An Opium Market Mystery
Mr. Costa raises a very interesting mystery:
Something strange is going on in the global opium market, and it could spell trouble.
Opium is a commodity -- an illegal commodity, but it should still be subject to the normal rules of supply and demand.
Annual demand for opium is approximately 4,500 tons. Last year a record 6,100 tons were produced in Afghanistan alone. That country's production is 30 percent more than total world demand. Heroin prices should, in theory, be plummeting. But they are not. So what is going on?
Does opium defy the laws of economics? Historically, no. In 2001, prices surged tenfold from 2000, to a record high, after the Taliban all but eliminated opium poppy cultivation across the Afghan territory under its control. So why, with last year's bumper crop, is the opposite not occurring? Early estimates suggest that opium cultivation is likely to increase again this year. That should be an added incentive to sell.
Yet prices seem to be resilient. The (unweighted) national average price of dry opium at the farm gate in Afghanistan is dropping, but not significantly -- it was $125 per kilo in December 2006 compared with $150 per kilo a year earlier. Prices differ across the country, not surprisingly, since Afghanistan is not a unified territory or market, even for opium. But overall, the drop in prices is modest when compared with the massive increase in opium production, 50 percent, in 2006.
I agree with Mr. Costa that this is quite unusual. To date, opium markets have indeed acted like traditional supply and demand markets. I might also add that the worldwide opium market is quite different than the cocaine market. While cocaine is produced only in Andean Ridge countries, opium can be (and is) produced in several countries throughout the world. Indeed, much of the heroin that finds its way into the United States is grown in Latin America. Traditionally, the diffuse nature of the opium market has made it far less amenable to supply-country strategies than cocaine.
Here is Mr. Costas theory for why the opium market is acting so strangely:
So where is it? I fear there may be a more sinister explanation for why the bottom has not fallen out of the opium market: Major traffickers are withholding significant amounts.
Drug traffickers have a symbiotic relationship with insurgents and terrorist groups such as the Taliban and al-Qaeda. Instability makes opium cultivation possible; opium buys protection and pays for weapons and foot soldiers, and these in turn create an environment in which drug lords, insurgents and terrorists can operate with impunity.
Opium is the glue that holds this murky relationship together. If profits fall, these sinister forces have the most to lose. I suspect that the big traffickers are hoarding surplus opium as a hedge against future price shocks and as a source of funding for future terrorist attacks, in Afghanistan or elsewhere.
I think that Mr. Costa is headed in the right direction, but I think that he misses the larger (and more dangerous) implication of his theory. For, if he is right that supply is being curtailed by major suppliers, it is highly likely that a dominant force or an organized cartel is controlling the supply of opium. An unorganized group of suppliers will simply not horde opium to keep prices up. The temptation to cheat is simply too big. There must be a more organized effort. Who is behind this? I fear that al Qaeda or the Taliban could be a the resurgent Taliban are likely suspects.
So what is the solution? In my view, the only dependable and workable policies are demand-side strategies. The large majority of opium is consumed by a relatively small number of addicts. If we want to cripple the heroin trade, we need to make a serious investment in treatment. Addiction is a treatable but chronic and recurring disease. If we want the number of addicts to go down, we need to treat addicts. It is that simple.
Okay, back to faith.
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