What opec actually is now: the economics of a cartel that is slowly dismantling itself

On May 1, 2026, the United Arab Emirates ended its 59-year membership in OPEC. The announcement had come four days earlier, on April 28, while Brent crude was trading above $100 per barrel — at points exceeding $106, having briefly touched $120 in late March — not because OPEC had done anything to push it there, but because the United States and Israel had attacked Iran on February 28, and for several weeks afterward it was genuinely unclear whether the Strait of Hormuz would remain open.

Twenty million barrels of oil pass through the Strait of Hormuz every day. When Iranian forces declared the Strait “closed” in early March and began attacking transiting vessels, tanker traffic collapsed to near zero — below 10 percent of normal operational capacity, per IEA data — within weeks. Ships anchored offshore and waited. The disruption was unlike anything oil markets had seen — the IEA estimated global stock drawdowns of 11 to 12 million barrels per day in April alone.

OPEC’s response to a 20-million-barrel-per-day chokepoint crisis was to announce 188,000 additional barrels per day. That is roughly a hundred-to-one ratio. Analysts called it symbolic — Gulf members couldn’t actually export through the closed strait regardless of what was announced. Placed next to the scale of the disruption, it reveals the institution’s actual position in the current oil market: it can adjust at the margins of a price determined elsewhere, by events it neither controls nor influences.

The UAE announced its departure in the same fortnight this was playing out. The timing looked coincidental. It wasn’t.

The game the cartel is playing

A cartel works like this. A group of producers agrees to restrict output collectively so the price stays above what it would be if they competed freely. Every member benefits from the higher price. But every member also benefits, individually, from selling a few extra barrels at that elevated cartel price — capturing the full revenue from cheating while the cost of price support is spread across all members. If everyone reasons this way simultaneously, everyone cheats, the price collapses, and everyone ends up worse off than if they’d simply competed from the start.

This is the prisoner’s dilemma. Cooperation is rational for the group; defection is rational for each individual member. The only way to stabilise the cartel is for one member to be large enough to enforce. It needs to be able to cut its own production when others cheat — absorbing the revenue loss itself while threatening that if cheating continues, it will abandon the floor entirely and flood the market, collapsing prices for everyone. The threat has to be credible. And credibility requires that the enforcer is genuinely large enough that its production decisions move the global price — and genuinely willing to accept significant short-term losses.

OPEC has had exactly one such enforcer across its history: Saudi Arabia.

The data on compliance makes clear how much enforcement matters. Between January 2024 and July 2025, six OPEC+ members exceeded their assigned quotas by a cumulative 4.779 million barrels per day. A compensation schedule was established requiring the worst offenders to make up 4.57 million barrels per day in cuts by mid-2026. As of the most recent available audit, only 41 percent of those pledged compensatory cuts had been fully executed. Approximately 30 percent — nearly a third of all compensation commitments — were completely ignored. Iraq and Kazakhstan were persistent structural violators; Russia treated compensation pledges as diplomatic gestures rather than production commitments.

What OPEC+ actually is — and how it differs from OPEC

OPEC is a formal international institution headquartered in Vienna, with a legal charter and eleven current member states following the UAE's departure. Its members have formal quota obligations and submit to the institution's governance structure. OPEC+ is something different: a looser alignment of twenty-three producers formed in December 2016, which added major non-OPEC producers — most importantly Russia and Kazakhstan — to the coordination framework. OPEC+ has no formal treaty obligations. Enforcement is entirely reputational. A member that violates its OPEC+ quota faces peer pressure and diplomatic friction; it faces no legal remedy, no formal penalty. The UAE was an OPEC member, but the production constraints that actually limited its output came through OPEC+. When it left both simultaneously, it ended obligations under two frameworks with very different weights.

The 4.779 million barrels of cumulative overproduction between 2024 and mid-2025 is not a rounding error. It is roughly equivalent to Iraq’s entire daily output. The cartel was, in practical terms, not operating as a cartel for most of this period — it was a framework for announcing targets that members systematically ignored while Saudi Arabia absorbed the consequences.

The enforcer and what it cost

The most illuminating episode in OPEC history is not the 1973 oil embargo — it’s what happened between 1980 and 1986.

Saudi Arabia entered the 1980s producing over 10 million barrels per day. As OPEC members — and non-OPEC producers including Norway, the UK North Sea fields, Mexico, and the Soviet Union — continued pumping at capacity regardless of price signals, Saudi Arabia cut. It cut and cut and cut. By August 1985, Saudi output had fallen to approximately 2.3 million barrels per day. The kingdom had absorbed five years of revenue destruction to hold the price floor, while everyone else collected the benefits.

By late 1985, Saudi Arabia had had enough. It reversed course, ramped production, and within months prices collapsed — falling from around $28 per barrel in 1985 to approximately $14 in 1986. The cartel’s enforcement mechanism had worked in the sense that it prevented an earlier crash; it failed in the sense that it couldn’t be sustained indefinitely, and when it ended, the price collapse was severe precisely because so much supply had been held back.

Zaki Yamani, who served as Saudi oil minister through this entire period, subsequently characterised the strategy as one in which Saudi Arabia had absorbed the costs of price support while every other producer — OPEC members and non-OPEC producers alike — collected the benefits without contributing to the enforcement. The mechanism was rational for the cartel; it was punishing for the enforcer.

Why did Saudi Arabia play this role at all?

Reserve logic gives the first answer. A country with hundreds of billions of barrels in the ground can rationally accept lower revenue today in exchange for higher prices across a long planning horizon. The mathematics work only if the reserve base is large enough and the horizon long enough. Saudi Arabia’s is.

The fiscal architecture gave the second answer — not just the constraint but the commitment. The Saudi state — its political settlement, its subsidy system, its royal transfers, its development spending — was built around sustained oil revenue at managed prices. This wasn’t careless planning; it was the entire premise of the national economy. Bloomberg Economics estimated Saudi Arabia’s fiscal breakeven at $94 per barrel; the IMF placed it at $96.20 per barrel for 2025. Those numbers represent what oil needs to cost for the budget to balance. They weren’t arrived at accidentally — they reflect decades of state expenditure calibrated to managed prices.

Geopolitical alignment supplied the third. From the 1945 Quincy Agreement onward, the relationship between Saudi Arabia and the United States was partly structured around Saudi Arabia maintaining stable, accessible oil markets — a commitment with strategic value that translated into US security guarantees. Enforcing OPEC’s price floor served not just Saudi Arabia’s economic interests but the broader logic of a geopolitical relationship that American foreign policy had underwritten.

Here is the arithmetic problem those three reasons now face: throughout much of 2025, Brent crude traded around $61 per barrel. Saudi Arabia’s fiscal breakeven is $94 to $96 per barrel. That is a gap of $33 to $35 per barrel. Saudi Arabia ran a budget deficit in 2025. It can borrow — its debt-to-GDP ratio is approximately 32 percent, which gives it some headroom. But borrowing to fund a fiscal gap created by supporting prices that competitors then undercut is not a sustainable strategy, and the Saudis know it.

One clarification the thesis requires: Saudi Arabia was not a continuous price manager. The mechanism collapsed in 1985-86, ran poorly in the late 1990s, and broke down badly in 2014-2016. What Saudi Arabia provided was not uninterrupted price control — it was the expectation of a floor. Petrostate fiscal architects could plan around a managed-price assumption because Saudi Arabia had periodically demonstrated willingness to enforce it. The planning horizon made sense because the enforcement mechanism had been shown to exist. Both of those things are now in question.

Zaki Yamani and the logic of the 1985-86 production surge

Sheikh Ahmed Zaki Yamani served as Saudi Arabia's oil minister from 1962 to 1986 — through the 1973 embargo, through the price shocks of the late 1970s, and through the punishing years of unilateral production cuts in the early 1980s. His documented position, reflected consistently across contemporaneous accounts and interviews, articulated the paradox precisely: the country best positioned to enforce the cartel floor was also the country that bore the most cost when enforcement required unilateral sacrifice. By 1985, Saudi Arabia was producing at roughly a fifth of its earlier capacity to maintain a price that other producers — OPEC members and outsiders alike — then undercut by refusing to adjust their own output. Yamani was dismissed by King Fahd in October 1986, shortly after the price collapsed. The timing reflected a genuine strategic failure: not Yamani's, but the cartel's. The mechanism that made OPEC work demanded that one country absorb costs the system distributed across all members.

The revolution that changed the rules

US shale didn’t just add supply. It added a fundamentally different kind of supply — one that behaves like an involuntary swing producer, responding to price signals individually and collectively without any coordination, and without any cartel loyalty.

Between 2014 and 2019, US oil production increased by 5.3 million barrels per day. In November 2014, Goldman Sachs identified what this actually meant: US shale’s effective spare capacity had exceeded Saudi Arabia’s. At approximately 5 million barrels per day of shale spare capacity versus Saudi Arabia’s approximately 1.5 million barrels, OPEC had lost first-mover pricing power. The cartel could no longer credibly threaten to flood the market in a way that would break high-cost producers — because American producers were already in the market and responding to prices independently.

Shale’s economic character makes this structural rather than cyclical. A shale well can be drilled, completed, and brought online in months. It can be suspended with equivalent speed. Producers don’t coordinate — they respond to price, and their collective response acts as a ceiling. When oil prices rise toward petrostate fiscal breakeven levels, shale producers ramp up and add supply. That addition dampens the price rise. The ceiling isn’t formal or agreed; it’s the aggregate of thousands of individual production decisions in Texas and North Dakota responding to a commodity price signal.

Saudi Arabia’s 2014-2016 response was to try to break it. OPEC formally abandoned output restrictions in November 2014, targeting high-cost producers — shale included. Brent fell from around $100 per barrel in mid-2014 to approximately $27 per barrel in January 2016. The strategy had a surface logic: if prices stay low enough long enough, shale producers go bankrupt and exit the market.

What actually happened: shale’s breakeven costs fell from approximately $80 per barrel to approximately $40 per barrel through efficiency gains — horizontal drilling techniques improved, completion costs fell, water management got cheaper, and producers learned to extract more from each well. By the time OPEC reversed course and formed OPEC+ in December 2016, US production was already recovering. The price war hadn’t killed shale; it had made shale more competitive.

The 2016 OPEC+ formation was supposed to fix the underlying problem by enlarging the coalition — bringing in Russia, Kazakhstan, and other major producers so that the combined group could actually move markets. The theory was reasonable. The practice revealed that adding large producers without enforcement mechanisms doesn’t create a larger cartel; it creates a larger framework for quota violations.

Why shale is structurally different from other supply

Conventional deepwater oil fields require years of capital investment before a drop of oil is produced. Once built, they run at capacity because the marginal cost of stopping is higher than the marginal cost of continuing. Shale is the opposite. The upfront cost per well is relatively modest, the time from decision to first production is measured in months, and wells can be idled when prices fall below operating costs. This means shale supply is price-elastic in a way conventional supply is not: it expands when prices rise and contracts when they fall, with a lag measured in quarters rather than years. For OPEC, this creates an insoluble problem. Any time the cartel successfully raises prices, it signals shale producers to expand — and that expansion pushes prices back down. The cartel's own success becomes the mechanism of its defeat.

The coalition that can’t hold

OPEC+ made the enforcement problem structurally worse, not better, because the new members brought fiscal and strategic logics incompatible with Saudi Arabia’s.

Russia’s operating costs for existing oil fields are approximately $13 to $14 per barrel — low by international standards, not far above Saudi Arabia’s lifting costs of approximately $17 to $18 per barrel. The temptation is to treat both countries as similarly positioned in a price war. Fiscal architecture destroys that reading.

Saudi Arabia needs oil prices to stay above $94 to $96 per barrel across a sustained planning horizon to fund its state. Russia is running a war. The Institute of International Finance estimated Russia’s fiscal breakeven at approximately $77 per barrel as of 2025. Other analysts have placed it higher; Sweden’s military intelligence directorate argued in April 2026 that Russia needs Urals crude above $100 per barrel for a sustained period to close its budget gap. What is certain is that Russia’s wartime fiscal logic makes it a volume maximiser. Running a war economy means maximising revenue, which means maximising the number of barrels sold at whatever price the market offers. Complying with a quota that reduces volume in hopes of prices rising — a hope that Russia’s own non-compliance helps to defeat — is not compatible with the wartime revenue imperative.

These are not compatible requirements.

Russia’s oil and gas revenues fell approximately 24 percent in 2025 versus 2024, totalling around 8.48 trillion rubles versus 11.13 trillion rubles the prior year. In November 2025 alone, oil and gas revenue was down 34 percent year-on-year. Urals crude fell below $40 per barrel in December 2025. Russia was producing under significant pressure — sanctions on its tanker fleet, Ukrainian attacks on oil infrastructure — and its revenues were collapsing. None of this translated into compliance with OPEC+ quotas. It translated into continued pumping at whatever level infrastructure permitted, because reduced revenue from compliance would have been worse than reduced revenue from low prices.

There is a key additional constraint. Saudi Arabia cannot credibly threaten Russia with a price war. Russia’s $13 to $14 per barrel operating costs mean it can sustain production at prices that destroy Saudi Arabia’s fiscal position. If Saudi Arabia abandons its own quota and floods the market to discipline Russia — as it disciplined OPEC cheaters in 1985-86 — Saudi Arabia’s fiscal breakeven problem becomes catastrophic, while Russia’s operational production economics remain functional. The threat that underpins cartel enforcement doesn’t work when the target of the threat can absorb low prices better than the enforcer.

This is the 1985 problem rebuilt on worse architecture. In 1985, Saudi Arabia eventually abandoned the swing-producer role when it became unsustainable, crashed the price, and eventually the market found a new equilibrium — one in which Saudi Arabia maintained a less punishing enforcement posture. The difference now: there is no new equilibrium available through a managed transition. The structural features of the current market — shale as a permanent supply ceiling, Russia as a volume maximiser, energy transition reducing long-run demand growth — mean the floor that enforcement used to create cannot be rebuilt through the same mechanism.

By May 2026, Saudi Arabia had effectively been stripped of its only functioning enforcement ally within OPEC. When the UAE left, Saudi Arabia became the sole enforcer against a coalition structurally incentivised to produce at maximum.

Why the UAE left — and what it’s actually saying

The UAE’s decision was not impulsive. It was arithmetic.

The UAE’s fiscal breakeven is approximately $50 per barrel — roughly half Saudi Arabia’s. That gap didn’t emerge accidentally. The UAE has spent two decades deliberately building an economy that isn’t dependent on high oil prices. In Q1 2025, the non-oil sector reached 77.3 percent of UAE GDP — a record high, and the first time in the country’s history that non-oil activities had reached that threshold. Non-oil GDP grew 5.3 percent in Q1 2025. The UAE’s full-year 2025 GDP hit $517 billion, with non-oil GDP expanding 6.8 percent for the year. Dubai’s tourism, financial services, logistics, and real estate sectors are not adjuncts to an oil economy; they have become the economy, with oil as a legacy income stream.

From that position, OPEC’s quota system looked different than it does from Riyadh. ADNOC — the Abu Dhabi National Oil Company — invested $150 billion in upstream capacity expansion between 2023 and 2027, raising UAE production capacity to approximately 4.85 million barrels per day, with a target of 5 million barrels per day by 2027. The OPEC+ quota ceiling for the UAE was approximately 3.5 million barrels per day. The gap between 4.85 million barrels of daily capacity and 3.5 million barrels of permitted production represents roughly 1.35 million barrels per day of constrained revenue — at $60 per barrel, an order-of-magnitude figure of approximately $29.6 billion per year in foregone income. The UAE built production capacity it couldn’t use while paying the price-support costs that sustained a system from which Saudi Arabia — with its $94-$96 fiscal breakeven — needed the floor far more.

UAE officials and ADNOC leadership had for years referenced a more direct argument: the need to monetise reserves before the energy transition makes them worth progressively less. This is the stranded asset logic applied to sovereign oil policy. If the long-run trajectory is declining demand after 2030 — consistent with OPEC’s own World Oil Outlook projections — then delaying production to sustain a cartel price imposes a permanent opportunity cost on reserves that will be worth less in the future. The rational response is to produce more now, not less.

Qatar left OPEC effective January 1, 2019, citing similar logic — LNG production strategy required capital deployment without the constraint of oil quota compliance. Qatar’s departure attracted attention but limited alarm: its oil production was a small fraction of OPEC’s total output, and its actual contribution to enforcement was negligible.

The UAE’s departure is categorically more significant. The UAE was producing, complying, and contributing actively to enforcement as Saudi Arabia’s primary partner. The UAE wasn’t a free rider; it was part of the mechanism. Its exit doesn’t remove a peripheral player. It removes the second pillar of the only working enforcement structure OPEC had.

What the floor was holding up

The numbers that matter most are not oil prices. They are the fiscal breakevens — the price at which each petrostate’s government budget balances.

Nigeria’s fiscal breakeven is approximately $86 per barrel, per S&P Global analysis from 2025. Iraq’s is $92.43 per barrel, per the IMF’s 2025 Regional Economic Outlook. Saudi Arabia’s is $94 to $96 per barrel, per Bloomberg Economics and IMF estimates respectively.

Goldman Sachs raised its Q4 2026 Brent forecast to $90 per barrel in April 2026, driven by the Hormuz crisis disruption. At $90 — the elevated, crisis-premium price — Nigeria barely clears its breakeven. Iraq comes up $2.43 per barrel short. Saudi Arabia comes up $4 to $6 per barrel short. Even the elevated price produced by a geopolitical shock that threatened 20 million barrels per day of daily supply leaves three of OPEC’s most important members in deficit.

The pre-Hormuz structural baseline is more telling. Brent closed 2025 at approximately $61 per barrel. That was the price before Iranian forces threatened the Strait — a price generated by underlying supply and demand without geopolitical premium. At $61: Nigeria is $25 short of its breakeven. Iraq is $31 short. Saudi Arabia is $33 to $35 short.

The shale ceiling explains why that baseline is what it is. Whenever oil prices approach petrostate fiscal breakeven levels in the $86 to $96 range, US shale producers respond to the price signal, expand output, and push prices back down. This isn’t a forecast or a theory — it’s the mechanism the industry documented in 2014, 2018, and 2022. It’s structural. OPEC cannot punch through it by restricting production, because the restriction itself raises the price that triggers shale expansion.

The distinction that matters for understanding what is actually different now: previous price crashes — 2014 to 2016, 2020 — were cyclical. Demand fell, or supply surged, and eventually the equilibrium corrected. Petrostates survived through borrowing, reserve drawdowns, and waiting for the cycle to turn. What is different in the current moment is that multiple structural features are operating simultaneously. The shale ceiling caps the upside permanently, not cyclically. The energy transition is reducing long-run demand growth — OPEC’s own projections show demand growth slowing substantially after 2030 as electric vehicle penetration accelerates. And the enforcement mechanism that used to create the floor is absent.

Venezuela: the demonstrated endpoint

Venezuela's oil production peaked at approximately 3.4 million barrels per day in the late 1990s. By 2020, it had fallen to around 544,000 barrels per day — a collapse of more than 84 percent. By mid-2025, it had partially recovered to just above 1 million barrels per day. The trajectory illustrates the political economy of petrostate fiscal failure at its most extreme. When oil revenues collapsed, Venezuela's government faced a choice between cutting the expenditures that maintained political compliance or borrowing against collapsing assets. It did neither effectively — it printed money, nationalised what remained of the productive private sector, and drove out the technical expertise that had maintained production. Hyperinflation erased savings; the political settlement collapsed along with the economy. Venezuela's story is often treated as exceptional — the product of specific political pathologies under Chávez and Maduro. It is exceptional in its severity. But the underlying mechanism — a petrostate whose fiscal system was calibrated to managed prices, faced with structural price decline, lacking the fiscal flexibility to adjust — is not exceptional. It is the generic problem, with Venezuela as an early and extreme instance.

The political dimension of petrostate fiscal stress is not separable from the economic one. Oil revenues are not just export income — they are the material substrate of political order. Subsidies, public sector employment, infrastructure spending, and in many cases direct transfers to citizens are funded by oil rents. When those rents fall and stay low, governments have three options: cut the spending that maintains political compliance, borrow against depleting assets, or attempt the economic diversification that takes decades to execute and requires exactly the stable revenue stream that is disappearing.

Saudi Arabia is attempting all three simultaneously — the Vision 2030 programme is real, the borrowing capacity exists at 32 percent debt-to-GDP, and the spending cuts are being made. Iraq and Nigeria lack both the fiscal headroom and the institutional capacity for equivalent adjustment. The IMF’s December 2025 assessment of Saudi Arabia called for “prudent fiscal policy and deeper reforms” as the kingdom faces the prospect of sustained lower oil prices — a formulation from the international financial architecture that is, in its measured way, acknowledging that the managed-price assumption is no longer bankable.

Closing

When the Strait of Hormuz reopens — and it will; ceasefires happen, Iranian naval strategy has limits, international pressure eventually moves markets — the Hormuz premium that pushed Brent above $100 will dissipate. US shale, which was ramping even during the crisis, will continue to operate at levels that cap the upside. The equilibrium that reasserts will look something like the pre-crisis baseline: Brent somewhere in the $60s, petrostate budgets in deficit, and OPEC announcing production decisions that the market acknowledges and then mostly ignores.

What the Strait crisis revealed — and what the UAE’s departure confirmed — is the permanent absence of the mechanism that used to operate between the extremes. There has always been volatility: $30 oil in 2016, $130 oil in 2022, $120 in March 2026. What OPEC used to provide was a floor within that volatility — not a fixed price, but a managed expectation that Saudi Arabia would periodically defend a minimum. Petrostate fiscal architects built their systems around that expectation. It was never guaranteed, but it had been demonstrated enough times to be plannable.

The enforcer has changed its own arithmetic. Saudi Arabia at $94 to $96 fiscal breakeven, with oil at $61, is not in a position to absorb the revenue cost of unilateral production cuts to hold a cartel price while Russia pumps at volume and shale caps the upside. It can announce cuts. It can publish targets. It can convene OPEC meetings and issue communiqués. What it can no longer do credibly is threaten a price war that would cost it more than it costs the members it’s trying to discipline.

The market has acquired two swing producers that don’t follow cartel logic: US shale, which responds to price signals without coordination, and Russia, which responds to wartime revenue imperatives without diplomatic constraint. And the UAE — the only other Gulf state that had the fiscal room and the production capacity to share enforcement costs — has voted with its barrels.

Don’t expect a formal OPEC dissolution. Institutions are durable; they outlast their functions. OPEC will continue meeting, issuing statements, publishing forecasts, maintaining its Vienna headquarters. What is ending is something more specific and more consequential: the political guarantee that managed pricing would make petrostate development models viable across the planning horizons governments need to build states around. That guarantee was conditional on Saudi Arabia’s periodic willingness to enforce it. The conditions that made Saudi Arabia willing no longer hold.

What follows is price discovery in a market that petrostate fiscal systems were never designed to navigate — a market that ranges from $30 to $130 depending on whether a military conflict is threatening a specific 21-mile strait, where the upside is geopolitically driven and temporary, and the structural pressure runs consistently downward. The governments built to assume otherwise are beginning to find out what that means, and the experience will not be uniform, or gradual, or managed.

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Burning oilfield during Operation Desert Storm, Kuwait – Wikipedia

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