It's a Crude, Crude World.
SUMMARY: Oil is everywhere. It’s all around us. It’s in everything and it makes the world go around. The Energy Information Administration (EIA) projects that renewable energy will comprise 27% of the world’s energy production by 2050, all things being equal. Pretty great, right? Not really. Based upon population and economic growth trends, the EIA also predicts that the use of liquid fuels will continue to increase over the same period. So as much as we think we might be getting ahead, we’re really not. But there’s another side of oil that most people rarely think about and that’s its value as a currency. Yes, a currency. We tie in good ol’ Milton Friedman again to discuss how trading this ubiquitous fuel went from commodity to casino, making it more difficult to break this habit than one might imagine.
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Oil is literally part of everything we do. It’s all around us. In our products, our homes, our cars, you name it. Beyond its many product uses, oil does a few other things. It hides our massive hypocrisy. Makes us behave very badly on the world stage. Fuels our war machine both physically and in appetite. And it makes the world go ‘round. In many ways, this is our most ambitious unf*cking yet because there isn’t an aspect of our lives that isn’t in some major way impacted by oil. I see this episode as a culmination of much of our journey together because it relies on many of the central themes that we’ve explored. Greed. Free markets. Climate. Imperialism. Corporatocracy.
The story of oil is the story of modern politics, economics and sociology. The parallels between our addiction to crude and our nation’s history are undeniable. They are forever linked.
Through a series of explanations and anecdotes, I hope to show how the story of oil is more than bubbling crude beneath the surface; it’s the story of America. To illustrate how the same fuckheads who believed they were setting the markets free only managed to put us in chains. It’s not about supply and demand. Or market forces. Oil isn’t just a product. It’s currency. Leverage. Power.
Ultimately what I hope to prove is that while we have visions and fantasies of a clean energy, renewable and climate neutral future, the current structure cannot - will not - allow for that to happen unless some very big, bold changes are made to how we view our place in the world.
I see this episode as the third in a trilogy that includes our Climate Industrial Complex and Vegan episodes. Taken together they paint a picture of the existential crisis we face as a species and what can be done about it if we have the courage to break with convention and think differently about our predicament here on earth. We’re going to cover a lot of ground but as we weave our way through our story today, I want to call three specific people to your attention. Three massively important figures in the world of oil that I guarantee most people on the planet have never heard of: Leo Melamed, Jeffrey Sprecher and Teodoro Obiang. We’ll do the worst first because he represents everything that can and did go wrong in our reckless pursuit of crude.
Chapter One: The Dictator
Equatorial Guinea is one of the smallest nations on the African mainland. But it has the third largest GDP per capita in the whole of Africa. And it’s the fourth most corrupt. It’s run by one of the longest tenured dictators on the continent named Teodoro Obiang who took power from his own uncle, whom he had executed.
I first heard of Equatorial Guinea from Peter Maass’ incredible book Crude World: The Violent Twilight of Oil published in 2009 when I became fascinated with oil and commodities; a fascination sparked by one of the greatest American investment banking scandals of my lifetime. We’ll get to that in a bit.
Growth in Equatorial Guinea has been explosive in recent years due to renegotiated contracts with several large U.S. oil producing companies. Originally, this wasn’t the case. When oil was originally discovered in this Central African coastal nation located in the “armpit” of the continent - not my phrase, by the way - U.S. companies swooped in like vultures to take advantage of this incredibly impoverished country.
Under the newer lease agreements, Equatorial Guinea is taking a much larger slice of the pie though precious little of the money actually finds its way to the people of the nation, who still rank among the poorest on the continent. For many years, Obiang and his family funneled money through various banks throughout the world including a corrupt boutique bank in Washington, D.C. called Riggs Bank.
Maass reported that by 2003, Obiang’s regime was holding between $300 and $500 million dollars at any given time at Riggs, money that represented the cash reserves of his nation. But Riggs was out of its depth and was eventually outed by investigative reporter Ken Silverstein whose reporting launched a probe into the bank. Obiang’s wealth remained intact but the bank didn’t. Riggs would eventually become so scandal-plagued for such behavior that it had no choice but to sell its assets. Nevertheless, it’s estimated that the dictator has currently amassed in the neighborhood of a billion dollars personally with far more still unaccounted for and spread out among family members, including his social media famous son of the same name who will likely take over from Obiang someday.
Very few outside of Africa paid much attention to Obiang before the discovery of what is estimated to be 1.1 billion barrels of oil reserves. It’s enough to last the country another 580 years at current production levels.
You won’t hear much about this small African nation in American media. In relation to the rest of the continent, Equatorial Guinea is a postage stamp area of land with around 600,000 inhabitants spread between the landmass on the continent and a few neighboring islands. It’s common to read stories in the French and Spanish press, but most western media simply ignore the country altogether. This is one of those countries that literally qualifies as the worst on the planet. Torture. Human rights abuses. Assassinations. Extreme poverty. It has it all of it and more, including the full support and admiration of corporate America and the U.S. government.
When Maass visited the country a few years back he took in a celebration of the nation’s dictator and wrote:
“Just as the festivities settled into mind-numbing redundancy, I noticed a trio of American flags coming up the road, carried by a delegation of local men and women whose banner said they were from ExxonMobil…They were followed by delegations from Halliburton, ChevronTexaco and Marathon, all of them hoisting corporate banners, American flags and celebratory placards that hailed the wisdom of the president.”
Teodoro Obiang is free to roam the world and spend lavishly on compounds in Europe and in America, including mansions on both coasts here. He has been greeted warmly by the Clintons, embraced by the Bush administration - Condoleezza Rice called him a “good friend,” and there’s even a smiling photo of Obiang and the Obamas on Google. But don’t take my word for it. Here’s now deceased former ambassador to Equatorial Guinea under Ronald Reagan Frank Ruddy who was also of counsel to ExxonMobil speaking about Obiang in a Democracy Now! interview from 2008.
“In the case of Equatorial Guinea, the United States has acted shamefully. We have basically, for reasons of realpolitik, treated a dictator, a killer, a thief, with the greatest respect. Condoleezza Rice recognized him as such when she received him at the State Department as a great friend of the United States and that, as an American citizen and a human being, disgusts me. He’s not the kind of person who should receive any honors from the United States. He’s a killer. He’s a murderer. He’s a torturer.”
Dude. That fucking guy worked for Reagan and said that shit.
So why start with Obiang? Equatorial Guinea is only the 39th largest oil producer in the world. Who really cares? Because it says a lot about the industry, our foreign policy and willingness to overlook heinous crimes against humanity when it suits our interests to do so. In terms of being a kleptocracy, Equatorial Guinea is regarded as one of the worst in the world. Its people live in squalor and fear. Almost none of the petrodollars generated from the sale of oil go to support its people. Because it’s so small and sparsely populated, even though it ranks low among global producers, the oil revenues from their contracts with American companies could have easily made it one of the richest, most socially and economically developed countries in the world.
As a comparison, there’s Norway. As a pure ratio, it’s a good fit. The 13th largest oil producer with a population of 5.8 million people in a territory about 14 times the size of Equatorial Guinea, Norway ranks number four in the world for gross national income. That’s pretty spectacular but what makes it truly special is its retirement guarantee. Norway discovered oil late in the game and made all the right moves. While it licenses operations to several outside companies, Norway centrally owns and controls most of the revenues associated with production and pours it into a sovereign wealth fund. As Leif Wenar writes in his 2016 book Blood Oil:
“Today, most of Norway’s oil money goes into this pension fund. Norway’s sovereign wealth fund is now the largest in the world, worth almost a trillion dollars, and it is waiting to begin paying Norwegians’ pensions whenever the people decide that it is time. Norway has the highest public health spending per person among the industrialized countries, as well as generous funding for parental leave, for public day care, and for unemployment insurance.”
If that’s the right way to do this, then Equatorial Guinea would be exactly the wrong way. Maass expertly describes the oil industry as a nation within a nation. Everything is imported. The labor, the equipment, the rigs, the food, the sex workers, you name it. All for the oilmen who run the rigs. Literally nothing goes back into the country. It’s an oil baron’s utopia. In fairness, they never had a shot. Once it was discovered that the country was sitting on a billion barrels, U.S. oil companies made Obiang an offer he couldn’t refuse.
Even the paltry original leases compared to what other nations are paid by our firms were more money than the dictator could ever imagine. And the savvier he got the better the deals he was able to renegotiate. The better the deals, the richer and more ruthless he became. And over the years Obiang enjoyed the full protection of the United States government to do as he pleased. And by protection I mean simply ignore him completely. Look the other way. You see, Obiang has a couple of things going for him. One, he’s a dictator interested only in cash and therefore has no interest in nationalizing the oil industry. And, two, its residents are primarily Roman Catholic as it spent years under the brutal colonial rule of the Spanish government. Libya, Sudan, Egypt, Somalia - the places we tend to fuck with the most - are predominantly Islamic states that are predisposed to hate our anti-Islamic imperialist ways. But Obiang prays to only one god and it ain’t Allah.
Chapter Two: What Lies Beneath
Before there was a demand for oil as the fuel for industrial growth it was seen as a plentiful substitute for whale oil, which was running critically low. The first rig made to specifically drill for oil appeared in Pennsylvania in the 1850s as industry searched for a way to replace whale oil for lamps.
The original crude was transported in whiskey barrels but it wouldn’t take long for infrastructure to be set throughout the country as more and more discoveries were made. The first rig was assembled by a guy named Edwin Drake who kicked off the rush for the new black gold. Drake never achieved the type of fortune that would accompany such discoveries and innovations shortly after and through to today. Fun fact about the whiskey barrel is that it would become the standard size for a barrel of oil and this standard was determined by John D. Rockefeller of Standard Oil.
Anyhoo. Fast forward a few years and the business became an industry. A big one. And what would a burgeoning capitalist industry be without bad actors who try to rig the system in their favor? So in 1928 a bunch of crusty oil barons from Royal Dutch Shell, Anglo-Persian Oil, Standard Oil and Gulf Oil known respectively today as Shell, BP, ExxonMobil and Chevron, got together to engage in price fixing at a meeting in Scotland.
They called it the As-Is agreement, but it was short-lived because they weren’t the only ones who had figured out how to unleash oil from the ground and they were constantly being undercut. Then a couple things happened. First, the crash in ‘29 and the beginning of the Great Depression. But more importantly for the oil men of this time, an old wildcatter named Dad Joiner discovered oil in Texas.
At that point the United States became the center of the oil producing and trading world. The government established the Texas Railroad Commission or TRC to impose restrictions on the supply of oil in order to control pricing making it the “arbiter of global prices from 1931 to 1971.”
A great deal happened from the days of Drake and Rockefeller to this period where some of the normal asshats in our Unf*cking journey join in. Suffice to say that the industrialization of the world and growth of the automobile meant that oil would become the basis of the entire modern economy. The only problem for the U.S. was a theory known as “peak oil.” As Maass writes, this phenomenon was:
“Discovered long ago by M. King Hubbert, a Shell geologist who predicted in 1956 that America’s oil output (not including Alaska) would peak by 1970. Hubbert’s prediction, derided when he made it, turned out in broad terms to be accurate. His forecast was based on the production trends of reservoirs he studied. He noticed a bell curve in which output rose until the reservoir was half empty, and then output dropped as quickly (or slowly) as it had risen. At the halfway point, reservoirs continued to yield oil, but the amounts slipped year by year because the fields had lost what was, in essence, their geological vigor.”
This obviously makes a lot of sense. We all know that oil is a finite resource trapped below the surface of the earth. What Hubbert didn’t see coming were multiple new discoveries of productive wells in the deserts of the Middle East, off the coast of every continent and in the deepest parts of the ocean.
America and other nations started hunting around the globe for new discoveries and for a while it seemed like we couldn’t miss. But because the discoveries were in parts of the world that weren’t adept enough to extract it, U.S. oil companies went into deal making mode and took favorable long-term leases throughout the world. The prevailing contracts typically landed around 50/50 and, for a while, that worked for everyone.
However, as Morgan Downey writes in an exceptional book and resource titled Oil 101:
“Cracks in the 50/50 concession arrangements began to emerge in 1951 as Mohammad Mosaddegh, the democratically elected prime minister of Iran, nationalized his country’s oil industry. Mosaddegh took possession of the British owned and operated Anglo-Iranian Oil Company production and refining facilities on behalf of the Iranian state in what became known as the Abadan Crisis.”
This kicked off the inevitable embargoes and sanctions against Iran, which nearly bankrupted Iran but everything returned to normal when the Brits and the U.S. teamed up to overthrow Iran and install the Shah of Iran. In 1960, The Organization of the Petroleum Exporting Countries (OPEC) was formed by five founding member nations - Saudi Arabia, Kuwait, Iran, Iraq , and Venezuela - to try and exert pricing influence over the market. The effect of this was marginal, which is largely misunderstood by observers who ascribe way too much power to OPEC. Price, up until this era, was very much tethered to the U.S. dollar because the dollar was the default currency for oil transactions. So when the dollar was weak, oil was high and vice versa.
As we’ve covered before, though, the 1970s ushered in a new era of financial fuckery and chaos beginning with Nixon’s unceremonious exit from Bretton Woods. As Morgan writes, “Dollars could no longer be exchanged for gold or any other metal held by the U.S. government.” Oil was on its own and therefore pricing was more susceptible to normal and abnormal market conditions. Two such abnormal conditions occurred on the heels of our exit from Bretton Woods and created shocks to the system. Shock one was in 1973 when Arab OPEC members cut off supply to the United States in solidarity with troubles in Egypt and Syria. The second shock came later in the decade when Iranian oil workers decided to strike in a rebuke of the Shah.
So we’ve covered the first hundred years or so of the oil business. How it grew, how the United States exerted its influence and how pricing typically worked right through to the 1970s.
This is where things get really juicy because we can bring in our Chicago boys to show how they fucked up this part of the economy as well and set us on a path to unbridled crude oil addiction. But before we get there, I think it’s helpful to understand all aspects of crude oil. It’s a strange thing because it’s literally all around us but very few of us will ever come in direct contact with it. It’s hidden in our gas tanks, our products, in big storage tanks or little cans and tubes. Because it’s out of sight, we never really stop to think about the actual product itself. So let’s get a quick education from Morgan Downey on all the distillates and uses of crude oil.
To begin, there are different types of crude called petroleum fractions. Essentially from light to heavy. Petroleum gases, light ends, middle distillates and heavy ends. Moving from light to heavy, here are the fractions and the primary uses:
Methane - Used for heating, cooking and electrical power.
Ethane - Petrochemicals and plastics.
Propane Butane - Together they’re referred to as LPG when liquified for consumer use like barbecue tanks and heating.
Naphtha - Petrochemicals, plastics, solvents and blending for gasolines.
Gasoline - Transportation fuel.
Kerosene - Jet fuel, lighting, cooking, heating.
Gas oil - Diesel fuel, home heating oil.
Lubricating oil - Motor oil, transmission oil.
Residual fuel oil - Marine shipping fuel, electrical power, industrial fuel.
Greases and waxes - Lubricants, candles and coating fruit.
Bitumen - Road paving and roofing.
Coke - Blow, toot, chop, nose candy, line, rail. (Okay. It’s industrial fuel for steel production.)
Bottom line. It’s in everything. It’s fun and popular to think about de-fossilizing the economy until you start looking around at literally everything around you. Even shit that doesn’t have oil in it was probably made in a plant that requires it to run and transported by a ship running on residual fuel oil, onto a truck using gas oil and into your gasoline powered car and into your home that uses home heating oil or natural gas under your roof made of bitumen. It’s inescapable and so is the reality that it will be with us forever.
I know that sounds pessimistic and we’ll come back to some mitigating concepts in our conclusion but this isn’t an opinion. Consumption statistics from the EIA portray a worrisome trend.
From 2030 to 2050 the numbers are actually encouraging. And remember this is if we stay on our current course. If nothing changes. Over this 20-year period the EIA estimates that coal consumption will decline and renewable energy consumption more than doubles to a point where it “nearly equals liquid fuel consumption by 2050.” They attribute this to falling costs of renewables and changing government policy and foresee global renewable consumption hitting 27% by this same time. Great, right? I mean considering this is an all-things-being-equal scenario, we’re on the right track.
Unfortunately, the world isn’t projected to stay still through this period and gaps in energy production will need to be filled. Despite encouraging policies in the European Union and South Korea, the EIA predicts that coal will remain very much in the mix the whole time even though it will decline in absolute terms and in share of production. This is due to the “expansion of coal-reliant heavy industry in India, the availability and security of local coal supply in some regions, and the projected growth of coal-fired generating plants in non-OECD Asia to fuel the region’s growing economies.”
Troublingly the report also concludes that post-pandemic, the economy will really surge again and along with it travel, manufacturing and chemical feedstocks for the food supply will increase consumption of liquid fuels from natural gas to pure crude and other distillates. All told, despite gains in the use of renewable energy, they project “growth in liquid fuels consumption to continue at a near constant pace through 2050.” In other words, renewables are one step forward but population growth puts us the same step back. So if you’re thinking we’re in a position to naturally phase out fossil fuels and transition the global economy under current policy, you couldn’t be more wrong. And we’re going to talk about some people who not only know this well, they’re banking on it.
Chapter Three: Wildcatters in Suits
Dan Dicker was a former commodities trader who wrote kind of a tell all about his trade. He’s an analyst today who has been warning the public about the degradation of his former industry ever since he left. Let’s tee things up with a brief passage from his book Oil’s Endless Bid:
“Thousands of articles appear every day on oil, trying to explain the micro and macro movement of prices. Those articles and television spots fling around oft-repeated and accepted ideas of what is really driving prices: the dollar, emerging market growth, and peak oil theory, to name only a few. But traders view all of these inputs to price in a far different way than the rest of the public and the news-driven media that report to them.”
When Dicker started out as a floor trader it was clear that the trading volume in the pits was driven by oil companies, a logical observation. But he noticed a shift around 2003 when drivers of the volume shifted from oil companies to financial institutions like Goldman Sachs and Smith Barney. Gradually, price was less a reflection of tangible circumstances. Again, Dicker:
“The difference in who is trading oil makes for very real price differences. To put it simply, that’s because the participants who are now primarily engaged in the modern oil markets don’t really care much about the price of oil…And when price becomes unimportant, it can move in unexpected and radical ways.”
So what do modern traders care about if not price? Spread. Spread and volatility. As we’ll show in a very high profile example, driving volatility is big business especially when you can stand on either side of a trade and make money. Make money when it’s going up and when it’s going down. Leaving the real shnook as the consumer who winds up paying for it down the line in the price of goods that require fossil fuels to manufacture, at the pump and in heating their homes. It’s a very wicked game that was never intended to be this way. This is where our story gets really juicy and gets me pumped Unf*ckers.
When you talk about oil in the United States, most people think about Texas. But the fields and refineries are only half the story. For the other half, we have to revisit familiar territory and head on back to Chi-Town.
As you heard, the oil biz was what it was until the 1970s. It grew from this point forward in volume and price volatility until the point that Dicker mentioned in 2003 when Wall Street traders got into the action. But none of this could have happened if it wasn’t for a good friend and protégé of Uncle fuckstick…aka Milton Friedman…named Leo Melamed, head of the Chicago Mercantile Exchange, or “the Merc,” took advantage of Nixon’s move off the gold standard and changed our world forever.
In 1972 Melamed established the International Monetary Market (IMM) within the Merc to facilitate the trading of currencies after President Richard Nixon repealed Bretton Woods, which removed the United States from the gold standard and allowed world currencies to float. In short order Chicago would no longer be known as the “second city” when it came to trading. Remember, everything currency related was fixed before this. No spreads. No margins. But Melamed recognized that floating currency meant volatility. And volatility meant spreads. And it’s in the spread that traders live and thrive. But Melamed didn’t stop there. No sir.
The genius of what the Merc introduced was the possibility of trading futures on just about anything. This included oil, which would begin as a small corner of the New York Mercantile Exchange in the late 1970s trading home-heating oil futures. Soon, almost everything would be fair game to trade.
The marriage of deregulation and technology over the past several decades has birthed franken-markets that influence nearly every aspect of our daily lives. From controlling pensions and mortgages to home-heating oil and bread, traders are pagan gods and we are their minions. Although markets today are bigger and faster, the underlying truth to the trading game is simple, proven and unwavering:
For every winner, there is a loser.
Leo Melamed unwittingly created a casino that allowed a highly select group of traders to wager on everything that mattered to the average consumer. It would take a few decades of deregulation, a handful of really bad decisions made by really shitty people and a visionary to set the stage for a Wall Street takeover that pushed the world economy to the brink in 2008 in one of the most underreported and long-forgotten financial scandals.
Let’s start with the visionary person first. If Leo Melamed was Bugsy Siegel then Jeffrey Sprecher is Steve Wynn. Melamed created a comfortable niche scam that made a handful of traders very wealthy but Jeffrey Sprecher turned commodities trading into Las Vegas and made it a force to be reckoned with.
In a wonderful book titled The Asylum: The Renegades Who Hijacked the World’s Oil Market, Leah McGrath Goodman details the unlikely rise of Sprecher, a power plant contractor in California who “became frustrated with the archaic ways of power trading. He wanted to make it easier for power plants, specifically his power plants, to buy and sell their electricity.”
In 2000 Sprecher approached the New York Mercantile Exchange (NYMEX), then the largest futures trading desk based in NY with a revolutionary concept. Instead of the old fashioned, in person pit-style trading, why not move everything to the internet where energy futures could be traded 24/7 with complete transparency. It was the logical and in hindsight, inevitable move but the old school traders at NYMEX weren’t prepared to move into the future. But there was one company that understood the potential value of this when they caught wind of Sprecher’s idea. Instead of involving him, however, they essentially stole the idea and did it on their own. That company was Enron. More on them in a bit.
Undeterred, Sprecher set about creating the technology for an online trading platform. But if he was going to beat Enron and get this thing off the ground, he would need some massive players to move volume on his exchange. So in 2000, Sprecher formed the Intercontinental Exchange (ICE) in Atlanta and approached the biggest players in the game to invest. Here’s Goodman:
“In exchange for test-driving ICE, he would give away all but 5 percent of his business to thirteen of the world’s largest energy trading companies and banks. They included Goldman Sachs, arguably the most powerful bank on earth; Morgan Stanley; Duke Energy; Deutsche Bank; Reliant Energy; Shell; Total; and BP, among others.”
From the outset, the ICE was a success but not on the scale that one might imagine compared to the much larger equity and bond exchanges. That’s because until this time, an important aspect to the commodities market was that there was always a ceiling to the transactions. Every investment made in the United States, for example, was overseen by the Commodity Futures Trading Commission (CFTC). This market cap and theory of transparency kept the commodities market in relative obscurity against its much bigger counterparts. These regulations prevented players like investment banks and hedge funds from engaging in speculative activities in commodities. There just wasn’t enough risk. Not enough upside. What Sprecher needed to really make this thing soar was the ability to invest serious capital within the United States, like their counterparts could on the London Exchange, for example.
Call it luck, vision or corruption, a year after founding the ICE in Atlanta, Sprecher purchased the London-based International Petroleum Exchange (IPE), and renamed it ICE Futures. It was an acquisition that was fairly straightforward until 2006, when the CFTC - seemingly out of nowhere - officially recognized the ICE as a foreign-based exchange because it had purchased the IPE.
So even though the ICE was based in Atlanta, backed by U.S. banks and now traded publicly on the New York Stock Exchange, the CFTC somehow decided to treat it as if it were based in London and thereby no longer subject to federal trading regulations. This one small shift meant that the investment banks could suddenly trade every type of commodity, especially crude oil, without any spending limits or federal oversight.
It was here that the wheels began to fall off the commodities market.
But let’s back up a bit to revisit Enron, because something else happened while Sprecher was building the ICE that would ultimately contribute to massive fraud in the system.
Recall that Enron, the now infamous defunct energy company responsible for rolling blackouts in California, was also creating an exchange. Well, in order to accomplish this they needed an opening. They weren’t, after all, a bank or an oil company. They had no standing, ability or reason to be trading energy futures. It was a utility and that’s not what they do. So to get in the game they needed a regulatory change, a change now referred to as “the Enron Loophole.”
Under the cloak of darkness at the end of President Bill Clinton’s second term and the waning days of the 106th Congress, it was then-Sen. Phil Gramm’s turn to dust off a bill, now commonly referred to as the “Enron loophole,” and attach it to an 11,000-page appropriations bill on December 15, 2000. The bill had previously died on the House floor, but Gramm resurrected it, found a new sponsor, became a co-sponsor, changed the bill number and turned it into an amendment. That’s a lot of work for one little loophole.
The Enron loophole essentially permitted the trading of energy futures on over-the-counter (OTC) markets, thereby allowing a new set of investors - hedge funds and investment banks - to trade energy futures. But, as we said, these trades were still transparent, so while it allowed Enron to participate, the OTC exchanges still saw relatively little activity as compared to their European counterparts, where the oversight was far more lax.
It should be mentioned that Phil Gramm’s wife was former CFTC chairperson Wendy Gramm. The Gramms knew the rules inside and out and knew exactly what they were doing when they shoved this loophole into the regulatory bill after it was already written and vetted by the senate. In fact, very few people even knew Gramm inserted the language into the bill at the time.
As Goodman writes:
“The loophole, which applied to complex financial instruments as well as the over-the-counter energy market, had allowed trillions of dollars of credit-default swaps to go completely unregulated, causing global banks to fall in on themselves like dying stars. The Enron loopholes had worked like an enchanted tonic. After it was approved, U.S. crude-oil and natural-gas futures volumes leaped 90 percent in just five years, with the number of traders betting on the market more than doubling, according to the U.S. Government Accountability Office. But the real victory was off-exchange, in the over-the-counter market, where Wall Street traders drove commodities volumes up 850 percent to an estimated $3.2 trillion in the same five-year period, according to the Bank for International Settlements.”
After Wendy Gramm left the CFTC, and five weeks after creating this exemption, she became a board member of - you guessed it - Enron. In return for her work deregulating the market for Enron to exploit, she racked up millions as an Enron board member prior to the company’s collapse.
The Enron Loophole outlived Enron and opened the markets to a flood of cash from sources that had never before contemplated such massive investments into commodities. Commodities and investments like CDOs and derivatives, the financial packages that would collapse the housing market in just a few short years and bring the American economy to its knees. Between the Enron Loophole, Sprecher’s invention of the ICE and the Bush administration’s mind-blowingly irrational decision to consider the ICE a foreign exchange and therefore exempt from any U.S. regulation, the stage was set for another historic meltdown.
Chapter Four: Mack the Knife
In the summer of 2008 the financial world was just beginning to melt down. The housing bubble was about ready to pop. The entire global economy was in deep trouble but only a few people understood just how bad things were about to get. Wall Street needed money. And it needed it fast.
Over at Morgan Stanley a promising young analyst named Doug Terreson was about to be an unwitting - and ultimately an unwilling accomplice - in one of the most underreported financial scandals in modern history.
In 2008 the price of a barrel of oil skyrocketed to a historic level, in part due to a forecast Terreson never got to make. At the time he was a rising star in Morgan Stanley’s Houston office and was often lauded for his ability to predict the movements of oil on the commodities exchange.
John Mack, then head of Morgan Stanley and Terreson’s boss at the time, was not just a wealthy Wall Street executive. Mack was an oilman. In every sense of the word.
How so, you say? Because under Mack, Morgan Stanley amassed a formidable group of companies involved in every aspect of oil, from refineries to home heating oil, a move that partly enabled Mack to navigate through a storm that brought some of the biggest American investment banks to their knees. And the whole world picked up the tab. By exploiting regulatory loopholes and throwing caution and conscience to the wind, Morgan Stanley, along with Goldman Sachs, artificially thrust oil prices to record levels.
They didn’t call him “Mack the Knife” for nothing. But Mack was just utilizing the tools available to him.
Mack ran Morgan Stanley through the ’90s before accepting the job as co-CEO of Credit Suisse First Boston, a leading investment bank, in 2001. Mack left CSFB in 2004 to pursue options outside the large investment-banking world but was wooed back to run Morgan Stanley in 2005. Upon his return, Mack’s Morgan Stanley went on an aggressive oil-buying spree - but not necessarily the kind you might expect.
On May 24, 2006, Morgan’s resident oil expert, Terreson, announced that integrated oil equities were “15 percent undervalued” and in a research report, he wrote that “Independent refining and marketing remains the largest sector bet in the global model energy portfolio.” Soon after, on June 18, 2006, Morgan Stanley acquired TransMontaigne, Inc. and its subsidiaries - a half-billion dollar group of companies operating in the refined petroleum business.
How convenient…after their oil analyst decides that this portion of the industry is looking up, Morgan Stanley gets into the oil business and buys an oil terminal company. However, it did not take only 25 days to conceive and work out the TransMontaigne transaction. This had to be a long-planned, well-thought-out takeover. One that worked for the great benefit of Morgan Stanley’s future oil plans as TransMontaigne now owns one-third of the nation’s oil terminal storage capacity.
Morgan’s investments in the oil business continued aggressively over the next year into the far corners of the industry. In short order it closed the circle of the supply chain by acquiring Heidmar, a shipping company that owns 120 massive oil tankers, as well as various stakes in foreign-based energy supply companies. It even snagged a contract from the U.S. Department of Energy to store 750,000 barrels of home-heating oil at its corporately owned terminal in New Haven, Conn. Morgan Stanley, which was at the time the largest trader in oil futures, was now a serious international oil company.
On March 14 of 2008, Terreson said that oil would settle around $95 per barrel for the remainder of 2008. Moreover, Terreson also concluded that oil would retreat to around $83 per barrel for 2009.
This would be Terreson’s last forecast for Morgan Stanley.
Two short months later, Dow Jones Newswires reported that Terreson had been ousted in a round of layoffs. Two weeks after that, Richard Berner, Morgan Stanley co-head of global economics and chief U.S. economist, issued a statement saying that crude oil could easily reach $150 a barrel.
This forecast set off a round of speculative fervor never before seen in the market. Goldman Sachs immediately followed suit by forecasting oil to roar beyond $150, saying it could hit $200 a barrel in the near future. Oil prices were off to the races, with the investment banks in full lobbying mode while pointing the finger at China and India. Remember that this was smack-dab in the middle of what we now know was one of the worst liquidity crises in banking history.
For a brief moment, oil did indeed hit $147 per barrel, a record never before reached and likely never again. Congress finally stepped in to ask what the fuck was going on and former regulators and traders themselves copped to the con and said the entire thing was cooked up. It was pure greed. Pure speculation.
But why? Why get so out of control? What happened to the so-called perfectly functioning and self policing free markets? Well, timing matters here.
Remember it’s 2008. Let’s say for a moment that you run Morgan Stanley and you know what most of America is about to discover: the bubble is about to burst. Not to mention that over the past few years you made a couple of bad deals. OK, so it was more than a couple, but not as many as your friends at Bear Stearns and Lehman Brothers. Regardless, you’re going to need cash. Fast. Thankfully, you have remarkable control over the price of oil - just by forecasting it. All you have to do is say the words and the markets will follow.
Pick a number. $100? $125? $150? Whatever helps you close the gap and fill the coffers.
It’s no small matter of convenience that you also own one-third of the oil storage capacity in the country and control several global shipping routes. What’s more, the government has handed you a contract to store 750,000 barrels of home heating oil for the Northeast United States and you founded and are still an owner in a public exchange that handles energy trades that no one can really see. Win. Win. Win. Win.
It shouldn’t come as a surprise. This is the same company that just 10 days after the Deepwater Horizon explosion in the Gulf that claimed the lives of 11 men, issued what the Oil and Gas Financial Journal called a “comprehensive” report on the “financial implications” of the explosion. The bottom line was that the analysts at Morgan predicted insurance would cover most of the costs associated with the spill and that the inevitable regulation that would occur should financially benefit the industry by limiting the number of new entrants into the market. In fact, Morgan predicted “established offshore drillers with the newest deep water units to benefit as demand for their rigs is likely to increase” and that it will be “positive for the drilling industry.” They concluded with, “this would make the long-term supply outlook for tankers more favorable.” Of course, they were right on all counts.
So why bring this up now? What does this have to do with commodities today, the price of oil or the prospects of a renewable future? Glad you asked.
Chapter Five: Bring it Home, Max
When we talk about breaking from our fossil fuel dependency it feels both possible and impossible. Possible because renewables are coming fast and furious, right? Humans are fucking smart. We can do this. In the vegan episode we talked about changing our relationship to food to flip the ratio of plant to animal products in our diets. How we can cut down on food waste and generate biofuel from seaweed farming. We know what to do.
In our Climate Industrial Complex episode we did the math to show that the missing financial ingredient and engineering capability to convert our entire economy to a green economy was hiding in plain sight in the military budget and that the military has been planning for climate resiliency since the early 90s so we know that they know and now they know that we know that they know so all of this is fucking possible, right?
The purpose of going so deep into the oil market is to help understand how deeply flawed the system is. But it’s frustrating to also know that the flaws are the result of very recent inventions. Inventions designed by the same cast of free market fuckateers that we’ve been howling about for the past year. Milton Friedman and Friedrich Hayek’s promise that the almighty markets will set us free and make the world a fair and better place.
Please understand that these markets, this whole mess, is not just an idea they had. It’s well documented that Friedman in particular considered the commodities pits in Chicago to be the best real life example of a free market. Yes. Commodities. Oil and gas. Wheat. Barley. Copper. In the obscure and small world of commodity traders in Chicago, Friedman saw perfection. A vision for how the whole world could work.
It doesn’t. And didn’t. Because we’re greedy fucks that cannot fly straight unless we’re regulated. But there’s even more to it. As you know, I’m a huge fan of The Illusion of Free Markets by Bernard Harcourt. Using Friedman’s favorite pet exchange, the Chicago Board of Trade (CBOT) which is no different than NYMEX or the Merc - in fact CBOT and the Merc eventually merged - Harcourt explains in detail how Friedman and other free market ideologues were victims of flawed thinking from the start:
“The entire history of the CBOT is a series of government interventions and regulatory adjustments that have facilitated a state-sanctioned monopoly and empowered the private practices of a small association of brokers and dealers…The U.S. Supreme Court essentially put its stamp of approval on its practices and its ability to regulate business and created a monopoly for the grain trade. The State of Illinois delegated its rule-making authority to a private regulatory agency. CBOT wasn’t ‘unregulated.’ It merely regulated itself. And by creating its own byzantine set of rules and high barriers to entry, it ran a monopoly that didn’t allow outsiders, confused outside authorities and prevented whomever they wanted from participating. By 1882 the initiation fee stood at $10,000! What the CBOT brought about was not a shift from a state of nature to free exchange, nor the production of order from chaos, but the creation of a new order that simply distributed wealth in a different way. Exchanges are essentially highly self-regulated clubs that restrict entry and exit and control the internal dealings of all members and nonmembers; the regulatory layers on top of that - whether the SEC or other federal prosecutors - merely add mechanisms for further review and regulation.”
Harcourt calls the idea of a self-regulated market “preposterous…It would be like a competitive sporting event without a referee.”
Free markets are a fantasy. They cannot, will not and have never existed because there will always be the Macks of the world willing to game the system and sacrifice the public as pawns to gaining wealth. Remember the words we’ve often spoken from Adam Smith who said that a free market is one that is effectively regulated.
But this is bigger than that.
If the EIA projects that liquid fossil fuels are projected to steadily increase through 2050 despite aggressive gains by renewable sources, then we have no choice but to intervene heavily. All of the loopholes that we covered? They still exist. Anyone who thinks oil is simply a product of supply and demand and other market forces doesn’t understand the industry. Just like before, the commodities market - the prices of which affect us directly as consumers - are still ripe for manipulation.
The only reason we haven’t seen the outrageous example from 2008 is because the government saw fit to pour liquidity into corporate coffers thereby propping up the equity markets. But is there seriously anyone who believes that equities are fairly priced at this point and not in some late stage of a bubble? Please. Remember this lesson when the bubble inevitably pops and commodities stage a comeback because they’ll likely tell you it’s because of OPEC or a supply chain disruption, or perhaps a war in Ukraine. These markets no longer give a fuck about such things because oil is no longer a commodity. It’s currency.
It props up ruthless dictatorships.
It pollutes the planet and threatens our existence.
It’s run by robber barons on Wall Street, not wildcatters on the Texas plains. They’re just bit players in a much larger scheme. One that waits in the wings for the bubble to burst leaving us all to pay the price.
Only through central planning to coerce the country toward a net zero future with the full support and force of both military personnel and the military budget can we halt this criminal enterprise and give ourselves a shot at a clean energy future that no longer props up villainous regimes and extracts more from the average consumer than it does from the ground.
Commodities aren’t currency. Regulation is freedom. And once again for posterity, fuck Milton Friedman.
Here endeth the lesson.
World Population Review: Richest African Countries 2022
Trading Economics: Corruption Rank by Country | Africa
Worldometer: Equatorial Guinea Oil
Democracy Now!: African Dictatorships and Double Standards
U.S. Energy Information Administration: International Energy Outlook 2021
Peter Maass: Crude World- Required reading for anyone interested in the dark underbelly of the oil and gas trade.
Leif Wenar: Blood Oil- Not my favorite. A little overreaching in the historical and socio-political connections it tries to make but contains some solid anecdotal insights to support a broader thesis of corruption.
Morgan Downey: Oil 101- A fundamental book to understand the product itself and the markets that move it.
Dan Dicker: Oil’s Endless Bid- Pedestrian but informative account of what it’s like to be a commodities trader and what went wrong with the business.
Leah McGrath Goodman: The Asylum: The Renegades Who Hijacked the World’s Oil Market- If you’re really into this topic, this is the book for you. I came to it late as it came out in 2011 but it’s an excellent, deep narrative dive into a world that very few people know or understand.
Bernard Harcourt: The Illusion of Free Markets- We’ve talked about Harcourt a lot. The first few sections of the book are very inaccessible but provide an invaluable history of the impact of Enlightenment thinking on the new class of free market promoters.
Emily Lambert: The Futures- Possibly one of my favorite business books of all time. A great read told in fun and engaging anecdotes that helps anyone access and understand the bizarre world of the markets.
American Scandal: Enron
OMG, f*cking awesome episode! It's been said before, but check out the podcast Drilled!, especially season 3, which goes deep into the history of hooking the American Consumer (tm) on O&G. Amy Westervelt rocks it.
Keep the faith, stay hopeful, props to all
first and most, 99
Manny for the skill and wit
and Max for bringing the heat and passion, and to whom I can best relate. Where the F*CK is GenX anyway. We own this problem now - it's unfair to leave it to the millennials!
F*CK Milton Friedman
First off, i love you all. And i looove this foquin podcast. Second off, this episode: NO ENTENDI UN SOBERANO CARAJO!! that loosely translates to: “you lost me at commodities, around chapter 3” (ask Manny’s Puerto Rican friend). And that’s not on you. It’s me. I am just dumb at economics. (And physics. I somehow barely passed those 2 classes in college, even though i have a PhD - obviously, in something else). I’ll have to read the substack, which i can do at my own pace. And then will go back and listen again. And pause and rewind. So there is more learning to do. I love that there is a substack. I always read it. Third off: in reality, i am 99. We all are 99. Which means: please dont out 99. Dont dox or identify them. I dont need to know who they are to love them. Or Max. They cite sources. They are earnest and sincere. Thats good enough for me. From last week’s episode, i wanted to comment that i love this project, and i also love that you are trying to build a coalition and support other podcasts. I will support any other podcast that supports #Unftr. I was a botlfucker, and now also enjoy the jesus white guys, pitchfork, etc. And #fmf. Always.