April 14, 2004-7
Copyright © 2004 Earth Policy Institute
SAUDIS HAVE U.S. OVER A BARREL
The Shifting Terms of Trade Between
Grain and Oil
Lester R. Brown
In 1970, a bushel of wheat could be
traded for a barrel of oil in the world market. It now takes nine
bushels of wheat to buy a barrel of oil. The two countries most
affected by the dramatically shifting terms of trade between grain
and oil are the United States and Saudi Arabia.
The United States, the world's largest importer
of oil and its largest exporter of grain, is paying for this shift
in the wheat-oil exchange rate with higher gasoline prices. The
nine-fold shift is also driving the largest U.S. trade deficit in
history, which in turn is raising external debt to a record level,
weakening the U.S. economy. In contrast, Saudi Arabia, the world's
leading oil exporter and a high-ranking grain importer, is benefiting
handsomely.
During the early 1970s before the oil price
hikes by OPEC, the United States largely could pay its oil import
bill with grain exports. But in 2003, grain exports covered only
11 percent of the staggering U.S. oil import bill of $99 billion.
While the exchange rate between grain and oil was deteriorating,
U.S. domestic oil output was falling and oil consumption was rising,
which means that oil imports were climbing. In 2003, oil imports
accounted for 60 percent of total use.
The shift in terms of trade between the
price of wheat, a surrogate for grain prices, and that of oil, is
both dramatic and ongoing. From 1950 to 1973, the prices of wheat
and of oil were remarkably stable as was the relationship between
the two. At anytime during the 23-year span, a bushel of wheat could
be traded for a barrel of oil in the world market. (See
and .)
The first big adjustment between oil and
wheat came when OPEC tripled the oil price at the end of 1973. During
the 1974-78 period, it took roughly three bushels of wheat to buy
a barrel of oil. Then in the years after the second OPEC oil price
hike, which boosted the price of oil from $13 per barrel in 1978
to $30 per barrel in 1979, it took seven bushels of wheat to buy
a barrel of oil.
This steep rise in the buying power of oil
led to one of the most abrupt transfers of wealth in history. The
coffers of major oil exporters, such as Saudi Arabia, Kuwait, and
Iran, began to overflow with dollars even as those of many oil-importing
countries were being emptied.
In response to higher prices, world oil
production outside OPEC expanded, thus loosening OPEC's grip on
prices. Between 1985 and 1986 the price of oil dropped by half.
From then until 1999, it took on average five bushels of wheat to
buy a barrel of oil. During 2000-2003, it took seven bushels of
wheat to buy a barrel of oil. Now in early 2004 it takes nine bushels.
What will happen to the wheat-oil exchange
rate in the years ahead, no one knows for sure. In contrast to grain
production, which can continue indefinitely, oil production is going
to peak and decline at some point, probably within the next 5 to
15 years.
Exactly when it peaks depends on the depletion
strategies adopted by the major oil companies and oil exporting
countries. If they decide to stretch their dwindling reserves by
lowering production to extend the lifetime earning period of their
oil fields, then the peak will come later. But if they are preoccupied
with boosting near-term sales, oil production may rise more rapidly,
hastening the day when output will peak and start to fall.
Even as we anticipate the peaking of petroleum
production, oil use continues to rise, especially in countries like
China and India that are industrializing at a breakneck pace. China
has already eclipsed Japan as an oil consumer, moving into second
place behind the United States.
The United States is pressing the Saudis
to produce more oil, but the answer is not for the Saudis to produce
more, but for the United States to consume less. Even though the
OPEC-engineered oil price hikes have signaled a need to use less
oil, the United States has been rapidly expanding its fleet of gas-guzzling
SUVs, boosting oil use and imports.
Even as U.S. dependence on Middle Eastern
oil is rising, so too is political instability in the region. The
growing insurgency in Iraq could spread to other oil-exporting countries,
disrupting oil supplies. If ever there was a time to get serious
about boosting auto fuel efficiency, it is now.
There are many steps that the United States
can take to reduce oil use with existing technologies. For example,
the new cars with hybrid gas-electric engines, such as the Toyota
Prius and the Honda Civic, are remarkably fuel-efficient. The 2004
Prius averages 55 miles per gallon (mpg) in combined city and highway
driving, double or even triple that of other midsize cars.
If the United States were to raise the fuel
efficiency of its automobile fleet over the next 10 years to that
of the Toyota Prius, U.S. gasoline consumption could be cut in half.
This would not require any reduction in the number of cars, only
the use of more efficient engines.
The gas-electric hybrid cars may represent
the most sophisticated automotive engineering on the road today.
In effect, what the engineers who designed the hybrids have done
is to substitute advanced technology for fuel.
The obvious next step is to modestly expand
the electrical storage capacity of the gas-electric hybrids so that
owners can plug in their hybrids to recharge the batteries during
the nighttime hours when electricity demand drops. Short commutes
could be powered entirely by electricity saving the gasoline for
the occasional longer trips. This would enable the United States
to substitute cheap wind-generated electricity for gasoline, further
reducing gasoline use.
Shifting to more electricity in the hybrid
engine fuel mix opens profitable new investment opportunities in
developing the vast U.S. wind resources. According to the U.S. Department
of Energy, the United States has enough harnessable wind power to
satisfy total U.S. electricity needs several times over. And U.S.
wind-generating capacity is growing fast. Between 1995 and 2003,
it increased from 1,600 megawatts to 6,400 megawatts, quadrupling
in five years.
The advances in wind turbine design that
offer cheap electricity from wind help explain why some 22 states
now have commercial scale wind farms pumping electricity into the
local grid. With a renewal of the wind production tax credit, which
is designed to establish parity with the subsidies for fossil fuels,
growth could be even faster in the years ahead, creating thousands
of new jobs.
We have spilled more than enough blood and
spent more than enough of our treasure to protect access to oil
supplies in the Middle East. RAND Corporation analysts calculate
that even in peacetime it costs at least $30 billion per year to
maintain the U.S. military presence needed to assure access to the
region's oil. It is time for a change.
Unless the United States assumes a leadership
role, Saudi Arabia will continue to dictate the terms of trade between
oil and grain. This means they also will dictate U.S. gasoline prices.
The United States, as the world's largest oil consumer and importer,
can regain some influence on oil pricing by sharply reducing its
dependence on oil. This would also delay the day when oil production
peaks, buying the world time for a smoother transition to the post-petroleum
era. The United States has the technologies and energy resources
to lead this effort. What the world needs today is not more oil,
but more leadership.
Copyright
© 2004 Earth Policy Institute
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FOR ADDITIONAL INFORMATION
From Earth Policy Institute
Lester R. Brown, Plan
B: Rescuing a Planet Under Stress and a Civilization in Trouble
(New York: W.W. Norton & Company, 2003).
Lester R. Brown, Janet Larsen, and Bernie Fischlowitz-Roberts,
The Earth Policy Reader (New York: W.W. Norton & Company,
2002).
Lester R. Brown, Eco-Economy:
Building an Economy for the Earth (New York: W.W. Norton
& Company, 2001).
Lester R. Brown, "Europe Leading World into Age
of Wind Energy," Eco-Economy
Update, 8 April 2004.
Lester R. Brown, "OPEC has World Over a Barrel Again,"
Eco-Economy Update, 8 September
2000.
From Other Sources
American Wind Energy Association, Wind
Energy Projects in the U.S.: A State-by-State Breakdown
of Existing and Planned Wind Energy Projects (Washington, DC, updated
January 2004).
BP, Statistical
Review of World Energy 2003 (Egham, United Kingdom: June
2003).
Environmental Protection Agency, Light
Duty Automotive Technology and Fuel Economy Trends: 1975-2003
(Washington DC: April 2003).
U.S. Department of Energy and EPA, Fuel
Economy Guide (Washington DC: 2004).
LINKS
American Wind Energy Association
http:/www.awea.org
BP
http:/www.bp.com
International Monetary Fund
http:/www.imf.org
United States Department of Agriculture
http:/www.usda.gov
United States Environmental Protection Agency
http:/www.epa.gov
Worldwatch Institute
http:/www.worldwatch.org
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