In September of 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela got together and formed the Organization of Petroleum Exporting Countries (OPEC). Nine other oil-exporting nations joined later: Qatar, Libya, the United Arab Emirates, Algeria, Angola, Gabon and Nigeria. Ecuador and Indonesia joined at one point and dropped out later. OPEC’s stated objective was “to coordinate petroleum production among member countries to create an efficient, economic and regular supply of petroleum to consuming nations along with a fair return to industry investors.” The idea began with organizers hoping to move prices from $3 per barrel to $8 per barrel. At the time, powerful multinational petroleum companies, generally located in the U.S. and Europe, controlled the world market, pocketing significant margins.
This modest effort to improve OPEC’s members’ lot in life created an effect unimaginable at the outset but overwhelming soon after it had begun:
“If we can get $8 per barrel, then $12/barrel, then $20/barrel, why not $100/barrel?”
And so the “energy crisis” began. OPEC rose to international prominence during the 1970s as oil prices rose steeply, triggered by the Arab oil embargo in 1973 and, ostensibly, by the Iranian Revolution in 1979. After reaching record levels in the early 1980s, prices began to weaken, responding to a production increase that had come about as a direct result of higher pricing: While $3/barrel oil attracted little capital, $100/barrel brought outliers from all around the globe into the game. Enter intense oil exploration—generally offshore—and new technology called fracking. Oil production thrived through the 1990s and 2000s beneath OPEC’s production/price umbrella.
OPEC’s innovative price mechanism temporarily stabilized teetering crude prices in the present decade. But a combination of market forces, speculation and increasing production first from the U.S. with fracking and then by economically strapped Ecuador and Indonesia going rogue, finally brought the situation to a head. Because of the heavy civil obligations that OPEC members have placed upon this fortunate resource, the need to manage this crisis exceeds anything in the past: Every Saudi home enjoys a piece of that “oil dividend,” minimizing political unrest. What would happen to the ruling class should this no longer be possible? Much of the same threatens other countries, especially Iran and Russia.
At the bottom of this intrigue, apart from political turmoil, lies, as it always does, the economic reality of supply/demand/price. While supply has a volume factor, at its base is a factor just as vital: cost. Being the low-cost producer of a commodity makes one the master of that commodity. Chevron’s 100-year-old California oil fields located in eastern Kern County still produce copious amounts of oil at or near $12/barrel. Middle Eastern oil, without the civil obligation heaped upon it, can also still be pumped for around $12/barrel. By fracking tired and weakened wells, oil can be extracted at between $45 and $75/barrel. Averaging these production costs, what will be the price that keeps everyone in business? Who will be driven out? How will transportation fit into the equation? Has the Middle East lost the U.S. market due to higher freight charges?
Since there is no “OPEC” or cartel in place for fresh potatoes, the “triple play” of supply/demand/price is where it is. Fresh-potato growers have learned that growing the crop (i.e. supply) that the market demands results in a fair price for all. Attempts at lowering one’s cost of production by increasing yields without adjusting acres only serves to oversupply already unbalanced and highly price sensitive markets.
In fresh potatoes, profitability hinges principally on one factor: supply