CLIFTON B. LUTTRELL

EAR the end of 1973 the Organization of Petro-leum Exporting Countries (OPEC) increased theaverage price of crude oil to about $10 per barrel,more than four times the prevailing price earlier thatyear.1 This price was increased another 10 percent in1975, nearly 15 percent from 1975 to early 1979, andabout doubled from early 1979 to early 1980. By De-cember 1980, the price of United States imported oilaveraged $35.63 per barrel, more than 12 times theprice in mid-1973. These sharp increases have ad-versely affected the U.S. economy by reducing bothpotential output and productivity, raising the generalprice level and slowing real business investment.2

OPEC’s actions in raising oil prices and restrictingproduction have given rise to numerous proposalsdesigned to offset the higher petroleum costs. Onewidely discussed proposal has been for the UnitedStates to organize a grain cartel that would significantlyraise grain prices to the OPEC nations. Many sug-gest that the terms of trade between the two cartelsshould be a bushel of wheat for a barrel of oil, i.e.,about the same terms that prevailed in early 1973when wheat sold for about $2 per bushel and im-ported oil sold for about $2 per barrel.

This article assesses the potential success of such agrain cartel, It describes the attributes of a cartel andshows why a grain cat-tel could not succeed. It argues

tThe OPEC nations ‘vere originally composed of Saudi Arabia,Iran, Iraq, Kuwait and Venezuela; Qatar, Indonesia, Libya,Algeria, Nigeria, Ecuador, Cabon and the United Arab Emi-rates later became members. OPEC: Questions and Answers(New York: Exxon Corporation), pp. 7, 12; Middle East Oil,2nd ed. (New York: Exxon Corporation, 1980), pp. 34-36;U.S. Department of Energy, Monthly Energy Review (De-cember 1980), p. 72.

2See John A. Tatom, “Energy Prices and Short-Run EconomicPerformance, this Review (January 1981), pp. 3-17.

that OPEC’s success in influencing petroleum pricesresults from certain economic conditions in the mar-ket for oil that do not exist in the market for grain.3

Competitive Firms Versus Cartels:Prices and OutputThe impact of a cartel (a combination of firms,

states, or groups whose purpose is to restrict outputand increase profits) can best be described by con-trasting its profit-maximizing operations with those offirms in a competitive industry. Every cartel or competi-tive firm produces at the rate of output that maxi-mizes its profits. However, given market demands andcost structures, the rate of output consistent with profitmaximization will differ between firms organized intoa cartel and those in a competitive industry. Thesedifferent rates of output imply different prices. Ina competitive industry, output and price levels aredetermined by the intersection of the industry demandand supply curves. The demand curve indicates thevarying amounts of a commodity that buyers willpurchase at each price, while the supply curve indi-cates the varying amounts of a commodity that sellerswill supply at each price. At the point where thesecurves intersect, competitive producers will supply thequantity of a good that consumers wish to purchaseat that price; any firm that attempts to raise its priceby producing less will simply lose sales to other finnsin the industry.

If the firms form a cartel, however, they can influ-ence market price in their favor by restricting output.

tmThe OPEC cartel may not meet the strict definition of a cartel

in all respects, but this term is used to facilitate discussion.An alternative analysis, not pursued here, would treat OPECas the dominant finn that sets and lets the small producerssell all they want at that price.

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A Bushel of Wheat for a Barrelof Oil: Can We Offset OPEC’sGains With a Grain Cartel?

FEDERAL RESERVE DANK OF ST. LOUtS APRIL 1981

The profit-maximizing rate of output will thus be lessand the price higher than would prevail in a com-petitive industry.

Cartels Are Typically Unstable

A cartel, however, is unlikely to survive imless itsrules are enforced by government sanction. Histor-ically, cartels have been fragile, lasting only a shorttime. Unless all producers in the industry are membersof the cartel, the higher price of the good caused bythe cartel’s restriction of output provides a great in-centive for nonmembers to increase their own output.4

Moreover, firms have a powerful incentive not to jointhe cartel. The higher price resulting from the restric-tions on output by the cartel will increase nonmem-bers’ profits even more since they can expand theirrates of output. Consequently, each potential memberof the cartel faces essentially the same incentive notto join, and actual cartel members will find theirshare of the market and profits reduced as nonmem-bers increase their production and sales.

The length of time that a cartel can survive dependsin part on the elasticity of the supply curve of theindustry’s output. The less elastic the supply curve,the longer the cartel is likely to survive. If a largeincrease in price elicits only a small increase in out-put by non-cartel firms, there will be less pressureon the cartel.

Likewise, the more inelastic the demand curve forthe cartel’s product, the higher the price can be raisedwithout drastically reducing the quantity demandedand the greater the potential cartel profit. If goodsubstitutes are available for the cartel’s product, how-ever, this will not occur; sizable increases in the priceof the cartel’s product will result in larger purchasesof these substitute goods. In this case, the cartel isunlikely to increase its profits for long by restricting•output and raising prices.

Although both the demand and supply relation-ships may appear to be quite inelastic in the shortrun, demand and supply conditions will change overtime in response to higher prices. These changes willreduce the stability of the cartel. First, over time,substitutes will always be found for the cartel’s prod-uct. As the price of petroleum rises, people learn howto substitute other goods (e.g., coal, alcohol, nuclearenergy, etc.) as sources of energy. Furthermore,

4See Ceorge J. Stigler, The Theory of Price, 3rd ed. (New York:The Macmillan Company, 1966), pp. 230-38; and Jack I-lush-leifer, Price Theory and Applications (Englewood Cliffs,New Jersey: Prentice-Hall Inc., 1980), p. 362.

14

greater economies in the use of a good, which alsoreduce the quantity of the good demanded, can beachieved over the long run. For example, the in-creased use of smaller automobiles and insulationhave reduced the quantity of petroleum demandedfor gasoline and heating. Consequently, the quantitydemanded decreases more drastically over time.

Second, new techniques of production, new dis-coveries and new investments will increase the quan-tity of the cartel’s product (e.g., petroleum) suppliedby others.

if the cartel is initially successful in raising pricessufficiently to increase profits, rivalry will arise be-tween the cartel members over how the reduced out-put and the increased profits are to be allocated. Eachmember will want to sell more as the price is in-creased through general production restrictions — thatis, each member has an incentive to cheat on the car-tels sales quotas. Intense rivalry for greater marketshares will develop among cartel members. Therefore,it becomes increasingly difficult for cartels to exist forextended periods.

OPEC Not Immune from Pressures

The OPEC cartel has not been immune to thesepressures. It is presently in the throes of relativelysevere adjustments in output in response to marketforces. It has already lost much of its internationalmarket to non-OPEC suppliers as shown in table 1.OPEC countries produced an increasing portion ofthe world’s petroleum output until 1973, at whichtime they accounted for 55.5 percent of the total, upfrom 52.6 percent in 1972, 48.3 percent in 1970 and37.6 percent in 1960. Their annual rate of pro-duction rose in excess of 8 percent per year through1974, well above that of non-OPEC countries. Follow-ing the first major price increase in late 1973, totalOPEC output dropped somewhat for two years andthen rose moderately through 1977. Then, from 1977 to1979 its output declined somewhat. Since late 1979,following the latest round of major price increases,OPEC’s output has declined rapidly, dropping about22 percent in the latest 12 months. Its share of themarket, which totaled 55.5 percent in 1973, declinedslowly to 49.6 percent in 1979. The decline has re-cently accelerated: OPEC’s market share dropped to44 percent by September 1980.

Higher oil prices have induced the non-OPEC worldto increase output. Output in non-OPEC nations rosefrom 24.9 million barrels per day in 1977 to 32M mil-

FEDERAL RESERVE BANK OF ST. LOUIS APRIL 1981

Table I

!orld Crude CII Production (thousand barrels per day)Growth Rest of Growth OPEC

OPEC Rate’ World Rate’ Share

1960 7,874~ 13,087 376%1961 8,497 13,923 37.9

1982 9,954 10.8% 14,383 5.5% 40.9

1963 10,865 16,253 41,8

1964 12,082 16,081 42.9

1965 13,177 17,115 43.81986 14,217 18,693 43.2

1967 15,630 109 19.732 6.7 442

1988 17,660 20,983 45.7

1989 20,341 21,341 48.81970 22,134.~ 23,692 48.3

1971 25,092 23,255 51.91972 26,711 ~- 85 24,070 1.5 52.6

1973 30,961 J 24,869 55.5

1974 30,683) 25,192 54 9

1975 27,134 ~ 0.6 25,858 41 51.2

1976 30,711 j 26,684 53.5

1977 31,230) 28380 52.4isis 29,800 F —0.5 30,390 5 3 49.5

1979 30,928 31,472) 49,6

19802 26,743,)- 13.5 32,5581 3.5 45.1

November 1979 30,770 32,370) 48 ~—21.8 F —o,i

November1980 24,015 3Z335~ 42.6

‘Annual rates of change2Estimated for November and December

SOURCE: U.S. Department of Energy, ~iontJily Energy Review. (March 1981), AmericanPetroleum Institute, Basic Petroleum Data Book (June 1977)

lion barrels per day in mid-1980 and has apparently OPEC’s cutback on production to maintain the car-maintained its pre-1973 rate of growth despite some tel price clearly’ caused stress among the colludingdecline in late 1980 in Mexico, and earlier declines nations. Though the reduction in output is absorbedin the United States and Canada where, until recently, by the group each nation’s share in the reduction willprice controls have reduced the incentive for oil differ. Per capita revenues also differ among individualproduction.~ nations. For example, oil revenue per capita varied

from $480 in Iran to $17,300 in the United Arab~The profits accruing to OPFC were enhanced and extended Emirates in 1979.6 Such differences engender conflictsover a longer period of time than they might othe,wi e hn~-ebeen by ill ad ised U.S. policu s. In ~ittempting to cushion the . -

impact of the sharply higher OPEC prices on the domestic sumption to the higher oil price reduced the incentive forconomy, the U.S. government has uhjected the oil industry dome tic production and led to great r rehanc on imports,

to varying degrees of price controls the last of hich were thereby enhancing OPEC’s ability to influence prices For alifted only thi year. The industry was then sñbject d to an further discus ion of this topic, see Hans H. Helbling andexcess” profits tax which will contnue to retard its inc n- lames E. Turley ‘Oil Price Controls: A Counterproductive

tive to explore and develop petroleum. Effort,” this Review (November 1975) pp. 2-6.These controls delayed the adjustment of domestic con- OMiddle East Oil p. 39.

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FEDERAL RESERVE SANK OF ST. LOUIS APRIL 1981

about how additional reductions are to be shared. Inaddition, non-OPEC, producer/exporters like Mexicoand Norway can obtain the existing high world pricewithout resorting to output reduction. The OPEC car-tel will face future problems in maintaining profit asthe United States and other nations eliminate priceand marketing controls in the oil industry.

WHY OPEC HAS BEEN SUCCESSFUL

FOR SO LONG

OPEC’s actions have led to a rapid rise in petroleumprices and revenues for all oil producers, both OPECand non-OPEC. From 1973 to 1979, receipts frompetroleum sales by Middle East governments roseabout tenfold.7 Hence, OPEC has clearly succeededin achieving its main objective.

An analysis of the supply of and demand for petro-leum in the non-OPEC nations shows why OPEC hasbeen so successful. First, there has been only a smallincrease in petroleum output by non-OPEC membersfollowing the sharply higher prices in 1973, indicatingthat supply of petroleum in non-OPEC nations isrelatively price inelastic. Although, the price of petro-leum has increased about twelvefold during this pe-riod, petroleum output in non-OPEC nations has in-creased only 24 percent.8 It is estimated that the long-run price elasticity of the non-OPEC oil supply isbetween .33 and .67. In other words, a 1 percent in-crease in price of oil will cause output to increaseabout .5 percent?

Part of the reason for the short-run inelastic supplyof petroleum by non-OPEC nations is the dominantposition of OPEC in the petroleum industry. From1945 to 1979, about three-fourths of world oil dis-coveries were in the Middle East (largely the OPECarea) .~° In 1973, when OPEC began restricting pro-duction, it was producing about 31 million barrels of

~Ibid,p. 31.

°Monthly Energy Review (December 1980), pp. 88-89 andMiddle Fest Oil, p. 26. Part of the apparent inelasticity, how-ever, reflects the impact of the price controls in the UnitedStates and Canada.

°MichaelKermedy, “A World Oil Model,” in Dale W. Jorgen-son, ed., Econometric Studies of U.S. Energy Policy, (Amster-dam: North Holland Publishing Company, 1976), p. 139. Onthe demand side, the long-mn price elasticity of demand forgasoline in the United States has been estimated at about —.8,which indicates that an increase in price of 1 percent causesa reduction of about .8 of a percent in quantity demanded,p. 132.

‘0

Middle East Oil, p. 37.

oil per day, more than four-fifths of which was ex-ported. OPEC supplied 83.4 percent of all petroleumexports in 1978 (table 2).

Also, petroleum demand by non-OPEC nationsis clearly price inelastic, at least in the short run. Thelarge increase in price has resulted in a relativelysmall decrease in quantity demanded as confirmedby petroleum consumption in the major free-worldindustrialized countries from 1973 until mid-1980. Al-though petroleum prices have risen about twelvefold,consumption in these nations has declined only 10percent, from 34.2 to 31.1 million barrels per day.1’

Not surprisingly, most of the more developed na-tions are highly dependent on imports for their supplyof petroleum. Western Europe, for example, producedonly 12 to 14 percent of its domestic consumption.South Mrica and Japan imported essentially all oftheir petroleum (table 3). Even the United States,one of the world’s largest petroleum-producing na-tions, imported more than 50 percent of its petroleum.Furthermore, most of the less-developed, non-OPECnations depend largely on imports for petroleum sup-plies. Thirty-seven of these nations produced an aver-age of only 12 percent of their consumption. Amongthe non-OPEC nations, only Egypt, Syria and Mexicohave sizable quantities of petroleum exports, and thecombined exports of these countries totaled less than10 percent of U.S. imports in 1978. Given OPEC’spredominant position and the length of time requiredfor the exploration and development of petroleumresources or substitutes for petroleum, the slow re-sponse of output by the non-OPEC world to thehigher price of oil is to be expected. Hence, OPEC’sability to increase profits by restricting output is notsurprising.

WHY A U.S. GRAIN CARTELWOULD FAIL

The U.S. grain industry does not possess the attri-butes necessary for a strong cartel. Both the worlddemand for and supply of U.S. grain are relativelyelastic. On the demand side, the price elasticity offoreign demand for U.S. output of food and feed hasbeen estimated to be —1.9 in the intermediate run

~iMonthly Energy Review (December 1980), p. 90. These dataoverstate the inelasticity of petroleum demand at any onepoint in time since demand has been increasing (the demandcurve was shifting to the right) - Another factor contributingto the relatively high rate of oil consumption has been theprice controls which assured gasoline to U.S. and Canadianconsumers at less than world prices.

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FEDERAL RESERVE BANK OF ST. LOUIS APRIL 1981

Table 2Crude Oil Production and Exports, Selected Countries(millions of barrels)

Percent of PercentWorld Net of World

OPEC Members Production Production Exports Exports

Algeria 401.5 1.8% 366.0 3.2%Ecuador 74.8 0.3 44.8 0.4Gabon 917.9 4.2 870.3 0.6Indonesia 596.8 2.7 503.4 4.4Iran 1,898.0 8.7 1,645.4 14.3Iraq 918.0 4.2 870.3 7.6Kuwait 764.7 3.5 642.8 5.6Libya 720.9 3.3 677.0 5.9Nigeria 697.2 3.2 677.0 5.9Qatar 176.5 0.8 175.2 1.5

Saudi Arabia 3,027.7 13.8 2,612.7 24.5United Arab Emirates 667.9 3.1 663.1 5.8Venezuela 790.2 3.6 453.4 3.9

TOTAL OPEC 10,810.7 49.4 9,595.1 83.4

Other Major Producing Nations’

Argentina 165.2 0.8% 14.9 0.1%Australia 157.0 0.7 69.7 —

Canada 480.0 2.2 —127.5 —

Egypt 169.5 0.8 47.8 0.4Mexico 443.5 2.0 133.2 1.2Norway 127.2 0.6 71.8 0.6

Oman 115.0 0.5 115.0 1.0United Kingdom 394.2 1.8 —315.1 —

United States 3,178.1 14.5 —2,278.1 —

Sino-SovietArea 4,978.0 22.8 130.0 1.1TOTAL 10,207.7 46.7 —2,277.7 —

WORLD TOTAL 21,874.5 11,501.82

Those producing 100 inillic n l.i rrvis i mor p ‘1 3 ear

2 j citil exports

souRc:E: t ‘‘S. De~arlmenL if mne-gy. lntc,nau nai Petrol urn Annual 1978

thn e to Jour year ) and —0.-I in the longer rim. Thuc. b tsis of real prü CS. PC Ursoi i found ih,tt 1 perc ‘‘?ila pnet’ hi1~c of J. creel ii u C rId resu Ii in a ck’erc,isc- inc rc-ase in Ga- rc d p1 Ic’ ‘ oil, rn i prodia t lead LI’ in

F I .9 percent in quantity dciiiandc’d in three to f icr iuerea.e I about 1.5 1~~ ‘it iii Iota] \~or!! uiLpia.iC Lrs wd a (,. t penc it di ‘.rc a’c in the ]ole4er i iin. Similar rc suits hasc been observed in the Unif.,l

St ift’s. lor cx imple. one study lound that ~o _~ih

The supply ol grain is also rclahvclv elastic. On the

::jf Dud /,‘r I ,~ ~j 5~u, ,p,, n pt , I +r,,’n I \\‘ll-. . P I ‘ii. item hun,] I ri’ l’’ic’ ‘ ‘,. . ‘ia!/.‘ ul Thu’. ci, hi /,/n’- Inc/i. ~t ‘L,d. dii r’’r’,i . (‘‘‘lii (lii ~ Fcu I, !a,’’ .S’n’ i,.’, (ui-i. .1 il-

Liiivc-rsity. 967 pp. 360, ,t~. (oral I ow (lt’.rair~ !‘7’i’. pp fl—i

FEDERAL RESERVE BANK OF ST. LOUIS APRIL 1981

Table 3Self-Sufficiency in Grain and Petroleum Consumption (1978’)

Grain Consumption Petroleum ConsumptionMillion Production Production

Number of Metric as Percent of Number of Million as Percent ofRegion Countries Tons Consumption Countries Barrels Consumption

More-Developed Areas

United States 1 178.4 152% 1 6.579 46%Canada 1 22.6 183 1 634 76European Community2 9 119.3 95 9 4,010 12

OtherWestern Europe’ 5 43.7 84 8 1,018 14South Africa 1 9.2 110 1 107 0

Japan i ~ 35 1 1,877 0Oceania4 2 6.7 394 2 257 63

Centrally Planned Countries’ 10 564.2 97 10 4,376 100

OPEC Nations 13 59.4 73 13 817 1,323

Other Less-Developed NationsWith Grain Production of:

90,- percent of consumption 30 233.4 108 11 818 136

80-89 percent of consumption 13 70.7 73 1 57 8370-79 percent of consumption 6 11.2 76 0 — —

60-69 percent of consumption 7 8.1 64 0 — —

0-59 percent of consumption 21 36.1 51 37 1,395 12

I Petrok-um data for calendar year, nd grain data ( w heat, cnar~c-grain., amt ii i]]cd rat’ I for oi.irketi,g car I 97’S—79.

~BcIgium. Denmark, Franc-c-, West Cc’rmariv, lr,-la,al, I talj,-. l.uxc’iiiburrr, N.’ethc-rlands, Un ted Kirigdcnn3

Austria. Finland, Greece, Norway, Portugal. Spain, Sweden. Switzerland1Australia, Nnv Zealand

~AIliani’a. Bnlçaria. Czechoslovakia, East Cc-rummy, Hangar>, Poland. Rumaui-i. YugosIa~ii USSR China

Sot - LIrE I ~5. Departnieri ,,f /s ~, jculwrc’, c;l&~~dFood Asst’ ssua’nt, 1980, am] t~.S. Departmuc’nt of Em-, gv. InternationalPcjrolcu,r, Annual 1978.

1 percent increase in price, crop output would rise used since 1933 to raise farm prices and increase re-about 1.5 percent in the long run.14

turns to U.S. farmers for a number of major exportedcrops, such as wheat, cotton, tobacco and rice. TheseGiven the elastic erriort demand for and an elastic

- . . programs were successful in increasing farm profitsworld supply of gram in the long run, the effective- for a few years. The higher price of these commoditiesness of a U.S-enforced gram cartel in increasing urofits -

increased profits to the U.S farm producers and for-to U.S. farmers or to the nation for more than a yeareign producers, and food prices to U.S. and foreignor two is unhkely. In the longer run of four to fiveconsumers. However, these farm production control

years, such a cartel would be disastrous. and price support programs have been considered

failures by many people over the long run.15

Similar Policies Have Failed in the Past,

The United States has had some experience with The United States accounted for 62 percent of worldcartel-type policies in the farm sector. Production cotton exports and its share of world cotton produc-restrictions and commodity loan programs have been

15See, for example, George Leland Bach, Economics: An Intro-

iiLuther C, Tweeten, Foundations of Farm Policy (Lincoln: duction to Analysis and Policy, 8th ed. (Englewood Cliffs,University of Nebraska Press, 1970), p. 244. New Jersey: Prentice-Hall, Inc., 1974), pp. 292~3O3.

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FEDERAL RESERVE BANK OP ST. LOUIS APRIL 1981

hon had risen slightly during the 10 years prior to theadoption of these programs for cotton in 1933 (table4). Following the adoption of the cotton program, theUnited States became the residual supplier of cotton(as OPEC has become the residual supplier of oil) -

Other cotton-exporting nations such as Mexico, Peruand Egypt sold all of their cotton output at the higherworld prices, while the United States exported theremainder of world imports. The higher world cottonprice predictably induced other nations to increasecotton production and induced consumers to increasetheir use of cotton substitutes such as rayon and othersynthetic fibers.

The higher price likewise induced U.S. growers toincrease domestic cotton production. Production con-trols were necessary to limit output to domestic con-sumption and export levels at the fixed prices. As aresult of this program, the U.S. share of world cottonproduction declined steadily, dropping from 56 per-cent in 1930-32 to 42 percent in 1940-42, 36 percentin 1950-52, 31 percent in 1960-62 and 20 percent in1970-72. Exports declined from 8.4 million bales in1930-32 (62 percent of world exports) to 4.4 millionbales in 1952 (36 percent of world exports) .‘~

The International Wheat Agreement, initiated in1949 and renewed at intervals until 1965, resulted inan organization that included both net-exporting andnet-importing nations.’7 The stated purpose of theagreement was to stabilize the price and quantity ofwheat in international trade. Originally, each exporterwas to furnish a specific quantity of wheat for exportand each importer to purchase a specific quantity. Theorganization soon evolved into a cartel with the UnitedStates and Canada as the price leaders. The UnitedStates supplied the residual wheat demanded at thespecified price. The cartel broke down in 1964, whenthe United States decided to regain the Japanese mar-ket captured earlier by the Canadians. Although U.S.production controls and price supports to farmers weremaintained, the breakdown of the cartel and a reduc-lion of U.S. wheat prices were quickly followed byaccelerating U.S. wheat exports. U.S. wheat exportsthrough commercial channels had averaged 141.2 mil-lion bushels per year during 1955-59, 12 percent oftotal world wheat exports. By 1964, when the cartelwas dismantled, such exports totaled 157.7 million

‘°U.S,Department of Agriculture, Statistics on Cotton and Re-lated Data 1920-1973 (GPO, 1974), pp. 40 and 49-50.

175ee Alex MeCaila, “A Duopoly Model of Wheat Pricing,”Journal of Farm Economics (August 1966), p.71’. The U.S.wheat surplus that could not be sold at the established pricewas transferred to the less-developed nations through majorgovernment subsidy programs.

Table 4

World Production of Cotton(annual average 1,000 bales)

United States asProduction Pencent of World

United Foreign Produc-States Countries tion Exports

1920-22 10,376 8,497 55.0% 57.1%

1930-32 14,677 11,439 56.2 62.31940-42 12,042 16.776 41.8 23.61950-52 13,434 23.441 36.4 36.01980-62 14,449 31.860 31.2 31.61970-72 11,378 44,967 20.2 22.3

SolIICL: 15.5. l)t’p;utmmn’nt of Amzncimlt mr,. ~Jahi.stic onC, ilti,,, a,,il H, ‘fated Data 1020— I .973. C )cWhir974. W a,hin~tnn. D.C.

bushels, only 9 percent of world wheat exports. By1970, such exports had risen to 508.0 million bushelsor 26 percent of world wheat exports.’8

A grain cartel composed of a number of the majorgrain-producing nations might increase profits fromgrain exports for a somewhat longer period than theU.S. could acting alone. However, within a few years,demand for the cartel-produced grain would becomemore elastic, profit from grain sales by the cartelwould decline sharply and the problem of allocatingproduction among the nations would become moreintense.

- . the Potential for PunishingOPEC Nations Is Limited.,.

A U.S-sponsored grain cartel will not succeed inpunishing OPEC because there is a relatively smalldemand for grain imports in most OPEC nations. In-comes in some OPEC nations are sufficient to pur-chase large quantities of grain. Most OPEC members,however, have relatively small populations and/orsmall per capita incomes and, hence, relativelysmall demand for grain; those with large populationssuch as Algeria, Indonesia, Iran, Iraq and Nigeriahave relatively small incomes per capita, and graindemand is relatively small because of low income(table 5). In contrast, Saudi Arabia with a population

iSU.5, Department of Agriculture, Agricultural Statistics, (GPO,

1966 and 1972).

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FEDERAL RESERVE SANK OF ST. LOUIS APRIL 1981

Table 5

Population and Per Capita Income,Selected Nations

Per Capita

OPEC Population’ Income2

Algeria 16,145~000 $ 780Ecuador 7783000 741Gabon 637,000 3 725indonesia 148,085,000 304Iran 37,430,000 1,986Iraq 12906,000 1,861Kuwait 1,277,000 11,431

Libya 2 920,000 6,335Nigeria 74 595,000 682

Qatar 210,000 12,500Saudi Arabia 9,292,000 6,089United Arab mmrates 871,000 11 000Venezuela 14,529~00 2,772

Other Nations

Argentina 27,210 000 1,388Australia 14,417 000 7,515

France 53,478,000 7908Italy 58,877,000 3,076United Kingdom 55,901 000 4955United States 222,020 000 8 612West Germany 81,302,000 9 278

‘Data are 1980 tim tes for the Unit d State and 1979e timat for all others.Years for which est, ates wer made vary from 974 forQatar to 1978 for nine n t,ons.

SOURCE’ The Wo Id Almanac and Book of Facts 1981

of 9.3 million and an income per capita of $6,089has both a relatively large population and high in-come per capita; \ enezuela with a 14.5 m’llion

opulation is likewise not far b hind WesternEuropean ations with per capita inco e of $2 772.

ommercial demand fo~ ‘mported grain by thgroup is a relatively small portion of the wo Id total.n 1978, the 0 EC nations consumed o y 59 milliet ic tons of grain less than one-thiS of .8. co -

s mp ion, and they p oduced almost three-fou hs ofair consumptio domestically, imporf g on y a out

6 illio metnc tons. A this 1ev 1 of imports t eap oxi ate grain price t at a a el ould a e to

rg ~n r ~t ffsetth ealthtancf rsa hie ed

20

by OPEC would be astronomical. U.S. petroleum fin-ports from the OPEC nations totaled about 1.6 billionbarrels lii 1980, which cost about $34 per barrel andtotaled about $54.4 billion. In 1973, prior to the car-tel, imports from OPEC totaled about 1.1 billion bar-rels, which at $2 per barrel totaled $2.2 billion. Ex-cluding the impact of inflation, the cartel gained $52.2billion in revenue from its petroleum sales to theUnited States alone.

In early 1973; a bushel of wheat and a barrel ofpetroleum were selling for about the same price ($2);hence, if a food cartel attempted to maintain thisrelationship, it would require a wheat price from theOPEC nations of about $34 per bushel or about eighttimes the January 1981 average of $4.21. The 16 mil-lion metric tons of grain imports (588 million bushels)by OPEC (assuming it was all wheat and all suppliedby the United States) totaled only $1.2 billion in reve-nue at the $2 per bushel price. Even at $34 per busheland with no change in bushels purchased, revenueswould total only $20.0 billion. Thus, the gains fromthe grain cartel ($20.0 billion — $1.2 billion) of $18.8billion would still be less than two-fifths of the OPECrevenue gains of $52.2 billion ($54.4 billion — $2.2billion). To offset this level of OPEC gains wouldrequire a wheat price in excess of $100 per bushel.

Furthermore, if the objective of the grain cartel isto offset total OPEC gains, it would require an evenhigher wheat price. Assuming that 83.4 percent of 1980OPEC petroleum production was exported (the samepercent as in 1978), exports would have totaled 8.24billion barrels. At $34 per barrel this equals $280.2billion in revenue compared with 9.42 billion barrelsat $2 per barrel or $18.8 billion in 1973. This differ-ence in OPEC’s revenue of $261.4 billion would re-quire a wheat price to OPEC of $445 per bushel.’°

- , .And a U~S.Grain Cartel WouldCause Famine in Sonic NationsOne factor generally ignored in a discussion of an

anti-OPEC grain cartel is its impact on the well-beingof the non-OPEC world, especially the less-developedareas. As this nation has recently discovered with itsRussian grain embargo, it would be futile to attemptto sell grain only to the OPEC nations at cartel prices.If a U.S.-sponsored grain cartel sold grain at lowerprices to non-OPEC areas, the OPEC group wouldbuy the grain from these other nations at a lower

iiMiddle East Oil, p. 26; U.S. Department of Agriculture, U.S.Wheat Industry, Agricultural Economic Report No. 432(August 1979), pp. 51-52; and Monthly Energy Review.

FEDERAL RESERVE BANK OF ST. LOUIS

price while reducing their purchases from the graincartel.

There are only two ways to deal with this problem.One way is to have a grain cartel consisting of allnon-OPEC nations of the world. But just as with theoil cartel, every nation, especially the less-developedones heavily affected by OPEC price increases, wouldhave a tremendous incentive to remain outside thecartel. They could then sell the OPEC nations alltheir wheat at a price slightly below the carters price.The other possibility of a successful grain cartel, evenin the short run, is for a few nations to somehowlimit total world exports. This policy would causestarvation and famine in many non-OPEC nations.Although OPEC has largely ignored its impact on thewell-being of non-OPEC nations, this is not an accept-able political possibility for the United States.

SUMMARYForming a grain cartel to retaliate against OPEC’s

oil cartel would be ineffective. The OPEC cartel hasbeen successful because of special supply and demandconditions for petroleum, which assured an increasein profits to cartel members when production wasrestricted.

A grain cartel composed of the United States alone

APRIL 1981

or the United States and a few other leading food-exporting nations would not succeed. Although itmight raise world grain prices and increase profits tothe cartel members for a year or two, the higherprices would soon lead to increased production in therest of the world and sharp reductions in the quantityof grain exported by the cartel members. Hence, reve-nue to the cartel would soon decline to less than pre-cartel levels.

Moreover, the United States and other nations havehad unfavorable experience with cartel-type farm ex-port programs. Attempts to maintain cotton prices atartificially high levels after 1932 resulted in reducedexports as the United States became the residual sup-plier, while other producing nations profited from ourproduction control and price support programs. Simi-larly, the International Wheat Agreement collapsedunder increased competition by member nations.

Another factor limiting the ability of a food cartelto punish OPEC is that a food cartel cannot be effec-tive without doing great injury to people in less-devel-oped nations. Attempts to provide less-developed,non-OPEC nations with food on more favorable termsthan the rest of the world would result in reshipmentto OPEC members, thereby nullifying the objectivesof the cartel. A food cartel would, thus, reduce foodsupplies for the near destitute masses of people in theless-developed nations.

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