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

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СКАЧАТЬ 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 СКАЧАТЬ