Not surprisingly, when Saudi Arabia replaced Texas as the world’s swing producer, it used the Texas Railroad Commission as the model for OPEC, the Organization of the Petroleum Exporting Countries.
The Railroad Commission stopped managing production in the early 1970s, just as a deregulatory wave hit the U.S. energy and transportation sectors, and as Texas lost its swing-producer status. In the decades that followed, Texas seemed to pass “peak oil,” and production began a slow but steady decline.
In the meantime, robust production in the Middle East and elsewhere put downward pressure on both oil prices and investments in new capacity. As a result, the world had little excess capacity to accommodate the sudden rise of China as a major economic power. In 1998, crude oil traded as low as $11 a barrel, adjusted for inflation. Then prices started rising and just kept rising, reaching $140 in the middle of 2008. Rising energy prices all but guaranteed a recession, but because a serious imbalance had crept into the world financial system, the result was a global financial meltdown.
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Oil prices crashed early in the financial crisis, but quickly rebounded, and remained high for several more years—enough time for one wily old Texan to test a theory that would revolutionize U.S. oil production. George Mitchell had long been convinced that two old technologies—hydraulic fracturing and horizontal drilling—could be married to produce vast quantities of oil from formations long thought inaccessible or depleted, particularly in shale rock. The new wells were a lot more expensive to start up, and required a lot more fracking than a vertical well, but they also proved far more productive.
Oil prices stayed high for long enough for these new oil wells to start popping up all across the Permian Basin. Led by independent oil companies, many of them firms with just a few dozen employees, the U.S. added the equivalent of a second Iran to world oil production in just a few years. By the time prices finally started falling in 2014, America had nearly doubled its oil production, but the Texans still weren’t done. They would go on to add much more production—the equivalent of the United Arab Emirates on top of Iran—and world prices began to fall precipitously. They reached nearly $30 a barrel in 2016, and have seesawed since.
As the U.S. has once again become the world’s leading oil producer, it has used its strategic leverage over Saudi Arabia, the world’s second-biggest producer, to keep OPEC output within bounds favorable to U.S. interests—high enough to ensure low gasoline prices and buttress U.S. sanctions against Iran, but low enough to keep prices from crashing.
However, the world’s third-biggest producer, Russia, has little incentive to advance America’s strategic objectives. Part of what led the rupture of coordination within OPEC is that Russia doesn’t want to give up further market share at the same time that Americans continue to increase production, heedless of all consequences.