From pricing power to peer rivalry: The structural collapse of the Saudi-led oil order

Does the UAE’s departure from Opec leave Saudi Arabia as the organization’s undisputed anchor? We won’t dive deep into the political rift for now and, while that framing is correct as far as it goes, what would Saudi Arabia be anchoring really? An even more difficult question to answer is whether Opec could still credibly set a price level for oil that the rest of the market organizes around and what does this mean for our region. We think these days are behind us now.

You see, in wonky terms, the dynamic between Saudi Arabia and other Opec members was less that of a cartel, in a traditional sense, and more of what economists speaking with marbles in their mouth would call a dominant firm model with a competitive fringe. Saudi Arabia, sitting on one of the lowest marginal cost barrels and the largest spare capacity, set the price by adjusting output. Non-Opec producers (the US, the North Sea, later Russia) took the price as given and supplied what they could. The cartel structure held because Riyadh had the capacity to credibly threaten to flood the market with production and make all producers suffer from lower prices as a result. It also worked because the “fringe” was passive enough not to swamp the residual demand curve.

Does this sound confusing and needlessly complicated? Don’t worry. That model just had the last nail driven into its coffin.

The dominant firm structure that gave Opec its pricing power from 1973 to about 2014 is now gone. What replaces it is genuinely unsettled, and the answer matters for every oil-importing economy in the region.

The cracks in that Saudi-led Opec system have been compounding for a decade. US shale broke the fringe assumption in 2014, making non-Opec supply materially more elastic than the dominant firm model required. Saudi’s 2014 abandonment of the swing producer role was a recognition that defending high prices was funding the fringe’s expansion. The 2016 Opec+ pivot — when Opec and 11 non-Opec members signed the Vienna Declaration of Cooperation to formalize Opec+ — effectively turned oil-price management from a Saudi-led project into a Saudi-Russia coordination problem.

From there, the structure kept shedding pieces. Qatar walked in January 2019, then Ecuador followed in January 2020 and Angola in Jan 2024, each citing a version of the same baseline-versus-capacity grievance. Chronic “cheating” by Iraq, Russia, and Kazakhstan ran in the background throughout.

Coordination failed publicly in March 2020 during the Saudi-Russia price war and again in the July 2021 UAE-Saudi baseline dispute that was papered over rather than resolved. What happened then was that the UAE blocked an Opec+ production deal because its quota baseline (3.17 mn bbl / d, set off 2018 production) no longer reflected the capacity it had built (4+ mn bbl / d). After two weeks of public stand-off and a Brent spike, Saudi Arabia conceded a partial baseline raise to 3.65 mn bpd, which bought time without resolving anything.

Quota tensions between Saudi and the UAE kept growing, and for good reason. As Bloomberg’s Ziad Daoud notes, while last year’s average oil price of USD 67 / bbl meant the UAE managed to record a budget surplus of nearly 5% of GDP, Saudi Arabia faced a 5% deficit.

The UAE kept building capacity, the mismatch kept widening, and this time, the UAE’s exit is probably that same dispute reaching its terminal point. In essence, the UAE exit now is not a rupture, but rather the loudest piece of a slow and inevitable structural collapse.

So, what are we left with now?

Essentially three large strategic producers (Saudi Arabia, Russia, UAE) with a total sustainable production capacity between them of around 27-28 mn bbl / d. They each have different fiscal breakevens, different capacity trajectories, different geopolitical ambitions, and different posturing toward Washington — Russia is ambivalent at best, and Saudi Arabia and the UAE competing directly for attention, influence, and investment. We also still have a US shale fringe that is structurally elastic in a way the original model never assumed. Plus Iraqi, Iranian, and Libyan production that remain in theory viable, but currently volatile for political reasons rather than commercial ones.

In a nutshell: Three distinct groups, no direct organization, and a complete mess.

This is, formally, closer to a three-player coordination problem with imperfect monitoring and divergent payoffs. The economics literature on three-player tacit collusion is as unkind as it is complicated, and stable coordination there is harder by a non-trivial margin. As Hamzeh Al Gaaod put it in his note that we shared on Wednesday, the exit signals “a decisive shift toward an independent, state-driven oil strategy.” Cheating, in cartel terms, is now done by more players — and who are no longer in the room.

Ok, now, why does any of this matter?

Well, the price floor for the oil markets is now probably weakened severely and permanently. For the next 12-18 months, the reality will be masked by the Strait of Hormuz blockade and lingering production disruptions, keeping prices higher regardless of structure. After is where the picture materially changes. If Saudi Arabia tries to defend prices through deeper unilateral cuts, those cuts could fail faster than they used to.

If Riyadh accepts a lower realized price and goes for higher market share, the price band stabilizes even lower. This wouldn't bode well for its Vision 2030 expansionary fiscal policy — and it’s not like they will be able to gather all major producers to set production quotas like before.

The pain from this new order might not just be confined to the Gulf and other oil producers globally. The production levels that funded the GCC’s spending also had a direct impact on the rest of the region’s external accounts. A sustained oil price collapse potentially poses risks to Egyptian, Jordanian, Pakistani, and Indian fiscal positions through three channels at once: GCC remittances; FDI and project finance from Gulf sovereigns (the largest single source of new capital into Egypt over the last three years and rising fast in Pakistan); and goods trade and transit revenues. including Suez Canal receipts.

The broader MENA-India corridor is also not immune as it relies on Gulf-funded demand at one end and Indian growth at the other. Even if India’s direct GCC exposure has narrowed as remittances rebalance toward advanced economies, the corridor and trade channel still reaches Delhi.

For the medium term, a significant external risk for the region’s oil importers is no longer a sustained oil price spike. It could, oddly enough, be a sustained oil price collapse that would soften the Gulf’s capacity to underwrite everyone downstream of it and with a complicated political rift to manage.

Bahrain is the regional canary in the coalmine, though now with a complicating wrinkle, it might be where we first see the impact of this rift. It is the most exposed GCC state to a sustained oil price collapse by an order of magnitude, with a projected fiscal breakeven at around USD 167 / bbl in 2030, a double-digit fiscal deficit, and a triple-digit debt-to-GDP.

The patronage channel that has historically backstopped Manama, most visibly the USD 10 bn coordinated GCC rescue in 2018, depended on a regional alignment mechanism that no longer exists in the same form. This channel has not disappeared so much as it has been reorganized. Three weeks before its OPEC exit, on 8 April, the UAE central bank signed a USD 5.44 bn five-year currency swap with the Central Bank of Bahrain, on the back of an investment-protection agreement that entered into force in May 2025 and a bilateral tax treaty from 2024.

Read together, these are the architecture of a soft bilateral backstop: Manama gets a peg-defense mechanism that does not run through Riyadh, and Abu Dhabi gets an explicit financial stake in Bahraini stability that competes, rather than coordinates, with Saudi influence. Sure, the canary survives for now, but the cage has changed. Bahrain becomes a place where Saudi-UAE rivalry now plays out on Manama’s balance sheet directly — and that works as long as the UAE’s commitment holds. It works less well if regional tensions escalate and Bahrain finds itself having to pick a side it didn’t previously have to.

None of these economic shocks are necessarily a done deal. Yet, from a political and policy point of view, we are in uncharted territory. The next Opec+ meeting could tell us what path Riyadh has chosen. We’ll be watching clues from the language on quota discipline and the tone toward Russia while keeping an eye on potential surprises of news of countries potentially readmitted or added to the organization.

The UAE’s stance will also become clearer over the next few weeks and we’ll see if it withdraws from more regional alliances and organizations. In the corporate world, we’ll also keep a close eye on something like Adnoc’s production trajectory: Capacity additions matter more than headline output now. And we’ll continue to watch Saudi fiscal break-even commentary, which has been creeping toward USD 100 / bbl as spending accelerates. The marginal cost of defending that level has probably just risen.

At the end of it all, the dominant-firm era was, ironically, what made the market and oil price floor reliable. We probably just lost that and, with it, we probably lost the aspirations of a stable, policy-coordinated Gulf.