Читать книгу The Squeeze: Oil, Money and Greed in the 21st Century - Tom Bower - Страница 8

Andy Hall was cheered by the reports from the Gulf of Mexico. Bad news from oilfields usually satisfied the tall, unshaven trader. Moving from his barren cubicle into the adjoining trading area, he gazed at one of the 15 screens and calculated how much he was up that day. As usual, at 5 p.m. he headed off to practise callisthenics for an hour with a ballet teacher in Norwalk, near the Connecticut coast. The rising price of oil in spring 2005 seemed to confirm Hall’s bet that the world was running out of crude. ‘The trend is your friend,’ he frequently told his staff. ‘Ignore the trade noise. Play it long, because I’ve got ample time to pay.’ Anyone, Hall knew, could buy oil. The skill was to sell at a profit. Ever since John Browne had predicted in November 2004 that oil prices would stick at around $30 a barrel – although they had already reached $50 – and had gone unchallenged by oil’s aristocrats including Lee Raymond, Hall had believed that his massive gamble on soaring oil prices was certain to pay off. Although he was coy about the exact amount, his first stakes were quantified at around $1 billion as oil hovered at about $30, the price, Hall believed, was heading towards $100 and possibly higher.

Lauded for being ‘clever as sin, outgunning everyone in the brains department’, and referred to as ‘God’ by rival traders, Hall immunised himself from daily market sentiment because he was not part of the herd. An Oxford graduate and art connoisseur, soft-spoken and deceptively shy, he abided by the old adage, ‘Oil traders work in a whorehouse, so don’t try to be an angel in this business.’ Originally trained by BP, he understood the mentality of Big Oil’s chiefs, and believed that Lee Raymond, John Browne and the rest were in denial. Some of the smaller oil producers, like the Austrian and Italian national oil companies, had even bought hedges pricing oil at $45 to $55 a barrel, which would lead to huge losses as prices rose. In March 2005, two years after Hall had made his first bet, and oil was at $55 a barrel, Arjun Murti, a Goldman Sachs analyst, predicted that the price would reach $105 ‘in a few years’. This was greeted by widespread scepticism, and Murti was criticised for serving the bank’s interests. Unusually, Henry ‘Hank’ Paulson, Goldman Sachs’s chief executive, was required to defend him. By late spring 2008, as the oil price rose beyond $105, Hall had personally pocketed over $200 million in bonuses, and expected to make even more. Murti was being hailed in some quarters as brilliant.

Hall had traded oil for nearly 30 years. Since he had arrived in Manhattan in 1980, disenchanted by England’s claustrophobic social system, he had metamorphosed into an aggressive trader. ‘I’m basically interested in one thing – business,’ he told his trusted circle. ‘I come in every day to make money.’ Whatever the oil price’s wild fluctuations, and regardless of whether he was earning or losing millions of dollars, Hall coolly controlled his emotions: ‘This is not a zero-sum game because we’ve been doing it for too long to get excited. Emotionally the ups and downs get evened out.’ Over the years Hall had attracted both praise and loathing for perfecting the ‘squeeze’ – causing the oil market to change, and forcing other traders to buy from him at a premium. ‘We’re not here to help others,’ he said. In the old days when trading was carried out on the floor of the stock exchange, and dealers had occasionally yelled, ‘Am I fucking long or fucking short?’, Hall had smiled about the screaming losers who always heaped blame on everyone except themselves.

Experience honed Hall’s pedigree. Unlike his younger rivals, he had started his career in BP’s supply department in the midst of the first oil crisis in 1973. Until then, BP and the other oil majors – Exxon, Mobil, Shell, Chevron, Gulf and Texaco, together known as the Seven Sisters – who controlled 85 per cent of the world’s oil reserves, had perfected a cosy arrangement to fix the world price. Their representatives met regularly to discuss their costs and calculate their required profits. Blessed by a near-monopoly and a surplus of oil, the seven chairmen would travel as statesmen to the Middle East and inform the Arab producers the price the cartel would pay for their oil the following year, usually around $25.25 per ton, or $3.60 a barrel. The chairmen acknowledged each other’s ‘turf’ and, acting like governments, used their intelligence agencies and military supremacy to impose one-sided agreements. The Arab producers meekly signed fixed-price contracts, Exxon formally announced the price, and the crude continued to flow from the Middle East to refineries in Europe and America, although the USA could rely on its own plentiful supplies, supplemented by additional oil from Venezuela and Mexico. Before 1939, Europe imported 90 per cent of its oil from America, but after 1945 it switched to Middle Eastern oil, which cost 20 cents a barrel to produce compared to 90 cents for oil from Texas. Even American oil companies increased their imports. To placate small US producers, who were protesting about competition from Arab oil, in 1956 President Eisenhower limited imports, thus increasing the glut in the Middle East. Four years later, without consultation, Exxon and the other Sisters unilaterally cut prices for oil producers. Resentful of the cartel, Saudi Arabia and four other leading Middle Eastern oil producers met in Baghdad in 1960 to form OPEC, to challenge the Seven Sisters’ ownership of their reserves.

The new, unfocused group confronting the Western cartel remained ineffectual until the Six-Day War in 1967. Resentment against America and Britain sparked the declaration by Saudi Arabia of an oil embargo, but this show of bravado descended into farce when the Seven Sisters efficiently organised increased supplies from Iran and Venezuela, and Saudi Arabia’s income plummeted. The fiasco emboldened Muammar Gaddafi after his coup in Libya in 1969. ‘My country has survived 5,000 years without oil,’ he told Peter Walters, BP’s managing director, during their first tense meeting in 1970, ‘and unless we get more money we will stop supplies.’ A huge spurt in demand had prompted Exxon to forecast for the first time a world shortage of oil, and the fear of scarcity, plus America’s increase in imports to 28 per cent of its consumption, served the interests of OPEC. The Seven Sisters, OPEC knew, could only control prices so long as there was a surplus of oil. Armand Hammer, the chairman of Occidental, was the first to capitulate, reducing production and increasing his payments to Gaddafi in May 1970. Gaddafi’s success encouraged the Shah of Iran, and then the governments of Venezuela and Saudi Arabia, to demand price hikes. The oil companies feared losing their power to threaten the producers with a boycott if they rejected the prices they stipulated. Meeting in New York on 11 January 1971, 23 oil companies agreed, with the American government’s permission, to breach the anti-trust laws, and confront Libya and OPEC. Their unity was short-lived. During negotiations in Tehran and Tripoli in March 1971, the companies’ agreement disintegrated, and prices were increased beyond their limits. ‘We’ll never recover,’ Walters lamented. ‘There is no doubt that the buyer’s market for oil is over,’ admitted David Barran, Shell’s chairman. The Arabs, he noted, felt betrayed by the West. Sensing weakness, the Libyan and Iraqi governments began partial nationalisation of Western oil interests in 1972. The United States, said Gaddafi, deserved ‘a good hard slap on its cool and insolent face’. The Shah agreed. He nationalised 51 per cent of the oil majors’ Iranian interests and increased prices again. Peter Walters was meeting OPEC representatives in Vienna on 6 October 1973 when he heard that Egypt and Syria had invaded Israel during Yom Kippur, the most holy day in the Jewish calendar. The relationship between the OPEC producers and the Seven Sisters had changed unalterably. The public and the politicians blamed the oil companies for creating chaos and making excessive profits. In the vacuum of considered energy policies, Western governments were accused of perpetuating a ‘fool’s paradise’ by relying on arrogant oil executives to supply civilisation’s lifeblood. Eric Drake, BP’s chairman, admitted to Andy Hall and other graduates recruited during that epic year that oil would probably rise from $2.90 to the unprecedented price of $10 a barrel. Prices actually rose to $12, provoking the Seven Sisters’ disintegration and the industry’s transformation. Oil was no longer a concession or a product for refining, but became a tradable commodity attractive to cowboys.

Until 1973, oil traders hardly existed except for a fringe group who, to the irritation of BP and Shell, shipped crude from Russia to Rotterdam to supply West Germany and Switzerland. After the Seven Sisters were disabled, BP and Shell no longer felt obliged to protect the Arabs’ monopoly. Whenever the corporations had a surplus of crude, they traded it for instant delivery in Rotterdam, one of the world’s largest oil-storage areas. Anro, a subsidiary of BP managed by Yorkshireman Chris Houseman, began speculating in oil and refined products based on ‘spot’ prices quoted in Rotterdam, and Shell established Petra, a rival trader in the port. Gradually the two companies replaced the fixed-price contracts agreed with OPEC with contracts based on prices quoted among traders on the day of delivery in Rotterdam. Oil became a traded commodity in an unregulated market, subject only to finance from banks and counter-party risk.

The treatment of oil as a commodity akin to sugar, rice, coal and particularly metal ores caught the attention of Marc Rich, a secretive trader employed by Philipp Brothers, the world’s largest supplier of raw materials, based in New York. Ambitious for wealth, Rich would achieve notoriety in 2000 when, in the last moments of the Clinton administration, the president granted him a pardon on charges of tax evasion. Rich’s journey had begun in the late 1960s. Accustomed to play both sides in order to control the market for any mineral buried in the earth, he and his partner Pincus (‘Pinky’) Green had realised that the Seven Sisters’ control of the oil surplus would eventually be challenged and replaced by the producers’ governments. Like the handful of rival traders in London, Rich understood both the complications and the simplicity of oil. After sophisticated technology had found a reservoir, basic project management would efficiently pipe the crude to a tanker for delivery to a refinery. To earn a real fortune from trading oil, Rich knew, required understanding of refining – heating crude oil to boiling point and separating the parts: naphtha for chemicals and the distillates to make petrol, jet fuel, heating oil, kerosene and diesel. Making a profit from the manufacture of those fuels depended on understanding the constraints of the 600 refineries in the world, each calibrated to process a particular crude from roughly 120 different types. If a refinery calibrated for Iranian crude was denied supplies, the adjustment to process the alternative heavy, ‘sour’ sulphur crude from Saudi Arabia or the lighter ‘sweet’ crude from Iraq was expensive and time-consuming. Profiting from oil, Rich knew, depended on anticipating the circumstances that could cause a disruption of the market or spotting a potential shortage, and securing alternative supplies.

The biggest profits were earned by breaking embargoes, of which none was more high-profile than that against the apartheid regime in South Africa. A company called Sigmoil, loosely connected to Philipp Brothers, dispatched laden tankers from New York to South Africa. In the middle of the Atlantic, the ships’ names were changed by rapid repainting, successfully confusing the hostile intelligence services in South Africa. In that atmosphere, Rich was looking for his own niche.

In early 1973, Rich heard rumours about a forthcoming Arab invasion of Israel. That war, he believed, would lead to an oil embargo and soaring prices. Rich was focused on Iranian oil, which in the event of war would be withheld. If he could accumulate and store Iranian oil, its value would rocket after the crisis erupted. Rich was able to find Iranian officials close to the Shah, the pro-Western dictator imposed on the country after a CIA coup in 1953, who were prepared to break their government’s agreement to supply oil exclusively to the Seven Sisters. Working in the shadows, Rich flew to inhospitable locations to supervise the loading of crude onto tankers destined for refineries in Spain and Israel and, more importantly, storage in Rotterdam. In exchange for selling the oil below the world price to Philipp Bros, but unbeknownst to the company’s directors, the Iranian officials, it is alleged, received ‘chocolates’ in their Swiss bank accounts. Even the corrupt, Rich always acknowledged, were clever. In New York, however, Philipp’s directors disbelieved Rich’s information about an imminent war. Fearful of the financial risks of purchasing and storing Iranian crude, they ordered the stocks to be sold. Philipp Bros’ position has always been that they had no idea what Rich was up to.

After the October invasion, as Israel fought for survival, the oil producers met and agreed to increase prices; to prevent any supplies of weapons reaching Israel, they also imposed an embargo on Holland and the USA. In the face of queues and rationing of petrol, there was fear throughout the West of economic devastation. Richard Nixon, fighting to retain his presidency in the midst of the Watergate scandal, supported Israel against what Henry Kissinger, his secretary of state, called OPEC’s ‘political blackmail’. In retaliation after Israel’s victory, the Shah, hosting a conference of OPEC producers in Tehran in December 1973, urged even higher prices than $12 a barrel. Privately, Nixon protested about the potential ‘catastrophic problems’ that would be caused by the ‘destabilising impact’ of the price increase. Iran, the Shah replied, needed to realise the maximum from its resources, which ‘might be finished in 30 years’. Whether the Shah believed his prophecy was uncertain, but OPEC’s new power was indisputable.

By then, Marc Rich and Pinky Green had quit Philipp Bros in fury to create a rival organisation. Registered in Zug, Switzerland, Rich’s new company used Philipp’s secrets and key staff to establish a network that spanned the globe, although the paper trail ended either in a shredder in his New York headquarters or in Zug, beyond the jurisdiction of America’s police and regulators. There was good reason for destroying the evidence. Rich’s growing empire was profiting by exploiting regulations introduced by President Nixon in 1973 to mitigate increasing oil prices and to encourage American companies to search for new oil. The regulations priced ‘old’ oil higher than ‘new’ oil. In common with many American oil traders, Rich relabelled ‘old’ oil as ‘new’. Unscrupulous traders, it was officially estimated, made about $2 billion from such practices between 1974 and 1978. Rich would claim that he, like his rivals, had exploited a loophole in badly drafted regulations. However, he had set himself apart from other traders by ostensibly operating from Switzerland, in order to evade American taxes. That might have been ignored if he had not planned to profit by exploiting a crisis in Iran, where oil workers were striking to topple the Shah, disrupting supplies. Oil prices in Rotterdam rose by 150 per cent, the harbinger of what would be called the second oil shock. Anticipating the shortage, Rich had again purchased oil for storage from corrupt Iranian officials. Among his customers was BP, the former owner of the Iranian oilfields, which was anxious to keep its refineries operating. BP’s reliance on Rich increased after the Shah was ousted from Tehran in January 1979 and replaced by the Islamic fundamentalist Ayatollah Khomeini. Fears of an oil embargo pushed prices further up.

On BP’s trading floor in London, Andy Hall watched Chris Moorhouse, the lead trader, regularly run up a flight of stairs to ask Bryan Sanderson, the director responsible for the supply department, to approve contracts to buy oil at increasingly higher prices. Over those weeks Rich resold oil which had cost between $1 and $2 a barrel for around $30. Resentful traders haphazardly tried to compete, and enviously asserted that Rich had paid for the oil with weapons. More seriously, Rich’s oil was occasionally exposed as substandard.

Refineries across the world relied on Iranian inspectors to certify the quality of the oil. Few realised how easy it was for Rich to disguise a tanker of low-quality crude. One tanker dispatched by Rich’s company to supply Uganda’s solitary power station carried, despite the inspector’s certificate, unusable ‘layered’ oil. After a day’s use the power station broke down, and the country’s electricity supply was cut off until another tanker arrived. Rich was aware that he was breaking the US embargo, but his profits were soaring. His good fortune was not welcomed by those queuing for petrol across America and Europe. Big Oil was accused of profiteering from rationing supplies, and Rich was in the firing line after the seizure on 4 November 1979 of 52 American diplomats in Tehran. His profiteering from America’s humiliation sparked a federal investigation into suspected tax evasion.

Rich’s success also aroused the interest of two independent oil traders: Oscar Wyatt, an American famous for running over anyone who got in his way, and John Deuss, alias ‘the Alligator’, a scarred buccaneer based in Bermuda, born 200 years too late. The son of a Ford plant manager in Amsterdam, Deuss’s early career as a car dealer had ended in bankruptcy. His next occupation was bartering oil between opportunistic producers and South Africa and Israel, both of which were excluded from normal trade by embargoes. From the profits he bought a refinery and 1,000 gasoline stations on America’s east coast. Compared to Marc Rich, Deuss and Wyatt were minnows. Rich’s skill, as they both appreciated, was obtaining oil by any means possible, brilliantly mastering the markets and insuring himself against losses by asking Andy Hall to legitimately hedge his daily trade against price fluctuations.

In 1980, Hall arrived in New York to run BP’s nascent trading operation. After BP’s expulsion from Iran and from Nigeria in 1979 for illegally trading with apartheid South Africa (exposed, according to BP’s executives, by Shell, which was eager to remove a rival), the company was seeking new sources of income. BP’s directors had noticed that as OPEC’s control over prices crumbled, BP could trade just for profit – buying and selling oil from other suppliers, and not just for its own use. After the discovery of oil in Nigeria in the mid-1950s and in the North Sea in 1969, the governments in London and Washington encouraged the oil companies to flood the market in order to undermine OPEC’s cartel. Hall, a novice trader, was given a short lesson on the art by Jeremy Brennan, the trader whom he was replacing. ‘To find out market prices,’ explained Brennan, ‘just tell them you want to buy when you want to sell, and that you want to sell when you want to buy. Keep good relations with the other majors and don’t squeeze.’ Hall decided to ignore the advice.

Conditions in America had changed. Although the country was the world’s largest energy producer if its oil, gas and coal were combined, the regulations introduced by Nixon in 1971 to encourage more exploration and keep oil prices down had proved unsuccessful. The fall of the Shah had prompted a new search for more oil and other energy sources, including nuclear power and natural gas, and energy efficiency. President Jimmy Carter encouraged the purchase of fuel-efficient cars, especially diesel engines, which used 25 per cent less gasoline, and greater energy conservation. His initiative was floundering when, on 22 September 1980, Iraq invaded Iran, starting an eight-year war. Overnight, both countries ceased supplying oil, and in anticipation of shortages, inflation and a recession, oil prices soared. The government in Saudi Arabia increased oil production to stem the emergency, and the crisis was short-lived. In 1981 Ronald Reagan, the new president, abolished price controls, and America was promised as much cheap oil as it needed. No one anticipated the turmoil this would cause. America’s oil industry was booming, and the supply gap from Iraq and Iran was filled from the North Sea and Alaska. Then, just as Saudi Arabia increased production, oil demand in the West fell. Prices tumbled, and OPEC members cheated on quotas to earn sufficient income. In retaliation against its OPEC partners Saudi Arabia flooded the market, and prices fell to $10 a barrel, undercutting oil produced in America. To save jobs in Texas, Vice President George Bush toured the Middle East, urging producers to cut production. His task was hopeless. Oil was no longer a state utility but was becoming a private business. Speculators and traders, not least Andy Hall and BP, rather than politicians and the OPEC cartel, were gradually determining prices.

The major oil companies had lost their way. The nationalisation of their assets in Iran, Saudi Arabia, Libya and Nigeria had shaken their self-confidence. Relying for supplies from dictatorships, Peter Walters of BP decided, had proven to be a mistake. Irate shareholders were demanding better profits. The oil companies began searching in the shallows of the Gulf of Mexico and in the North Sea, but refused to stray into the unknown. An offer to Walters in 1974 from the Soviet ambassador of exclusive rights to explore for oil in western Siberia had been rejected as too risky. Without experience in exploration, Walters did not understand the limitations of his strategy. The new world was unstable, and the future was unpredictable. Oil had become a cyclical business. Fearful of a financial squeeze, the American majors diversified into non-petroleum industries which would eventually include coal mining, mobile phones, high-street retailers, nuclear power, chemicals, button manufacturing and minerals. Exxon invested in the Reliant car; Occidental bought Iowa Beef Processors; Gulf considered buying Barnum & Bailey circus; BP bought a dog-food factory. Astute trading was another solution to compensate for low prices and the loss of oilfields.

To exploit the political uncertainty, Andy Hall was urged to trade aggressively. In the era before computers and screens, the market was inefficient. Traders were constantly scrambling to identify the last trade in the market and the latest price paid by rivals. In 1981, ascertaining future prices was difficult. At the beginning of the Iran crisis, experts had predicted that oil would rise beyond $40 a barrel, but instead it had remained at around $30, and sometimes lower. Politicians and OPEC’s leaders blamed London’s traders and the Rotterdam spot market. The oil companies, having bought massive quantities of oil to cover every eventuality, were dumping their stocks. The volatility of prices caused OPEC and most of the major oil companies concern, but BP seemed well-placed to profit from the new uncertainty. Unlike other traders, Hall noticed that besides the increasing amounts of oil being imported by the USA and the simplicity of trading tankers of crude oil on the daily Rotterdam spot market, there was an opportunity to speculate about future prices by using schemes devised in the financial markets. The rapid changes in prices made those profits potentially lucrative. The second oil shock had hastened the development of speculation.

The impetus for the change was BP’s discovery of oil in the North Sea. Before the discovery of the Forties field in 1970, few experts had believed that any riches would be found under the grey water. The surprise breakthrough fired a stampede, akin to a gold rush. Among the biggest reservoirs was ‘Brent’, discovered in 1971 beneath 460 feet of water, which would provide 13 per cent of Britain’s oil and 10 per cent of its gas. Developed by Shell across 10 fields and 13 platforms, the reservoirs were 9,400 feet below the sea bed, and the oil was piped 92 miles to Sullom Voe, a terminal in the Shetlands, using unique technology. In 1976 Shell’s experts estimated that production would end in the mid-1980s, and on that basis the oil companies were allowed to take the oil cheaply, without paying special taxes. But as the North Sea reserves’ true size became apparent and their productivity was extended for at least a further 35 years, the British and Norwegian governments imposed swingeing taxes just like other national oil companies, and reaped the same consequences of the oil majors refusing to search for new oil.

Initially, the North Sea produced about 24 tankers of oil every month. As production increased, a few American refineries switched to the ‘light and sweet’ North Sea crude and abandoned Saudi Arabia’s heavy ‘sour’. Although the quantities of this oil were small, their effect on the market was significant. After 1976, North Sea production was controlled by the British and Norwegian governments. To avoid oil shortages in Britain and to thwart profiteering, the government agency BNOC (British National Oil Corporation) intervened at the taxpayer’s expense to undercut OPEC prices, and directed that crude should be sold only to refineries. In the early 1980s these restrictions were breaking down, and North Sea oil was leaking onto the ‘spot market’, attracting dealers in London and New York. Although the quantities traded were small, the free market of Brent oil became the price-setter or benchmark for oil produced in North Africa, West Africa and the Middle East. The Saudis complained of chaos, but the traders loved the opportunities for speculation. BP and Shell fixed Brent prices, and using BP’s oil and information, Andy Hall began trading Brent oil aggressively. Both oil companies had to accept that the market had become opaque.

To introduce transparency into the forward, or futures, market while controlling prices, Peter Ward, Shell’s senior trader and the self-appointed guardian of the Brent market, formalised in 1984 the idea of ‘15-day Brent’. On the 15th of every month the oil majors were assigned a cargo of 600,000 barrels of Brent crude at Sullom Voe for delivery the following month. At that point, once the oil major named the day for delivery, the Dated Brent could be traded, and speculation started. Tankers carrying 600,000 barrels of oil were sold and resold 100 times before reaching a refinery. Ward believed he had created an orderly market at fixed prices. He had not anticipated that Hall and others would profit by legitimately squeezing rival traders. As the oil travelled across the North Sea, it was bought and sold by traders playing a dangerous game – buying more Dated Brent than had been sold, knowing that others had sold more than they had bought, in the expectation of eventually balancing their books. Since the quantity of Brent oil available every month was limited, Hall could profit by buying large quantities for future delivery, hoping that rival traders would eventually be compelled to buy from him at a premium price. Squeezing the market – compelling rival traders needing the oil to fulfil their own contracts to buy at his price – added uncertainty and volatility to prices. As the Dated Brent was sold to refiners, the price of the 15-day Brent rose because there was less on the market, rewarding the squeezer. In that topsy-turvy world, Hall perfected the squeeze, attracting charges of price manipulation. The squeeze, Hall knew, was not illegal. On the contrary, the British system invited speculators to buy large quantities of Brent for future delivery, despite the fact that Hall’s tactics precipitated a 15-year battle to draw a line between aggressive dealing and manipulation of the annual $30 billion trade.

As the spot market grew and prices moved depending on disruption of supplies, Hall became a substantial participant in the futures market for the sale of oil. His advantage over other traders was BP’s own information. Only BP knew how much oil would be piped from its Forties field through its own pipeline to the terminals at Hound Point. Working with Urs Rieder, a Swiss national at BP’s headquarters in London, and under the supervision of Robin Barclay, BP was not only anticipating how prices would vary, but was actually causing the market to change. That power transformed the company’s image. Buoyed by BP’s constant participation in the physical market, Hall traded uncompromisingly against smaller competitors. Leveraging the market to the hilt was not illegal, but entrepreneurial. Rieder’s move from BP to Marc Rich strengthened the relationship between Hall and the American trader. To outsiders, BP had become the Eton of traders. BP’s traders were a special breed, stamped by pedigree and lifelong friendships. Not only were they numerically astute, they were also internationalist, aware of historical, religious and cultural tensions dictating the price of oil. Among them, Hall shone as the prefect or head boy of a new school.

Hall’s casualties included Tom O’Malley, Marc Rich’s successor at Philipp Bros. Shrewd, intriguing and charismatic, O’Malley possessed an instinctive understanding of oil trading, bending rules but, unlike Rich, not breaking them. Profiting from the oil industry’s inefficiency and the market’s ignorance, he occasionally exported cargoes of oil from America’s west coast to the east coast merely to boost prices on the west coast, but he was occasionally stung by Hall’s squeeze when he was contracted to supply Brent oil in New York. To enhance his business and remove the competitor treading on his toes, O’Malley offered Hall a job. Simultaneously, Hall also received an offer from Marc Rich. At the climax of his negotiations with O’Malley, Hall asked for the terms and conditions of his employment and a company car. ‘Terms and conditions,’ snapped O’Malley, ‘is BP bullshit. You come to Philipps to become rich.’ Hall’s resignation from BP in summer 1982 was regarded as a bombshell in London. Rising stars and potential board members never left the family.

Combined, Hall and O’Malley were feared as ‘crocodiles in the water’, and became notorious for analysing markets, buying large, long positions in Brent oil, and holding out if there was insufficient volume until rivals screamed for mercy. In the Big Boys’ game, a rival trader’s scream was an invitation to squeeze harder. Philipp Bros, or Phibro, was good at squeezing, because there were large numbers of small traders – at least 50 in the US alone. To outsiders, Phibro personified the separate world inhabited by oil traders. ‘You’re ignoring the rule, “Don’t steal from thy brethren”,’ London trader Peter Gignoux complained. The British government’s remaining control over North Sea oil prices crumbled as Phibro aggressively traded primitive derivatives and futures against rival traders. The ‘plain vanilla swap’ compelled the customer either to take physical delivery of the oil or to pay to cover the loss.

For the first time, global oil prices were influenced by traders speculating as proprietors, regardless of the producers or the customers. The OPEC countries, especially Saudi Arabia, hated their game, and even Shell was displeased that their precious commodity created profiteers and casualties. In 1983 the market became murkier when Marc Rich remained in Switzerland and escaped facing criminal charges including tax evasion. Despite the scandal, Phibro and others continued to trade with him and Glencore, his corporate reincarnation in Zug. Phibro’s aggression invited retaliation. During that year, Shell took exception to Phibro squeezing Gatoil, a Lebanese oil trader based in Switzerland. Gatoil had speculated by short-selling Brent oil without owning the crude. Subsequently unable to obtain the oil to fulfil its contracts because Phibro had bought all the consignments, it defaulted on contracts worth $75 million. Refusing to bow out quietly, Gatoil reneged on the contracts and sent telexes to all its customers blaming Hall’s squeeze. Shell’s displeasure was made clear at the annual Institute of Petroleum conference in London, where every trader was warned not to attend Phibro’s party featuring Diana Ross. ‘A puerile idea to boycott our party,’ scoffed Hall, furious that the ‘clubby clique of traders around Gatoil and Shell obeyed and we were on the other side’. Shell levied a $2 million charge, and Phibro paid.

Mike Marks, the chairman of New York’s Mercantile Exchange, Nymex or the Merc, attempted to put an end to the chaos in 1983. Dairy products had been traded on Nymex since the market was established in 1872; Maine potatoes were added in 1941; and later traders could speculate on soya beans, known as ‘the crush’. Marks introduced trading of heating oil, an important fuel in America, and crude oil futures, dubbing the price spread ‘the crack’. The reference for prices was the future delivery of West Texas Intermediate (WTI, America’s light sweet crude oil) to Cushing, a small town of 8,500 people including prison inmates in the Oklahoma prairies. Several oil companies were building nine square miles of pipelines and steel container tanks in Cushing as a junction linked to ports and refineries in the Gulf of Mexico, New York and Chicago. Prices quoted on Nymex, based on those at the Cushing crossroads, rivalled those at London’s International Petroleum Exchange, trading futures in Brent and natural gas delivered in Europe. Instantly, the last vestiges Saudi Arabia’s stranglehold over world prices were removed. With the formalisation of a futures market, OPEC’s attempt to micro-manage fixed prices was replaced by market forces. The fragmented market became more efficient, but also murkier. Dictators producing oil were unwilling to succumb to regulators in New York, Washington and London. Instead of sanitising oil trading, Nymex lured reputable institutions to join a freebooting paradise trading oil across frontiers without rules. ‘I wish we were regulated,’ one trader lamented. ‘Why?’ he was asked by Peter Gignoux. ‘So I could bend the rules.’

In 1982, Phibro had faced an unusual problem. The profitable commodities business was handicapped by a lack of finance. Its solution was to buy Salomon Brothers, the Wall Street bank, and begin issuing oil warranties. Manhattan was shocked at a commodities trader owning an investment bank. Overnight, Hall and O’Malley were established as super-league players among oil traders, yet Hall was upset. ‘Traders and asset managers don’t mix,’ he announced. ‘I don’t want to be part of a bank.’ Phibro moved to Greenwich, Connecticut, to be as far from Salomon as possible, operating as a hedge fund before hedge funds became widespread.

Across Manhattan, Neal Shear, a pugnacious gold trader at Morgan Stanley, had watched Hall’s success with interest. Recruited in 1982 from J. Aron & Co., a commodities trader owned by Goldman Sachs, to start a metal-trading business to compete with his former employer, Shear envied the easy profits Hall and Rich were making. Compared to gold, he realised, oil trading was much more sophisticated and profitable. Without transaction costs or retail customers, and blessed by general ignorance about differing prices in Cushing and elsewhere in America, traders could pocket huge profits. In economists’ jargon, oil trading was ‘an inefficient market’. Shear’s business plan was original: ‘Our concept is not to be long or short but flat, to profit from transport, location, timing and quality specifications.’ Initially he wanted Morgan Stanley to copy and compete with Hall and Rich, but Louis Bernard, one of the bank’s senior partners, understood that the rapid changes in oil prices guaranteed better profits than speculating in foreign exchange. On Morgan Stanley’s model, the volatility of oil prices could be 30 per cent, while in the same period foreign exchange could move just 8 per cent. Investment bankers who had traditionally offered their clients the chance to manage risk in foreign currencies could make much more by offering them the chance to manage, protect and hedge crude prices against the risk of price changes. In 1984 Bernard hired John Shapiro, a trader at Conoco, and Nancy Kropp, a trader employed by Sun Oil, to trade crude. To ensure a constant stream of information about the market’s movements ahead of its rivals, the bank leased a few oil storage containers from Arco in Cushing. Hour by hour the traders in New York would be aware of whether there was a surplus or a shortage of WTI in Oklahoma, which determined prices on Nymex. Shapiro invented oil options, explaining the new idea to the oil industry at its annual conference in London in 1985. ‘We’re not taking speculative positions,’ he explained. ‘This is defensive, as a hedge, leaving Morgan Stanley to manage the residual risk. We’ve no desire to do an Andy Hall.’ Andy Hall had also ‘invented’ oil options, offering to the public the chance to invest in the oil trade. In the same year, by a different route, Goldman Sachs established another group of oil traders.

As the gold market deteriorated in 1981, J. Aron & Co., a conservatively managed precious metals dealer, had been sold to Goldman Sachs for $30 million, although the rumoured price was $100 million. Goldman Sachs’s partners had only agreed to buy what one called a ‘risk-averse pig-in-a-poke’ because they assumed that Phibro’s purchase of Salomon’s must be clever, and Aron would give them additional international experience to earn a slice of the commodities trade. Three years later, 30 Aron metal traders were ordered to start trading oil. Under the leadership of Steve Hendel, Charlie Tuke and Steve Semlitz, they were to rival Morgan Stanley. Among their new ventures was speculating in heating oil contracts. By offsetting any order to buy or sell heating oil for future delivery, the bank earned its profit on the arbitrage regardless of future prices. ‘Arbing on the difference in price’ depended on whether the speculator took a bearish or bullish view, but the risk was taken by the customer. The bank’s books were nearly always balanced. Whenever an order to buy was booked, the bank’s traders made sure that the order for the future was fulfilled by finding a supplier. In those early days, neither Goldman Sachs nor Morgan Stanley were proprietary traders betting on the price, and they were blessed that British banks were either too sleepy or too small to compete.

In 1985, to profit from the ‘cash and carry possibilities’ of heating oil and crude, Goldman Sachs’s traders also acquired storage containers in Cushing and New York. The two American investment banks had become players in physical and paper oil. Oil prices, they realised, were determined not only by demand, but also by supply and international events. In that jigsaw, they traded only if they had the edge. Recognising that accurate prediction of prices was impossible, the traders did not bet on prices going in a particular direction, but traded on the volatility itself as Brent fell from $30 a barrel in December 1985 to $9 in August 1986. Fast and furious, dealers traded huge volumes even to earn just half a cent on a barrel. The watershed in their trading – before computer models had eradicated the club atmosphere – was the formal introduction of derivatives (‘Contracts for Difference’), allowing traders to own huge ‘paper’ positions to influence the market. Bankers, oil traders, the oil companies and the OPEC producers were plotting against each other to master and manipulate the market. The trade in futures, or ‘paper barrels’, was as much a banking business as an oil trader’s speciality.

1986 was the beginning of oil’s Goldilocks years. Survivors of the crash were destined to earn fortunes because of the volatility of prices. Regardless of whether these went up or down, the traders could profit. During the boom in the 1970s, oil prices had soared fivefold, and pundits had predicted $100 a barrel. In the mid-1980s, Sheikh Ahmed Zaki Yamani, the Saudi oil minister, became worried that high prices would encourage the West to search for alternative sources of energy. In that event, he anticipated, the floor for oil prices would be $18. Others including Matt Simmons, a Houston banker, predicted a crash. ‘Stay alive till ’85’ became the mantra of groups characterised by Simmons as ‘insular and unreliable’ for failing to understand the effect of the growing excess capacity. Contrary to their expectation, oil prices had fallen despite the Iran-Iraq war. Falling prices appealed to President Reagan. According to rumours, in 1985 he urged King Fahd of Saudi Arabia to flood the world with oil in order to destroy the Soviet economy; at the same time, Margaret Thatcher ended BNOC’s monopoly in the North Sea, deregulating prices of Brent oil. During December 1985, Simmons’s pessimistic forecast began to materialise. Prices were falling from $36 as Saudi Arabia flooded the world with oil, and they fell further as unexpected surpluses of oil from Alaska, the North Sea and Nigeria were dumped on the market. Traders in the speculative Brent market played for huge profits as prices seesawed. The value of 44 to 50 tankers carrying 600,000 barrels of crude oil every month from the North Sea terminals to refineries assumed global importance among the 50 players – oil companies, banks and traders. All crude oil in the world beyond America was priced in relation to Dated Brent, the benchmark of oil prices. Two traders fixing a future price for oil produced in Nigeria would base their contract on the price of Brent on the material day in the future. By squeezing the price of Dated Brent, traders could directly influence the price of crude sold by Nigeria, or Russia, or Algeria. Fortunes could also be made by manipulating the market prices of other oils across the globe based on Brent.

In that hectic atmosphere, a group of traders regularly met at the Maharajah curry house off Shaftesbury Avenue in central London to agree joint ventures to reduce risk and decide what price they would bid for Brent. In the era before the computerisation of the markets, the traders, unable to know at an instant the price of oil elsewhere in the world, relied on gossip and trust, knowing that rivals would pick their pockets whenever possible. The atmosphere in the curry restaurant was akin to a club where ‘everyone was prepared to screw but not kill’. Over 50 per cent of the trading market was governed by self-interest rather than laws. ‘Can you break a law when laws don’t exist?’ asked one club member rhetorically. Unscrupulous traders seeking to achieve the desired price on a Dubai contract would try to squeeze the price of Brent oil on that day. Shrewd traders noticing a rival taking up a perilous position would step aside to avoid a crash. The unfortunates who screamed ‘help’ could expect assistance, but at a price. The hostility was not tarnished by malice. Those meeting in the restaurant were deal junkies playing for pennies on each barrel, and at the end of the day they jumped into their Porsches to party and celebrate all night with Charlie Tuke before starting to trade at 6 o’clock the following morning. Among the reasons to celebrate was the crash of Japanese trading companies in London. In previous years, their traders had been paid commission on turnover and not profits, and were thus keen to accept any contract. Those traders were known as ‘Japanese condoms’ because they would be left holding all the contracts. As oil prices fell in the mid-1980s, the Japanese traders had been forced to pay huge sums to the London traders before their companies closed. ‘Hara-kiri all round,’ toasted the profiteers.

Falling oil prices in early 1986 terrified the Saudi rulers. President Reagan had lifted all controls, allowing supply and demand to determine oil prices. Many predicted huge rises, but instead prices began falling from $26 a barrel in January. By April they were $11. America’s high-cost producers could not compete in the new markets. Domestic production in Texas and California collapsed. Across the country, oil wells were mothballed, dismantled and closed. Laden by huge debts, property prices across the oil regions fell by 30 per cent, followed by bankruptcies and a smashed economy. Hardened oil men grieved about ‘the dark days’. In spring 1986, US vice president Bush flew to Saudi Arabia to plead with King Fahd to stop flooding the market.

OPEC’s first attempt to stabilise prices by cutting production in early May 1986 by two million barrels a day temporarily restored prices to $15. Any OPEC country which broke the rules, Yamani warned, would be punished. OPEC reduced output by another million barrels to 15.8 million barrels a day. Traditionalists believed that Saudi Arabia’s bid to control prices would succeed. Prices rose to $17 on 19 May, but secret sales of Saudi crude to sustain the country’s expenditure exposed Yamani’s political weakness as prices tumbled again to $12. OPEC had lost control. The industry was in chaos. In July prices fell below $10. British prime minister Margaret Thatcher refused a Saudi request to cut production in the North Sea. Her reasons were not political but were intended purely to raise taxes, regardless of the fact that the price collapse was causing havoc in Texas’s oil industry and the American economy. Bush’s plea had been too late. By August that year the customarily riotous Margarita lunches in Houston had dried up, sales of Rolex watches ceased, 500,000 jobs disappeared, bankruptcies proliferated, and Texas was devastated. In the darkest days, oil was $7 a barrel. In October Yamani was fired by the king, and Saudi Arabia cut production from nine million barrels a day to about 4.8 million.

Fearful of continuing low prices, the oil majors’ enthusiasm for exploration and improved production evaporated. Less glamorous, but nevertheless critical to the future, the profits from refining oil began a long, permanent decline. Convinced that low prices would last for years, the major oil companies sharply reduced their investment. ‘It’s the end of the party,’ said Peter Gignoux, noting that the world could no longer rely on the Seven Sisters as guaranteed oil suppliers. Liberated from that responsibility, the major oil companies resorted to skulduggery to reduce their taxes. By churning trades of oil to reduce Brent prices to absurdly low rates, they could reap lucrative tax advantages from the 15-day market. In 1986 Transnor, a Bermudan company, claimed to be a victim of a squeeze over Brent oil orchestrated by Exxon, BP and other oil majors. To seek relief, its directors litigated against the companies in America.

The oil companies became alarmed. The Brent trade was an unregulated international business, not subject to American or British laws. Squeezing Transnor was part of the game to manipulate prices and secure tax advantages. The companies’ initial ploy in the American court was to persuade the judge that 15-day Brent was similar to ‘a forward contract’ used by farmers to secure guaranteed prices for their crops, and was therefore not subject to the Commodities Futures Trading Commission (CFTC), the American regulator.

Created by Congress in 1974 ‘to protect market users and the public from fraud, manipulation and abusive practices’ in the commodities trade, the CFTC initially supervised 13 commodity exchanges with staff recruited from Congress, especially the agricultural committees. Political favourites, some with limited experience, were appointed commissioners to supervise those monitoring the markets. Relying on the traders’ reports submitted to Nymex as its primary tool to identify suspicious price movements, the agency was deprived of adequate funding by Congress, undermining its prestige from the outset. After 1984, as the trade of contracts tripled and the trade in options multiplied tenfold, the 600 staff struggled with an inadequate computer system and a falling budget to identify market manipulation and excessive speculation in 25 commodities, the value of which was growing towards $5.4 trillion a month. That bureaucracy was anathema to Exxon and BP. The oil majors adamantly denied the agency’s authority over their business.

Transnor argued the opposite. Its agreement to buy Brent oil, the company argued, was a speculative or hedging ‘futures contract’, which was subject to American law and the CFTC. In 1990 Judge William Conner found in favour of Transnor, ruling that trading Brent was illegal in America. The oil majors were dismayed. Oil traders, they argued, were big enough to look after themselves without a regulator’s protection. To persuade the US government of their cause, they stopped trading with American companies and lobbied the director of the CFTC in Washington to reverse the judge’s ruling. The CFTC, a lackadaisical regulator caring primarily for farmers and agricultural contracts, had never experienced the pressure of oil lobbyists. Within days the companies declared victory. Fifteen-day Brent was declared to be a ‘forward contract’ and beyond regulation. The oil companies could administer their own ‘justice’, especially when they fell victim to a squeeze of Brent oil orchestrated by John Deuss, the sole owner of Transworld.

Transworld was based in Bermuda, with trading offices in London and Houston, and Deuss’s micro-management stimulated the sentiment among his traders that the only compensation for suffering his obnoxious manner was the unique lessons in oil trading he could provide. Oil spikes, Deuss believed, occurred once every decade, and in the intervening years traders should tread water, manipulating the market with squeezes. The best squeezes, he boasted, passed unnoticed.

During 1986, Deuss decided to execute a monster squeeze on the Brent market. Mike Loya, Transworld’s manager in London, was delegated to mastermind the purchase of more oil than was actually produced in the North Sea. In that speculative market, the cargo of a tanker carrying 600,000 barrels of North Sea oil was normally sold and resold a hundred times before it reached a refinery. If prices were falling, traders who bought at higher prices were exposed to losses, while those selling short would expect to profit. Starting in a small way, Deuss and his traders in London bought increasing amounts of 15-day Brent every month. Seeing that by tightening the market they were pushing prices upwards and earning extra dollars, they became bolder. Summer 1987 was the self-styled ‘Eureka Moment’. To allow maintenance work, monthly oil production had been reduced to 32 cargoes. Traders at Shell, Exxon and BP had as usual sold 15-day cargoes, expecting to buy back at the end of the period any oil they needed for their refineries. Now, however, their offers were ignored. Mike Loya, the traders noticed, had bought over 40 cargoes, so owned more oil than the fields produced. And having bought everything, Loya was not selling. Transworld’s squeeze was felt in London and New York. Prices rose and the protests grew. The oil majors needed Brent to produce specific lubricants which were unobtainable from other North Sea crudes. Without that oil, the refineries could not operate. Contractually bound to supply Brent, they were compelled to pay Transworld an extra $2 a barrel, earning Deuss $10 million profit for one month’s work. Unexpectedly, the majors then suffered a second blow. Because of the complexities of oil trading, while 15-day Brent prices increased, Dated Brent prices fell. That fall directly cut the prices of oil produced in West Africa and the Gulf, so the producers lost money on supplying it to other refineries. Deuss’s squeeze had caused chaos. ‘Very painful,’ admitted BP’s senior trader, suspecting that the squeeze had been profitably shadowed by Goldman Sachs and Marc Rich.

After Loya’s summer coup, Transworld’s traders earned more profits from smaller squeezes until, in December 1987, Deuss believed he had the information to strike a spectacular bonanza. Focused on an audacious coup against the oil companies, he was convinced by the golden fable that no regulator, stock exchange or even country could control the oil market. Like every trader, Deuss nurtured his OPEC contacts, and few were more important than Mana Said al Otaiba, the oil minister of the UAE, who was also a co-owner with Deuss of a refinery in Pennsylvania. Al Otaiba convinced Deuss that in order to force up oil prices, OPEC would agree at its meeting in January 1988 to significantly cut production. If OPEC’s production fell, Brent prices would rise.

‘Buy Brent,’ Deuss ordered. Transworld’s traders in London bought 41 out of 42 Brent cargoes for $425 million, but prices barely moved. No other traders appeared to believe that OPEC would cut production. Then prices began to fall. ‘Buy more,’ Deuss ordered, to shore up his position. To achieve a squeeze, he simultaneously also bought Brent oil from rival traders for delivery in the same period. Those traders, unaware of Deuss’s plot, had expected to buy those cargoes from BP and Shell once they were produced. In the common usage, the traders were ‘short’ – selling oil without owning it. As the moment of delivery approached, Deuss demanded delivery of the oil. The unsuspecting traders discovered that no oil was available. Deuss expected to hear screams appealing for mercy. The traders faced two options: either pay Deuss a penalty for defaulting on their contracts, or buy their cargoes from Deuss in order to resell them to him, inevitably suffering a hefty loss. But instead of hearing screams, Deuss became perplexed by the ‘shorts” silence. Unknown to him, Peter Ward, Shell’s trader, had agreed with Exxon to sabotage the squeeze by producing extra oil. ‘Deuss is a buccaneer,’ Ward declared. ‘Let’s teach him a lesson.’ There was, he decided, a fine line between combat trading and corrupt trading.

To embarrass Deuss, a Shell trader gave the details of the failing squeeze to the London Oil Report and BBC television. ‘Everyone’s ganging up against him,’ noticed Axel Busch, the Oil Report’s editor. ‘It’s become a free for all.’ Deuss calculated the cost. Not only could he not afford to pay for the 41 cargoes he had bought, but the storage costs if he did take delivery would be crippling. Urged by his staff to continue buying up to 60 cargoes, Deuss blinked. Unable to bear the risk, he retreated. Summoning his London manager out of an Italian restaurant, he ordered, ‘Sell everything.’ Within minutes, the first six cargoes were sold. Competitors smelled Deuss’s panic. With 35 cargoes remaining, prices collapsed. Transworld lost $600 million. Deuss could pay his debts only by selling his oil refinery. ‘He’s been bagged,’ laughed Peter Gignoux. It was the end of an era. In 1988 the International Petroleum Exchange in London opened a regulated market to trade Brent futures. Refiners could hedge their exposure to prices. Some believed that the squeeze and manipulation had finally been curtailed. But the traders and the oil majors knew that humiliating one buccaneer had not legitimised the trade. The odds, Andy Hall knew, and the potential profits, had only increased.