How the Idea Behind OPEC Started Right Here in Texas

Nov 29, 2016

Tomorrow, the Organization of Petroleum Exporting Countries (OPEC) meets in Vienna to try to figure out a way to cut oil production.  For decades OPEC’s set oil prices by controlling supply. So the meeting will be closely watched because it could lead to higher oil prices.

But, the idea to manipulate oil prices by setting limits on oil, didn’t start with OPEC. It started right here in Texas.

During the oil boom of the 1930s, large oil producers were worried that independent drillers were over-supplying the market.  To control production and stabilize prices the Railroad Commission issued "pro-ration" orders to limit production from each oil well.  

When independent oilmen in the East Texas field refused, the governor of Texas went so far as to declare martial law and send in troops. Some said oil prices would rise "as the point of a bayonet." (You can see more about that in the 1985 documentary "Wildcatter" below.)

It was a dramatic gesture but, in the long-term, it worked. The Railroad Commission, in partnership with other oil producing states, controlled oil production (and by extension, prices) for decades. 

Then, in the 1950s, the oil minister of Venezuela decided that if the Texans could do it, so should other oil producers.

"He hired the chief engineer of the Railroad Commission, named Jack Baumel, to come to Venezuela and then show the oil minister of Saudi Arabia how it was done," said UT Austin government professor David Prindle, who wrote a book on the Railroad Commission. 

"OPEC was explicitly modeled on the Texas Railroad Commission," Prindled contends. 

And OPEC soon followed. The Railroad Commission still regulates oil here in Texas but, the rise of OPEC marked the end of the commission’s power over prices – in part, because OPEC controls more market share. 

The question before OPEC now is whether member states can reach an agreement to cut production to bring prices back up. But some wonder whether an agreement to cut would matter.

Now that the US produces so much shale oil, some people think OPEC’s lost a lot of its ability to set global supply. 

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