Business

The Relentless Production of Shale Oil Is Breaking OPEC’s Neck

In this Dec. 13, 2009, file photo, oil personnel work at the Rumaila oil refinery, near the city of Basra, Iraq. OPEC's purpose is to coordinate oil output to keep prices high and stable, to maximize member countries’ revenue but make sure global demand for oil stays strong. A steep, coordinated cut in output could stop and possibly reverse what has been a 30 percent decline in price over five months. (AP Photo/Nabil al-Jurani, File)
In this Dec. 13, 2009, file photo, oil personnel work at the Rumaila oil refinery, near the city of Basra, Iraq. (AP Photo/Nabil al-Jurani, File)

(Business Week) – The world’s biggest oil companies faced ruin in the summer of 1931. Crude prices had plummeted. Wildcatters were selling oil from the bonanza East Texas field for a nickel a barrel, cheaper than a bowl of chili. On Aug. 17, Governor Ross Sterling declared a state of insurrection in four counties and sent 1,100 National Guard troops to shut down the fields and bring order to the market. A month later the Railroad Commission of Texas handed out strict production quotas.

That heavy-handed intervention in the free market was remarkable enough. Even more remarkable was who pulled it off. The person in charge of shutting down the wildcatters, National Guard Brigadier General Jacob Wolters, was the general counsel of Texas Co., an ancestor of Chevron (CVX). And the Texas governor who ordered Wolters in was a past president of Humble Oil and Refining, a forerunner of ExxonMobil (XOM). Big Oil played hardball in those days.

History is repeating itself, with a twist. The stressed-out giants of today are Saudi Arabia and its fellows in the Organization of the Petroleum Exporting Countries. The descendants of the 1930s wildcatters are today’s producers of oil from shale, who are driving down the world price of crude by flooding the market with millions of barrels of new oil each day. At $64 a barrel, Brent crude is down 44 percent since June.

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