may further influence the already strained relations between Iran and Saudi Arabia.

For OPEC itself, this undoubtedly is a heavy blow, especially as the external world has begun to question its long-term cohesion.

Moreover, once the UAE can fully restore oil market supplies via maritime transport or pipelines, its target daily output could potentially reach 5 million barrels. Saudi Arabia may respond by initiating an oil price war. Given the UAE's more diversified economic structure, it may be able to withstand this, but other poorer OPEC members may not be able to cope.

To a large extent, this will depend on Saudi Arabia's response.

Several senior UAE officials have mentioned a new oil pipeline starting from the oil fields in Abu Dhabi, bypassing the Strait of Hormuz, and leading to the currently underutilized port of Fujairah.

Currently, there is one pipeline operating at high capacity, but larger pipeline capacity is needed to meet production growth and address the permanent changes in tanker transportation fluidity and costs in the Gulf region.

Of course, given that maritime traffic in the Strait of Hormuz is currently subject to dual blockades, this is not the major event affecting the oil market, nor the principal factor influencing the prices of oil, natural gas, gasoline, plastics, and food.

Although global attention remains focused on oil prices at $110 per barrel, it is not impossible that next year's oil prices may approach $50—if the chaotic situation in the Strait can be resolved, especially before the upcoming midterm elections in the United States later this year.

Compared to the 1970s, OPEC's significance in the global oil market has drastically declined. Back then, about 85% of international trade oil came from OPEC, while today that figure is close to 50%. Oil is no longer as critical to the global economy as it was in the 1970s. OPEC still holds some influence but does not monopolize the market. It can no longer hold the world hostage as it once did.

I remember hearing an OPEC representative, former Saudi oil minister Sheikh Yamani, say: "The Stone Age did not end because the world ran out of stones; the oil age will not end because the world runs out of oil." This suggests that the future world will replace hydrocarbons with other energy sources.

From this perspective, the UAE's actions can be seen as a sign of the global reduction in dependence on oil. In the current vortex, some other clues have emerged: China's investments in electrification help cushion the economic impact of rising oil and gas prices.

According to some estimates, the electrification of cars, trucks, and railways in China has reduced the daily oil demand of this second-largest global economy by about 1 million barrels. As this trend accelerates globally, overall oil demand may stabilize.

In light of this viewpoint, it makes sense to quickly cash in on oil reserves while demand has not significantly dropped. The UAE has strong financial capabilities and has achieved some economic diversification through financial services and tourism.

When the hostile actions in the Gulf region cease and what the new normal will look like largely depends on this.

The UAE's exit from OPEC may trigger further domino effects and will place considerable pressure on Saudi Arabia.

When tankers successfully pass through the Strait of Hormuz again, or when the UAE doubles down on new pipeline construction, the scale of UAE oil flow will be unprecedented and will no longer be constrained by OPEC commitments.

This move has little impact on the current blockade, but everything could change thereafter.