Wednesday, November 22, 2006

the economics of the heroin trade

I've been trying to understand some of the economics of the heroin trade. Lehrer did a piece yesterday about the poppy business in afghanistan.

If we take the story at face value, they discuss a farmer, Ahmed Ollah, who " is a small farmer, just a couple of acres." Ahmed sells his 800kg of opium at the farm door for about $40/kg = $30,000. The opium gets trafficked into Iran and turned into 'potentially' 80kg of heroin; street value in Europe, approx $7 Million.

Does anyone have a good idea of the economics of what happens between the farm gate and the street?

2 comments:

starroute said...

A little googling turns up a good article from 2002 by Matthew Brzezinski. It's got a really nice, step-by-step explanation of where the price hikes come in and how much they amount to:

Sept. 11 and its new world of heightened border controls has made decentralization doubly important for international smuggling networks, be they Chinese, Colombian, Turkish or Nigerian. Ever since the big Cali and Medellin cartels were wiped out nearly a decade ago, virtually the entire narcotics trade has radically slimmed down. . . .

The modest price of the China White they carried illustrates how in the overall cost structure of the heroin industry, refining is not a particularly large profit center. . . . The real profits in heroin, to borrow a term from the embattled accounting industry, are all downstream -- in transportation and distribution. . . .

In fact, most of the foreign buyers are West Africans -- Nigerians, to be precise -- who tend to stick out in the Thai provinces even more than Agent Carter does. They prefer the more cosmopolitan anonymity of Bangkok and are prepared to pay for the added security. In the Thai capital, the local middlemen charge between $7,500 and $9,500 to deliver each kilo of heroin, depending on the quantity ordered. West Africans are not the only foreign customers; there are smugglers from Taiwan and Europe. But the Nigerians are by far the most organized and entrenched group. Their job in heroin's ever-lengthening supply chain is also among the riskiest: to get the heroin into the United States. . . .

The drug runners breach every United States frontier, but one of their main targets is San Ysidro, Calif., America's busiest border crossing, the fragile demarcation line that separates San Diego from the smuggler's paradise of Tijuana. Between a quarter and a third of the heroin, cocaine and marijuana entering the country passes through here and four smaller checkpoints in Southern California, and on a good day the Customs Service can hope to make at least a dozen decent-size seizures. . . .

One sure sign of the high regard in which traffickers hold San Ysidro's defenses is the risk premium attached to making it across. If getting heroin into China or Thailand bears a markup of $1,000 per kilo, here it's a different story altogether. After it makes the 100-yard journey across the border, a kilo of Black Tar will soar in value to $54,000 once safely on the San Diego side. Colombian heroin will rise by as much as 20 times once it gets to Los Angeles. And China White will command well into the six figures once it reaches American soil. . . .

With its high market value, heroin is ideally suited to traveling tens of thousands of miles, crossing countless borders. It requires far smaller networks to smuggle than the big organizations needed for cocaine or marijuana. And spreading loads over dozens of individual couriers minimizes risk. . . .

Heroin traffickers tend to operate more like highly compartmentalized terrorist cells than multinational corporations or the sprawling Colombian cartels of the Pablo Escobar era. But that's also the case, increasingly, across the entire narcotics industry. "This type of activity does not allow concentration of power like legitimate commerce,'' says Ethan Nadelmann, an economist and drug-policy expert. ''If smugglers get too big, they develop security and personnel problems and get targeted by law enforcement."

lukery said...

(you rock. thnx)