As the price of oil soared toward its all-time record of $75 a barrel the other day, Mahmoud Ahmadinejad, Iran's hard-line president, read us a little lecture. He said oil was still priced below its true value. That is a statement of such breathtaking arrogance and greed that it's almost funny -- but I, for one, can't laugh very well when my teeth are clenched. What was flat-out ludicrous was Ahmadinejad's "proof" that oil is too cheap. The sure sign, he said, is that refined oil products "are sold at prices dozens of times higher" than what the OPEC producers get for their crude oil.
They must teach a strange kind of economics in Iran. As Ahmadinejad knows perfectly well, any basic commodity costs a fraction of the price of the products made from it. Consider a bushel of wheat: As I write, you can buy one for $3.58, delivered in May. But that bushel can produce more than 70 loaves of bread, each priced at $2 or more. That means the wheat in each loaf cost only 5 cents, one-fortieth or less of the final price. But remember that the wheat must be stored and shipped, milled into flour, mixed with yeast, water, and other ingredients, baked, wrapped, shipped again, stacked on shelves in the supermarket, and rung up by a store clerk before you can eat it. To be sure, there's a small profit to be made at every step of the operation -- but no one is profiteering on wheat, flour, or bread. They are sold in free markets, where prices reflect true costs and competition for buyers. And that's another key difference between oil and wheat.
The true cost of wheat starts with the seed a farmer buys. It includes a large input of mineral fertilizers -- phosphates, potash, and nitrogen-based nutrients (which are all, by the way just as "finite" in nature as petroleum is and without which yields would be so low that food shortages would result- think "Green Revolution"). The cost of wheat also includes the value of the land it grows on, tractor fuel and depreciation, irrigation, insurance, taxes and the like, and the farmer's labor. Factoring in all that, there isn't room for a lot of profit in a $3.58 bushel of wheat.
In sharp contrast, oil in Saudi Arabia costs, by OPEC's own admission, just $1.50 a barrel to find and pump (and probably less). Add the cost of pipelines, processing, and shipping, and it would still be comfortably profitable at $5 a barrel, delivered in Rotterdam or Houston or Mumbai. But oil producers manipulate the market to keep prices high -- and now, at over$70 per barrel, oil is wildly, extortionately, obscenely profitable for the OPEC sheikhs and their oil patch cheerleaders (think Exxon-Mobil, or Lee Raymond}. It is almost as obscenely profitable for their cronies whose costs of production are higher -- the producers of oil from the North Sea, the North Slope of Alaska, the wastes of Siberia, and the deep-water wells of the Gulf of Mexico. Even in the Canadian tar sands, where oil companies are investing billions to steam oil from the hard black earth, the cost of production is just $20 a barrel, leaving a profit of 275 percent at today's price.
If the producers of wheat and other food crops could collude on prices as successfully, the world economy would probably collapse, and famine would rage around the planet.
Perhaps the farmers would be happy -- at least for a while. Ahmadinejad is happy, too, but he thinks he can be happier still by raking off even more dollars for his oil. And the oil patch is happy to cheer him on. And we continue to be happy to let them get away with it!