The Prices of Milk and Oil

By Jawad Ali

Prince Bandar, the Saudi ambassador in DC, has been in the news lately. Bob Woodward’s latest book reveals that Bandar offered to lower Saudi oil prices later this year to help Bush win the election. Bandar was quick to defend himself, but not by saying that he would never stoop so low. His defense was to shrug it off with a: sure I do this sort of stuff all the time, what’s the big deal.

This raises some very interesting questions that we will not attempt to answer here. Chief among them is how did the house of Saud become the model for moderate Islam, and its very opposite, both at the same time? Do Israeli missiles that land on Palestinian homes have a tiny “Made in Saudi Arabia” sign right underneath the bolder “Made in USA” one? How come George Bush is still the darling of conservative Muslims, but Ariel Sharon gets no love from them? We are going to skip right past these tough questions and go directly to the price of oil.

Apparently, dropping oil prices to help American politicians is Prince Bandar’s full time job. He first came to prominence in D.C by dropping the oil price for Jimmy Carter. Apparently this is also no big secret in D.C, so the prince’s confession did not make the front page of any newspaper that I saw. Yesterday’s San Francisco Chronicle did however have a front page story about how California has fixed the wholesale price of crude milk at a whopping buck eighty-five a gallon, a whole fifty cents above the previous level.

Many years ago I took a summer school class in Economics. My professor was an unabashed free market capitalist. Oddly enough, he was from Iraq. One day he lectured us on the futility of price fixing and how the God-like hand of free markets will eventually punish and destroy all price cartels. He used OPEC as an example of a fake, evil and ultimately futile price-fixing cartel. The cartel will never be able to sustain a high price for oil because the divine forces of the free market will provide enough incentives for one of its members to cheat and bring oil prices back to their natural levels, he argued.

I brooded over this for the rest of the day. The next day I found enough time during the mid-term exam to write him a meandering and long winded rebuttal. It seemed to me that there was price-fixing cartel of oil buyers that was far more important and powerful than the famous but wimpy OPEC. The real cartel used sanctions, coups, invasions, assassinations and super-power militaries to enforce its price. The main difference between terrorists and freedom fighters, between fundamentalists and moderates, is their willingness to kneel before this mighty cartel.

The un-named oil buying cartel is absolutely and completely successful and dominant. It not only spanks the puny and cowering oil kingdoms, but it spits in the face of the almighty god of supply and demand.

Gas was under a dollar for a gallon that summer (I am old, remember). How can that be the natural free market price for a precious fossil fuel that exists in finite and dwindling quantities, I wondered. It takes millions of years for mother nature to replace it. It is fabulously expensive to extract. The industrial processes to refine it are some of the most expensive in all industries. It is a hazardous and toxic material that has to be lugged clear across the global through some of the most dangerous regions of the world. How can one dollar a gallon be its fair market value.

Simple bottled water, without bubbles, costs more than that. So does milk. And beer. One can go across the block from the classroom and get a half gallon pitcher of beer at Kip’s Restaurant for a buck seventy five. My extensive (academic) research had shown that that was the cheapest pitcher of beer in all of Berkeley that summer, within walking/staggering range. Beer, water and milk can be produced/replaced/refined quickly, cheaply and locally. The fair market value of oil ought to be somewhere between the price of antique mahogany and polished diamonds, I postulated. Hail the mighty cartel!

He gave me one whole extra point (out of a 100) for my “interesting conspiracy theory.” To this day I wonder about the fair "market" price of oil.