The discovery of oil as a source of energy has fuelled
economies the world over. The radical
improvements to agriculture, manufacturing, textiles, construction, and
transport made possible by the exploitation of this incredible natural resource
has drastically improved the quality of life for everyone on the planet since
the beginning of the 20th century.
The fact that this transformation was brought to us by the world’s oil
industry is a great credit to them and should not be forgotten. However, that is probably the last nice thing
I am going to say about the industry.
What follows is the dissection of a bloated, greedy and dying industry
that perpetuates global and societal inequity and environmental degradation for
the benefit of a very few.
Investigative journalist Ken Silverstein’s “The Secret World
of Oil” illuminates the dark corners of this guarded industry. In an attempt to distil some of the more
interesting points in the book I’ll discuss the oil industry in relation
to countries, middlemen and then derivative markets.
Countries
When the “Seven Sisters” (comprising the Anglo-Persian Oil
Company (now BP); Gulf Oil, Standard Oil of California (SoCal), Texaco (now
Chevron); Royal Dutch Shell; Standard Oil of New Jersey (now Esso) and Standard
Oil Company of New York (Socony) (now Exxon Mobil)) exploited the world’s oil
fields in the mid-1900s, the majority of the world’s oil rich nations (Algeria,
Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE
and Venezuela) banded together to counteract the Seven Sisters power to pillage
their natural resources while failing to share revenue, transfer technology or
clean up their mess.
In hindsight, this was the creation of Frankstein’s monster:
OPEC (the Organisation of Petroleum Exporting Countries). OPEC now operates as a legal price-fixing
cartel, only held legal by the fact they are countries rather than private
entities (and thus benefitting from the law of sovereign immunity). Had any collection of private entities banded
together so blatantly to manipulate the price of a commodity (and in this case,
perhaps the most important tradable commodity in the world), national and
international competition authorities (such as the UK’s Competition and Markets
Authority, the US’s Federal Trade Commission, or global organisations such as
the OECD, WTO or G8) would have come down on them with serious punitive
measures to destroy their ability to pervert the market for their own
gain. Instead, OPEC now sets the price for
just under 42% of the world’s oil supply, heavily distorting the global market
and contributing to a market that is rife with corruption.
At the time of writing, oil is trading at its lowest price
in years. Counterintuitively OPEC has
chosen to use its power by publicly stating that they will maintain current production
levels, sending the price of oil plummeting (news link)
(don’t be fooled though, this is no act of charity, it is a power move designed
to decrease the profitability of the current US boom in oil production (via
shale) – they will collude to raise the price again once it is over).
In doing so, OPEC members utilize the basic economic laws of
supply and demand, and I have no problem with that. Any single resource provider/exporter has the
right to restrict production in order to reduce market supply (however, when doing
so they do incentivise the development of substitute goods – in this case,
renewables or nuclear) but acting in unison is always anti-competitive and
drives the price up for consumers. The
US has approximately 12% of the world’s oil supply (Russia (12%), China (5%),
and Canada (4%) being the other large, non-OPEC producers), but the government
has far less control over the private entities that do the drilling. Consequently, the justification that the OPEC
cartel is legal because the members are nations (and thus the benefit is theoretically
shared with each country’s populace) is quickly discredited once you realise that
the countries in OPEC have historically been run by autocratic dictators who
persistently embezzle their oil revenue, for their own greed, rarely applying
the funds to address the issues of insufficient infrastructure, poor healthcare
and poverty that run rampant in these countries.
In developed nations, if you want to drill for oil you
negotiate a licence with each local landowner, provincial or state authority
and pay him royalties. In the Third
World, power is concentrated in the hands of a dictator or a small group
because mineral resources are typically owned by the head of state. Perversely, a strongman president, using an
inherently centralized process is great for oil companies as it is a lot easier
to win support from the top than to build from the bottom.
Consequently, the leaders of oil rich nations rank among
some of the richest people in the world, but lead some of the world’s poorest
countries. Look up any of the following:
Omar Bongo (Gabon), Mobutu Sese Seko (Zaire), Sami Abacha (Nigeria), Teodoro
Obiang (Equatorial Guinea), Laurent Kabila (Congo), Nursultan Nazarbayev (Kazakhstan),
Huh Sen (Cambodia), Ilham Aliyev (Azerbaijan), Islam Karimov (Uzbekistan), Garbanguly
Berdimuhamedov (Turkmenistan). The
reason you haven’t heard of them is because their populations are kept so poor
and isolated that they do not possess the means to be heard and because it
works for the oil companies to keep it that way. Furthermore, if you do hear their names, they
constantly hire lobbying and PR firms to ensure negative press is quickly spun
in a positive light.
Silverstein goes to great lengths to unveil this gross
corruption by highlighting the excesses of Teodoro Obiang, the son of
Equatorial Guinea’s leader by the same name (who ousted his uncle in a violent
military coup to become president in 1979). Jr. lives a lavish lifestyle in LA,
chartering private jets, dating playboy bunnies, buying sports teams, mansions
and fleets of sports cars (the guy would be a hilarious caricature if it
weren’t for the corruption that led to his embezzling of roughly $600 million) while
Equatorial Guineans suffer horribly with rampant human trafficking, suppression
of the media, half of the population having no access to clean water and 1 in 5
children dying before the age of five. It is abhorrent that the country’s oil-wealth
has led to huge personal wealth for a few individuals while the country lives
in poverty. It is equally deplorable
that major world-powers have refrained from standing up to Obiang for fear of
losing access to Equatorial Guinea’s 0.4% of the world’s oil (Condoleeza Rice
calling Obiang Sr. a “good friend” in 2004 and Obama inviting him to the
Whitehouse in 2009).
The embezzlement of these funds has been made possible by a
select group of countries who have chosen to turn a blind eye when it comes to
banking. The fact that the Cayman
Islands, Panama, Switzerland and even a great majority of American states have
enacted laws stating that it is not necessary for companies to disclose their
beneficial owners (as opposed to their registered owners, who serve as fronts)
allows these leaders to hide their ill-gotten gains and perpetuate the cycle.
Middlemen
It is clear that despotic presidents and oil companies have
fared very well from the status quo, and I believe that is largely common
knowledge if you’ve taken a passing interest in geopolitical affairs over the
last few decades. However, what
Silverstein does a great job of uncovering is the vast wealth this has created
for middlemen.
Because oil companies are cash rich, but opportunity poor,
the competition to become friends with leaders has become intense. Consequently the crucial question becomes:
how do you beat your competition to the key decision makers? That’s where “fixers”
come in. Fixers make introductions and
broker deals between states and companies.
Again, look up any of the following: James Giffen, Jamal
Daniels, Friedholm Eronat, Marc Rich, Hany Salaam, Fouad Ajami, or Gilbert
Chagoury. You won’t know their names,
and they have worked hard to keep it that way.
They trade world leaders and oil company executives like baseball
cards. Their service is like that of a
concierge at a fancy restaurant; tip them and you will get the table you wanted
(except this tip is millions and/or stocks, options, diplomatic immunity,
etc.).
These are men of impressive commercial acumen and political
opportunism, but I struggle with the morality of their motives. Silverstein illuminates his subject by
focusing on two in particular: Ely Calil and Marc Rich.
Ely Calil, a Nigerian born man of Lebanese descent, pushing
70 years old, now lives in London after having spent the majority of his career
fixing oil deals for Mobil in Russia, Kazakhstan and Nigeria. Arranging introductions, and quite often
taking healthy cuts of deals for himself, has been good to Calil who was
well-known for counting Severo Moto (the leader of Equatorial Guinea before
Obiang), King Abdullah II (Jordan) and Peter Mandelson as some of his closest allies
in the past. Rather than shoehorn my own
incomplete opinion into this review, I have chosen a few choice quotes from his
interviews with Silverstein to illuminate Calil’s perspective of his role
within the oil industry:
“Corruption isn’t endemic in the
energy business because people in the industry are more corrupt or have lower
morals but because you’re dealing with huge sums of capital…A million dollars
here or there doesn’t make any difference to the overall economics of a
project, but it can make a huge difference to the economics of a few
individuals who can delay or stop or approve the project.”
“There used to be about 40 people
who ran the oil-trading business, but then the world got bigger, especially
when the oil market boomed and the hedge funds came in, but it’s still a pretty
small group of people.”
“From a strictly legal
standpoint, there was nothing strictly illegal about it. It has become illegal now…Was it legal?
Yes. Was it moral? I don’t know.
But business isn’t about not making money. I’m not a philosopher, but the law is there
to be tested. If you’re on the wrong
side you should be sanctioned, and if you’re not you should be left alone. Americans want their gasoline cheap, but it’s
not possible without cutting a few corners.”
“Oil is not a commodity, it’s a
political weapon.”
“There’s no way to do business in
the Third World without enriching government leaders.”
I would not classify Calil in the same bracket as the
dictators he chooses to keep for company and trade for his living. He took advantage of a commercial opportunity
by simply introducing people; what those people did after the introduction was
not under his control. But he is
certainly an enabler and another example of an individual who become disproportionately
wealthy from (and thus indirectly contributed to the poverty perpetuated by) the
oil industry.
While stronger anti-bribery laws have reduced the clout of
fixers in recent years, they continue to outpace and outsmart regulators. Rather than directly funnelling money to
dictators, companies simply partner with a local company that is owned by a
president, oil minister, or some other official that needs to be appeased. Safe to say that where centralised decisions
regarding oil persist, fixers will continue to profit.
Derivative Markets
In contrast to my slightly conflicted opinion on Calil, the
other fixer highlighted by Silverstein, Marc Rich, is perhaps one of the most
poisonous men the world has never heard of, in my opinion.
A Belgian-born US citizen, Rich started life as a fixer
before starting an oil-trading company called Glencore in 1974. At first glance, trading oil seems like a
perfectly legitimate and relatively harmless business model in order to redistribute
a physical commodity to where demand is highest in the world. But when looking deeper at global oil prices,
in conjunction with the rise in power of these trading companies (see also Vitol,
Gunver, Dagmara, Envergure, Cargill, Addax and Trafigura), I am compelled by a
different story.
Silverstein describes how, since the oil shocks of the 1970s
(caused primarily by the Israeli-Arab war of 1973, the position the political
position the US took in that war and the subsequent reaction of OPEC) the price
of oil has largely been driven by supply and demand (with distinct geopolitical
dimensions). However, in the last decade
prices have swung wildly in the face of such market forces. For almost 20 years the price fluctuated
between $10 and $40 per barrel. However,
in 2005, the price jumped quickly to $70, then after a short lull, again to
$140 in 2008, but then fell all the way to $30 within a year and tripled again
within three.
The primary reason for this severe and seemingly illogical fluctuation
in the price of a commodity with a relatively stable supply is the introduction
of a variety of sophisticated hedging techniques recently adopted by oil
traders. Where traditional traders used
to trade equally in the physical and paper trading of oil (the latter’s job
being to hedge the sales of the former), modern trading firms now perform 50
paper trades for every one physical trade.
Consequently, for every barrel of oil sold, 50 bets are being placed on
at what value it will sell. Silverstein
interviewed half a dozen traders for the purpose of the book but they all
refused to speak on the record. One
ex-trader stated, “Historically paper markets were created to facilitate trade
by letting buyers and sellers hedge their bets.
The intention was not for people to gamble or to give them the ability
to manipulate the market, which is what happens today”. While it is not suggested that there is conspiracy
between traders to consistently short the market, the ex-trader goes on, “these
guys all know each other. It’s so easy
to influence prices. If someone at one
trader decides he’s going to start selling one hundred million barrels of oil,
the market will obviously go down. No
doubt if he makes a call to his friend, and that friend talks to his friend, in
a few days everyone is selling, selling, selling – and the insiders sell early
and make a giant profit.”
This further perversion of the oil market drives up the cost
for the end-user and increases geopolitical tensions.
Now the world’s biggest middleman (valued at $232.7 billion),
Glencore is headquartered in Zug, Switzerland (close to Geneva, where OPEC’s
headquarters are located – in fact, due to the sheer number of times Switzerland
reoccurred in Silverstein’s book, I’m led to believe that the majority of the
world’s oil industry operates in the area under the safety of their banking
secrecy laws and friendly tax regimes). Operating
through a maze of subsidiaries that make it virtually impossible to know who
they are trading with, how much and at what prices, Glencore now wants to
control the entire supply chain: pumping, shipping and refining oil while
trading and hedging all along the way.
They are an “active predatory force”, designing a system in which, at
every step, the money stays in the same pocket.
Silverstein reports that Glencore’s effective global tax rate for 2010
was just 9.3 percent, because nearly half its 46 subsidiaries are incorporated
in “secrecy jurisdictions”. Furthermore,
it appears that no money-making strategy is off the table as Glencore helped
bankroll the Ivory Coast strongman, Laurent Gbagbo, in 2007 in return for
future exports.
Importantly, when it comes to the media, oil traders
consciously stay away from the public spotlight, which is probably why you’ve
never heard of Glencore despite it being the tenth biggest company in the world. Commodities trading remains as one of the
world’s most opaque, secretive, corrupt – and globally consequential –
industries.
Other discussions
Silverstein’s chapters on dictators, traders and fixers were
a riveting insight into the recesses of the oil industry, but I must admit that
the book doesn’t consistently deliver with chapters about lobbyists (much to my
disappointment, as I really felt that was going to be ripe for plucking),
legacy lawsuits, retired politicians who happily trump up the oil agenda for
their last pay day, and gatekeepers who enmesh themselves in the fabric of oil
nations in order to profit from every move.
A discussion of the Louisiana’s Corbella case (one of the first environmental lawsuits against an
oil company in which the plaintiff was awarded damages for the degradation of
his land caused by the oil drilling techniques used) was enlightening, but too
much was made of the seemingly surprising fact that US Republicans had sided
with the landowners in these cases (because of their belief in the property
rights over their supposed allegiance to the oil industry).
A chapter titled “Tony Blair” had me salivating at the idea
that I would unearth some seriously scathing analysis of Labour’s fallen hero,
but instead it was simply the constant allusion that the extortionate fees Mr
Blair charges for his public speaking these days have often been paid for by
petro-states rather than anything much more nefarious.
George W. Bush’s brother, Neil Bush, was regularly thrown
under the bus for being an incompetent energy executive who has bumbled his way
through countless companies, bankrupting most along the way and only surviving
through a series of hand-outs and political favours doled out by his family’s
impressive oil network. This was hardly
surprising news and felt more like Silverstein just wanted to score some easy
points by picking on some well-known names.
I wish he had spent more time exploring the themes of environmental
degradation and high-level collusion than personal knit-picking of this nature.
However, the book was incredibly thought-provoking. It is easy to label the oil industry as bad,
and I have often done so. It is much
informative to read an investigative journalist’s findings and understand how
the industry can be so poisonous, why corruption persists and consider if
anything can be done to change it.
Unfortunately, having read the book, the picture looks quite
bleak. Where such huge sums of money
stand to be made corruption will ensue.
While oil remains the driving force of almost every global economy,
there will never be the political will (or the authority) to effectively police
the world’s corrupt leaders. Though the
book contained no real discussion of the future direction of energy companies (i.e.
their ability and/or willingness to phase renewable energy into their portfolios),
I feel that this is where our collective mind must now turn. Rather than be upset by this frustrating set
of circumstances, the book reinvigorated my passion for a green energy economy,
free from dependence on oil. Besides the
environmental/climate change issues associated with oil this is an incredibly poor
way to power our economy and ultimately our society.
In reality, the only solution is time, a commitment to
raising living standards and unearthing corruption the world over. Time for alternative energy sources to
develop. Time that will then drive down
the price of the alternatives, reduce the demand for oil and hopefully eradicate
the negative externalities Silverstein’s The
Secret World of Oil so importantly reveals.
Score: 66/100
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