The Squeeze: Oil, Money and Greed in the 21st Century. Tom Bower

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