STACEY VANEK SMITH, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. And today's indicator is 11 million. That is roughly the number of barrels of oil the U.S. produced every single day in 2018. The U.S. is now the biggest oil producer in the world. We produce more oil in this country than Saudi Arabia, which produces about 10.5 million barrels of oil a day, and Russia, which produces around 10 million. And this represents a major global change, both politically and economically, and those changes are sure to be at the top of the agenda for OPEC's big meeting next week.
OPEC is a group of oil-producing countries, basically headed by Saudi Arabia. And the group used to have enormous power over the global economy, particularly over the U.S. economy. The U.S. is the biggest consumer of oil in the world. Now, OPEC still has a lot of power, but dramatically less than it used to. And its power over the U.S. economy is probably forever diminished. Today on the show, global oil - how the U.S.'s role as top global oil producer has changed things.
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VANEK SMITH: Christopher Knittel is an economist at MIT. He has studied the oil markets for years. Chris, thanks for joining us.
CHRISTOPHER KNITTEL: No problem.
VANEK SMITH: So Chris, recently, something pretty extraordinary happened, which is that the U.S. became the largest producer of crude oil in the world.
VANEK SMITH: So first of all, how did that happen?
KNITTEL: In two words, fracking revolution. We - the advent of horizontal drilling and hydrofracturing has really transformed world oil markets and has propelled the U.S. into being a major player on the production side, rather than just on the consumption side.
VANEK SMITH: What is the economic significance of the U.S. being the largest producer of oil in the world?
KNITTEL: We need to step back a little bit in the sense that we still import oil. So we are still a net importer of oil.
VANEK SMITH: We're still not making enough.
KNITTEL: Exactly. So we're still consuming more than we make, but in the past, we used to import about half of the oil we consume. And now, on a net basis, that's only about 10%. So from that perspective, it has been a major, major shift.
VANEK SMITH: How does that change the economy of the U.S. and of other oil-producing countries?
KNITTEL: Well, let's start with the U.S. So in the past, when we were importing so much oil, when oil prices fluctuated, that had a big impact on the U.S. economy, especially when oil prices went up.
VANEK SMITH: Oh, it's no longer, like, an economic drain. It's just money moving from one part of the U.S. economy to the other.
KNITTEL: Right. The big negative effects in the past were that we were just sending more money outside of the country, and that's no longer the case.
VANEK SMITH: How much downward pressure does the U.S. producing so much more oil than it used to - like, how much downward pressure does that put on the price of oil?
KNITTEL: It - quite a bit, especially during peak demand periods like now, where, globally, economies are doing pretty well. It's an extra 6 million barrels a day that are - is being on the market. That's about, you know, 5% - a little over 5% of world production. But when oil supplies are short, that 5% to 7% can mean a lot on prices.
VANEK SMITH: And what about politically? What is the sort of political effect of the U.S. being the biggest oil producer in the world?
KNITTEL: Yeah, I think that's a major factor. It's not hyperbole to say that the fracking revolution has completely transformed the geopolitics around energy. For one, OPEC has a lot less power now than they used to just because they're a smaller share of the world oil production.
VANEK SMITH: What has that meant for - I guess for the U.S. and then for the Middle East?
KNITTEL: Again, now that we're only importing about 10% of our oil, in theory, at least, we're less beholden to the Middle East. Now, we still are in the sense that if there's a disruption in the supply of oil, their prices will go up. And as we talked about, that's not a great thing for the U.S. economy, but it's not as bad of a thing as it used to be.
VANEK SMITH: What has this meant for OPEC?
KNITTEL: Well, from OPEC's perspective, they have a lot less power - in particular, pricing power - as they used to.
VANEK SMITH: I mean, yeah, they used to just be, like, this sort of very all-powerful cartel, and pretty much everyone was at their mercy. I mean, we're the largest consumers of oil in the world, so this was a big...
VANEK SMITH: ...Deal. Like, if - we couldn't not have oil.
KNITTEL: That's right. And so, you know, they sort of had us stuck, and that's no longer the case.
VANEK SMITH: What role do you think oil is playing globally right now? I mean, is it, like, a significant role? Is it kind of quieted down? I mean, this - oil used to just move - I mean...
VANEK SMITH: ...There have been moments in history when oil really just moved every market.
KNITTEL: Yeah, I don't - so I don't think world leaders and countries are worrying about the price of oil as much as they used to. Twenty years from now, you can certainly imagine a world where oil-producing countries have almost no power in the world because we have this surplus of oil, and we're consuming much less oil than we ever were.
VANEK SMITH: I mean, oil used to be - I mean, there's a phenomenon in economics called the resource curse, which happens when countries have a lot of, usually, oil. And because it's so lucrative, they plow every resource they have into developing oil. The rest of their economy suffers. I mean, there's a whole curse associated with having a lot of oil because oil is such a powerful, valuable commodity. Do you think that is going to change? Do you think oil - oil's going to lose that kind of muscle to sort of make an economy?
KNITTEL: Well, I think we're already seeing that change. So Saudi Arabia now is looking to diversify their economy. And the traditional oil-producing countries more generally are going to need to reinvent themselves in the face of more production coming out of the U.S., as well as alternatives to oil in the transportation market.
VANEK SMITH: And what do you see as the future for oil production in the U.S.?
KNITTEL: So as economies move away from oil and transportation and other sectors, there won't be as much of a - as much profit being made from fracking. But insofar as the demand for oil is there, we have a huge amount of resources available to us, and I wouldn't expect them not to be untapped if the demand is there.
VANEK SMITH: This episode was produced by Constanza Gallardo, fact-checked by Emily Lang and edited by Paddy Hirsch. THE INDICATOR is a production of NPR.
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