Texas used to be the world’s swing producer of oil. In the first half of the twentieth century, the Texas Railroad Commission enforced production quotas to balance markets and keep prices and profits stable. Texas lost that job to OPEC in the 1970s, though, and never gained it back—until now.
The momentous shift became evident in the weeks after OPEC’s November decision to hold oil production steady in the face of weakening prices. It was time, Saudi oil minister Ali Naimi said, for another producer to idle his rigs. With Saudi Arabia standing firm, prices plummeted. Crude lost half its value between June and December 2014. Within a few weeks, it became apparent that someone would heed Naimi’s command, and that OPEC’s do-nothing strategy would succeed, at least in the short term.
Starting in January, scattered roughnecks toiling on thousands of dusty pads across the Middle American heartland began moving rigs into storage, cutting back on well drilling, and, in doing so, bringing less new oil to market. The cutbacks only accelerated through February and March. Estimates show that new volumes of American oil coming onstream continued to drop, albeit at a slower pace than the steep cutback in drilling.
A few years ago, low prices would have induced Saudi Arabia to shut off a few valves in Abqaiq. Today, it is U.S. producers that are reducing investment. The effect is the same. Prices of West Texas Intermediate crude, the U.S. benchmark, climbed 14 percent during April. What is exceptional in this story is that shale producers were willing—and able—to reduce their activity so quickly, so collectively, and without the intervention of cartel bosses or a regulatory agency. This time around, the world’s oversupplied oil markets are getting respite because thousands of competitive firms, all of
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