Patriot Corner...

The Cost of Dependency

- Dan Meador

The week of March 1, gas stations in Ponca City, Oklahoma went to $1.45 per gallon of regular unleaded. That's quite an increase from lows around 72 cents in early 1999. When the 38 cent tax is removed, the increase at the pump is around 300%, reflecting the one-year increase in crude prices from around $10 to over $31 per barrel.

The overall effect is severe enough that people across the nation are advocating a "gas-out" to protest escalation in prices of petroleum products. Even CNBC Squawk Box host Mark Haines winced when he mentioned his New York home heating oil bill for February.

Escalation in petroleum prices wasn't accidental. In March last year, ministers of the Organization of Petroleum Export Countries, which includes Middle Eastern countries, Mexico, Argentina, and other Latin American countries, decided to reduce production in order to increase price. And increase they have. A few of the OPEC ministers have recently expressed interest in increasing production to provide an amount of price relief, but the probability of anything significant happening before the end of March is remote. And even if there is a decision to increase production, prices at the pump probably won't decline significantly before late summer. In the meantime, air and overland freight companies are adding sur charges to cover fuel costs. The ripple effect will potentially increase consumer prices for everything from groceries to tinker toys.

Those old enough to remember will recall the Arab oil embargoes of the 1970s. As the Vietnam war geared down, Arab countries nationalized oil resources and production. Western oil companies were threatened with eviction. The price of gasoline and other petroleum products soared. While the American people didn't have sufficient political will to launch another war, there was a mandate for energy independence. Through the balance of the decade, domestic production was dramatically increased, and tremendous amounts were invested in developing alternative energy sources.

Prices remained reasonably high through the seventies, but there was a semblance of prosperity as the domestic energy industries expanded, and American agriculture, moved to center stage by the Russian wheat raid, geared up to feed the world.

Then the tides of fortune reversed. In 1981, the war between Iran and Iraq broke the OPEC cartel down so many of the Middle East countries flooded the market, and through the eighties, improved weather resulted in tremendous grain surpluses. From 1981 through 1985, the global price of natural resource commodities plunged by an average of 30%. The consequence was devastation for American natural resource producers. The farm crisis materialized and the number of active petroleum drilling rigs fell from over 4,000 to around 800.

Former Oklahoma Representative Glenn English demonstrated overall economic effect with a single example: Curtailed demand for drill pipe alone was equivalent to steel used in a million automobiles per year. Effect on the nation's mining and steel production industries was obvious. By 1990, the average age of farm tractors was 19 years. Bankruptcy was commonplace for America's natural resource producers and related service industries, and our nation's first-level processing and equipment manufacturing suffered sufficiently that much of it was either shut down or exported. Within two decades, we were once again dependent on imported petroleum, and viability of the nation's food production system was compromised. By 1990, Federal government alone employed more people than all American manufacturing, and through the decade we continued to lose family farms at a rate in excess of 500 per week.

In 1999, the OPEC cartel decided to curtail oil production in order to increase prices to profitable levels. The decision was based on the best interest of OPEC member countries. They were able to make the decision, and make it stick, because developed nations around the world are dependent on them. The OPEC countries monopolize enough of the global oil production that they can double or triple price again if they choose. We are at their mercy.

This damned-if-you-do, damned-if-you-don't situation brings General Agreement on Tariffs and Trade and North American Free Trade Agreement rationale into focus: How is unrestricted global free trade possible without compromising the best interest of any given nation?

Benjamin Franklin, one of America's better-known founders, disposed of the free trade notion in reasonably short order: The only way to profit from trade, he said, is if somebody cheats.

In other words, there has to be some kind of imbalance for a producer in one region or country to sell something for less than people in the consumer region and locality can produce it for. On a level playing field, basic commodities and manufactured goods should sell for approximately the same price in each region or nation, so the cost of additional transportation and handling should be prohibitive.

This is where the notion of "parity" came from. In general terms, parity is the price of production plus a reasonable profit, usually calculated at about ten percent. Profit is necessary for any producer to continue production. If he continuously loses money, he eventually has to shut down.

Global prices below the cost of American production is what made us dependent on petroleum from the Middle East prior to the seventies oil embargoes. The Arab nations had lower labor costs, and they have the advantage of reserves at depths comparable to what many Americans have to drill water wells. But the Arabs got tired of being deprived of returns on their petroleum resources while international oil cartels got rich on production profits. Arab leaders believed it was in their best interest to provide benefits for their people from natural resources being taken from their respective countries. The conflict turned on self-interest. Likewise, the mania for American energy self-reliance resulted from perceived self-interest.

The United States supported Saddam Hussein in his war with Iran. In fact, we helped Iraq build the fourth largest military in the world. Within a decade we engaged the Persian Gulf War to curtail Hussein's ambition. A decade after that, the United States continues to patrol the Iraqi demilitarized zone and impose trade restrictions.

Although there hasn't been any bombing or shooting over current energy prices, relations with Iraq over the past three decades exemplify the delicate balance between friend and foe. Each nation has its own prosperity and self-interest to consider. These considerations must be taken into account when striking international agreements. Self-sufficiency has to be one of the considerations. And the nation willing to undermine its own standard of living in the name of trade engages in folly. When and if a nation becomes dependent on foreign producers for essential commodities, it exposes itself to what Americans are currently experiencing at the gas pump.

As consumers, we all want to buy the most and best we can for the least possible price. It's a natural impulse. But if you starve the goose that lays golden eggs, the days of golden eggs are numbered. When someone else monopolizes the market, we either pay what they demand or do without. Our natural resource industries, which account for all new wealth for our economy, are quite literally the geese that lay America's golden eggs. And, of course, they are responsible for commodities the nation must have, so national sovereignty and self-reliance is dependent on natural resource industries.

The lesson is learned at the gas pump. Had we been willing to pay reasonable prices based on the American cost of production, the OPEC cartel wouldn't be able to spike prices across the nation. As it is, a significant disturbance in the fragile alliance we have in the Middle East could easily double or triple prices again. This is the cost of dependency and vulnerability.

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This article was submitted by Servant of the Most High - March 6, 2000