Prices for crude oil have rocketed near 800% in less than a decade, an almost unheard of leap for such a basic commodity. Many reasons and explanations for this massive increase in price have focused on the demand side (economic growth, China, India, and on). Yet it is on the supply side primarily, that has led to these incredibly vertiginous and manipulated prices. It is where the Organization of Petroleum Exporting Countries (OPEC) has played an especially nefarious role as the only player with meaningful and immediately available reserves and production capabilities able to meet world demand. Quite simply, over the last ten years OPEC has done all it could to control supply to squeeze every last penny out of the market.
In my book published in 2005, of which an updated and revised edition will be reaching bookstores this month (Over a Barrel: Breaking Oil's Stranglehold On Our Future), I postulated "Just imagine the firestorm of indignation that would erupt if the public found out that the world's big grain producers (say the United States, Canada, Brazil, Argentina and Australia) were conspiring to triple or quadruple the price of such basic commodities as soybeans, corn and wheat." Were it to come to pass the outcry would be deafening. Yet market and trading conditions are now ideal for such a cartel to take root. All things being equal it very well might. Yet what is clearly missing at this juncture is the political tolerance to allow it to happen. But that too may change.
Conditions for the formation of a cartel are always at their most fortuitous when there is an imbalance, or perceived imbalance of supply to meet market demand. Producers understand that in such a universe, if they can fine tune and control supply they have enormous impact on the price the market will pay for product which they, the producers, have withheld from the marketplace thereby making it progressively harder to access. In the oil or grain business, it is always that last cargo of supply that when not readily accessible, that sets the market tone and price, especially if price is the sole inducement to make that cargo available.
This year the grain markets are booming given increased demand worldwide for wheat and soybeans, strained inventories, difficult growing conditions and increased demand for corn because of ethanol off take. And yet, when compared to the evolution of oil prices the comparisons are stunning. The price of oil has increased near 800% within the past decade as mentioned above. Compare this to:
Close 09/28/07 | One Year Ago | Ten Years Ago
_____ ______ ____
Wheat $ 9.51/bu | $ 4.45/bu | $ 3.54/bu
Soybeans $10.17/bu | $ 5.52/bu | $ 6.21/bu
Corn $ 3.86 | $ 2.64/bu | $ 2.57/bu
Oil | $82.60/bbl | $62.90/bbl | $10.86/bbl (12/'98)
Under circumstances of growing scarcity, given the primordial importance of grains to a consuming world, the formation of a grain cartel would be inevitable if maximizing return were
the primary consideration, and consuming nations would sit idly by permitting their pockets to be picked, as is the case with OPEC.
For an agricultural products cartel (let's call it the Organization of Agricultural Products Exporting Countries, or OAPEC) many of the key elements of supply restraint are already in place. As example, the Australian and Canadian government's Wheat Boards, are considered by our government to be monopolistic, lacking in transparency and a detriment to free and fair trade. Quite incredibly we pontificate and harangue our closest allies, but rarely do we or our benighted Administration or its Department of Energy call to account the mercantile thugs at OPEC. That said, it would be a relatively easy matter for our government to set up our own wheat and ancillary grain boards and join the Australian and Canadians, among others, and together act to control available grain supply to the world marketplace.
In some ways, much like OPEC, we are already restraining production, in order to curtail supply and to support grain prices. We, through the USDA, are setting aside some 36 million acres of land for which we are paying farmers not to plant crops. This land can only be replanted by leaving the USDA program with severe penalties. In spite of pleadings to release lands in order to enhance constrained supply, the appropriate government authorities denied extending waivers. OPEC is teaching us well.
And please, not the argument that it's alright for OPEC to constrain supply because their commodity is finite. Remember, as mentioned here before, our harvests are critically dependent on adequate supplies of fertilizer, comprising such elements as phosphates, sulfur, potash, nitrates all of which are as finite as oil and without which our harvest yields would diminish dangerously.
If we permitted a grain cartel to take root, domestic prices for our cost for food would skyrocket. Well, not necessarily. Here again we can learn from our kindly OPEC pushers. While we and the rest of the world are paying for gasoline and heating oil based on over $80 dollars barrel for crude oil, the Saudis are happily tanking up with gasoline priced at 45 riyals per liter or 46 cents per gallon or the equivalent of $15 per barrel of oil. Venezuelans' gasoline prices are significantly lower yet. Certainly similar programs could be crafted for grain prices in our home market.
This is all conjecture of course, and being the leaders or party to an OAPEC would be an abomination. It would fly in the face of free market principles and fair trade. But, but, but, if it is so ignominious for us, why are we and continue to be so tolerant of OPEC? Theirs is a basic commodity of vital importance to the world economy. And yet we permit their extortion with barely a whimper, while an entire segment of our economy, the oil industry and those allied with oil interests from capital goods manufacturers to financial institutions cheer OPEC on, and render our representative government almost impotent on this issue. You want to hear screaming, just listen if our farmers and their Agricultural Co-ops and Growers Associations ever really try to form a cartel.