Deepwater Horizon event

The Deepwater Horizon burns after the explosion. Photo: US Coast Guard

The Gulf of Mexico oil rig Deepwater Horizon was either a triumph of 21st century human engineering or one of the worst excesses of global capitalism, take your pick. For 13 years the South Korean-built monster rig plied ocean waters finding hard-to-reach oil 10,000m deep in the Gulf of Mexico until its life was ended, as was 11 people aboard, in a spectacular explosion on April 20, 2013. There followed the largest oil spill ever over 87 days until the well was finally capped.

The Hollywood film Deepwater Horizon barely taps at the surface of many of the issues but as disasters action films go, it shines a rare light on corporate excess. The movie partially focuses on the death by a thousand cuts in the lead-up and ignores the destructive aftermath to concentrate on the human element of the disaster on the day, but to that end it does a fine job.

Deepwater Horizon, the rig, had a complicated history the film alludes to in its corporate colour-coded cast. Swiss company Transocean owned the rig and flew it under the Marshall Islands flag of convenience. Almost half the world’s fleet is registered in three countries – Marshall Is, Liberia and Panama – none of which has a large maritime fleet. The flag of convenience is globalism writ large, offering economic and regulatory advantages, and increased freedom in choosing employees from an international labour pool but also anonymity, tax advantages and immunity from prosecution.

The rig had worked in the Gulf of Mexico all its life. In early 2013 the rig was in the Macondo Prospect 40km off Louisiana, a field whose exploration rights were owned by a three-company conglomerate. The majority shareholder (65%) was British multinational oil giant BP. Texan oil company Anadarko owned another quarter, with the remaining 10% with the Japanese keiretsu Mitsui. Transocean and all three field owners would suffer big financial penalties after the event but well-known BP carried the most reputational damage.

Deepwater Horizon’s primary asset was its ability to explore for oil at deeper levels than any other rig in the world. It had a great success rate in finding oil wells and was finishing off at Macondo at the time of the accident. It was considered a “lucky” rig and had a fine safety record. But as the GFC began to bite and the oil price dived, the owners and operators were looking to make cost savings whereever they could. Inevitably, maintenance suffered as the company culture changed. BP was investigated for having a “worse health, environment and safety record than many other major oil companies.”

The problem was exacerbated by a administrative conflict of interest. The US government makes big money from Gulf wells through selling off the exploration rights licences in auctions held by the Minerals Management Service. However that same Minerals Management Service was also in charge of the regulation and inspection of the oil rig. The pro-business George W Bush administration was keen to remove “red tape” from commercial enterprises. But some of that tape was holding things together. According to an Associated Press investigation MMS’s examination was performed with a lack of detail, lax regulations and poor record keeping. During its lifetime, Deepwater Horizon had six citations of non-compliance, five relating to safety and the sixth to electrical equipment.

The safety event covered in the film was the failure to test cement at the well.  The investigation found this would have cost $128,000 and taken 12 hours. BP and Transocean blamed each other for the lack of safety checks and misinterpreting the results of the checks that were performed. Neither admitted cost cutting caused the accident. BP issued a terse statement after the movie’s release to say it was not an accurate portrayal of events and it ignored “multiple errors made by a number of companies”.

Accurate or not, the film’s portrayal of the explosion was spectacular on screen. The proximate cause was a problem with the blowout preventer. Some of the 126 workers on board later testified the electric lights flickered, followed by two strong vibrations. A blowout occurred – a bubble of methane gas escaped from the well and shot up the drill column, expanding quickly as it burst through seals and barriers before exploding.  The explosion caused an uncontrollable fire and after 24 hours, the rig sank. The nearby Tidewater-owned supply boat took 94 workers to safety. Four more made it to another vessel and 17 were rescued by helicopter. Those that died were mostly on the platform floor at the time of incident. The film Deepwater Horizon is dedicated to those 11.

The tragedy did not end there. It took almost three months to cap the oil spill and almost five million barrels of oil spilled into the Gulf of Mexico. There was extensive damage to marine and wildlife habitats in one of the most productive ocean ecosystems of the world. Oil and compounds entered the food chain leading to fish with oozing sores and lesions and pelican eggs with petroleum compounds. Several species were critically endangered and there was a sharp increase in dolphin deaths. There were also human physical and mental health consequences to those living near the Louisiana and Florida Gulf coasts.

In July 2015 BP agreed to pay a fine of $18.7 billion to the US government and five states, the largest in US corporate history. The size of the fine shows that although the regulator was compromised (and eventually split up by the Obama administration), the US court system remains a strong bulwark agains unfettered capitalism. Imagine how little BP would have paid had the accident happened in, say, Mexican waters. The company remains bullish. BP recorded a loss in September 2016 of $1.5b but the net loss includes a $5.5 billion loss for settlement in the gulf of Mexico oil spill, leaving the adjusted net income to be around $1.5 billion in profit. Its dividend is still safe.

Deepwater Horizon, the rig, was a force of nature, that ultimately was unnatural. Deepwater Horizon, the event, was a tragedy with many deep repercussions. Deepwater Horizon, the Hollywood movie plays on that tragedy for emotional reaction. BP might well say that the movie did “not reflect who we are today, the lengths we’ve gone to restore the Gulf, the work we’ve done to become safer, and the trust we’ve earned back around the world”. But the movie forces people to think about chain reactions and human agency in corporate decisions. That’s no bad thing and it deserves a wide audience.





The history of oil: Past, present and future

oil wellOf all the oligopolies that controlled the oil price, the reign of OPEC was the shortest and most anarchic. At peak production OPEC controlled over half the market but by 1975 it was a shrinking market with a surplus of world oil. Only predictions of coming shortages stopped a total price collapse and there was a small but growing spot market where buyers would pay over the OPEC odds to guarantee supply.  Every time the spot market went up, hawkish producers like Iran, Iraq and Libya demanded OPEC hike up its prices. A second oil shock was coming.

The catalyst was the 1978 revolt against the Iranian Shah. Pahlavi’s brutal regime imposed martial law against protesters but that only brought 17 million people out on the street. The dying Shah was convinced his time was up and he left the country in January 1979, sending the oil world into panic over the future of the world’s fourth largest producer. The Three Mile Island nuclear disaster of that year also helped inflate oil prices as Ayatollah Khomeini’s regime inspired Islamic radicals everywhere.

World tensions climaxed with the Soviet invasion of Afghanistan at the end of 1979 causing the US president to issue the Carter Doctrine: “Any attempt by outside forces to gain control of the Persian Gulf would be regarded as an assault on the vital interests of the US”. The US would use military force to defend those interests. Yet Carter was powerless to end the US embassy siege in Tehran as scientists predicted peak oil was coming.

Not for the first or last time, they were wrong. In 1980 world demand dropped abruptly as oil finally proved to be price sensitive. The previous high prices had enabled profitable investment in otherwise hard to reach areas such as the North Sea and Alaska while the USSR also upped its production to become the largest in the world. Saudi Arabia decided to become a swing producer as OPEC slashed production to keep its prices high but Iran, engulfed in war with Iraq, refused to throttle its output. The first West Texas Intermediate oil future market at New York’s Nymex, launched in 1983, served as an objective frame of reference for all oil pricing and unchained from distortive psychology, spot transactions drove prices down.

By 1986 a tidal wave of oil hit the market causing prices to collapse. Free market economics had far-reaching effects on the seven sisters. Thatcher’s public floating of BP saw the Kuwaiti Investment Office buy one fifth of the company while Gulf was taken over by Chevron. Oil became just another commodity, subject to the vagaries of world demand and the iron laws of economics. Saddam Hussein further destroyed OPEC’s credibility with Iraq’s invasion of Kuwait in 1990. After defeat by a US-led coalition in 1991 , Iraq’s production went down to one fifth of its pre-war total until Saddam finally accepted a UN Oil for Food program.

Even the end of the Soviet Union had no effect on oil prices as demand stayed sluggish. It took renewed discipline by OPEC at the end of the 20th century to stabilise supply and finally increase prices. The problems of the Middle East were brought home to Americans with the 9/11 attacks and the failures of the Israel-Palestine peace process. The hawkish Bush administration used 9/11 as an excuse to invade Iraq, though it made the politics of the region – and oil supply – more unpredictable. With no new exploration finds, the price soared after 2003. Once again the prophets of doom spoke of the end of the oil era. Once again they were wrong. Russia and Venezuela stepped up production to meet increased demand.

Outside the Gulf, the story of the 21st century has been the growth of third world consumption, led by China. The price which stayed below $25 a barrel from the 1980s to 2003, began to skyrocket reaching $147 in 2008, with record profits for the oil majors. It took a decision by President Bush to lift the ban on oil drilling to end the rises and the GFC that struck later that year sent prices plummeting again. It rose steadily again as the Arab Spring affected output in the Middle East and a faltering US economy kept the dollar low.

By 2015, the barrel price was one third what it was in 2008 and by the end of the year had slipped from $50 to $38. The low price has acted as a dampener on exploration of shale oil and gas but predictions of peak oil seem as far fetched as ever they were in the last 50 years. The concept of peak oil is based on the scientific model of Marion King Hubbert dating from 1956 (and not invented by the “green left” as ludicrously claimed in today’s Australian by Judith Sloan) from his observations of the production bell curve of known oil provinces. Hubbert correctly predicted peak oil in US fields (which were the most well-researched) around 1970.

Recoverable oil supplies are finite and demand is high. However Hubbert’s models don’t take into account scientific innovations such as fracking, limited knowledge of geology and hydrocarbon exploration or political motivations. When Hubbert tried to apply his model to world supply he predicted peak in the mid 1980s with a massive drop off by the end of the century. Of course that proved hopelessly wrong with over twice as much oil drilled in 2000 as Hubbert predicted. The International Energy Agency says production has ratcheted up from 75 mbd (million barrels a day) then to 97 mbd by end 2015 and a forecast average demand of 96 mbd next year. Indeed Hubbert failed to foresee that the US itself would contribute most of the increases through its shale oil supply which came online in 2008.

Certainly continued low prices will act as a dampener on investment in new oil and LNG fields and the world climate agreement will further reduce incentives. But long term the iron laws of supply and demand will govern the price of crude and China will continue to drive demand. Sometime in the next 10 to 20 years solar and wind power will become cheaper alternatives but until that time oil will remain the black gold driving the world’s ongoing obsession with energy as it has done for the last 150 years.

The history of oil: From Seven Sisters to OPEC: 1946-1974

Mr Robert Garrott, cashier at Hopfields Service station on the O
Petrol shortages were common in the 1973 oil shock.

America’s growing involvement in Middle East affairs after the Second World War came to a head with the establishment of Israel in 1948, despite the distaste of the US’s new oil partners Saudi Arabia. President Harry Truman fought against his own administration and the oil companies to recognise the new country as American policy in the region remain mired in contradiction for decades to come. Meanwhile the British overthrow of Reza Shah in Iran (as Persia renamed itself in 1935), set in motion more nationalism and hatred of BP’s dominance of their economy and their refusal to accept the “fifty fifty” arrangements of other world oil producers.

Veteran politician Mohammed Mossadegh led the opposition to foreign manoeuvring and in 1951 the Iranian parliament approved his proposal to nationalise BP’s assets. Labour prime minister Clement Attlee labelled the Iranians “thieves” and “paranoics” though they were doing exactly what Attlee was doing in Britain: nationalising major institutions. Britain led a world oil blockade of Iran which lurched towards economic collapse. Britain’s position hardened when Churchill was returned as prime minister in 1951. His hopes of a coup d’etat were raised after Eisenhower won the US presidential election a year later and Iran was seen as a potential Soviet pawn, threatening the oil reserves of the Persian Gulf. The successful coup was engineered in 1953 but Britain did not get the result it wanted. An international consortium replaced BP’s monopoly with British and American interests getting 40% each. The oil companies were at the forefront of American foreign policy and strategic objectives.

The golden age of oil was between the Marshall Plan of 1948 and the first oil shock of 1973, with world consumption growing sixfold and the number of cars growing fivefold. Europe and Japan led the way with car production, while aeroplanes became mass transportation. Petrochemical plants also had inexhaustible demand for oil to make plastics and the Gulf countries rose to the challenge. The combined production of Saudi Arabia, Iran, Kuwait, Iraq and the Emirates went from 1.7 mbd in 1950 to 13.3 mbd in 1970, skyrocketing to 20.5 mbd by 1973. Cheap oil underpinned the postwar economic miracle, with Europe tapping into growing Soviet reserves whenever the Seven Sisters became too demanding.

Other countries looked at how they could best use their oil. In September 1960 ministers from Venezuela, Saudi Arabia, Iran, Iraq and Kuwait met in Baghdad to form the Organisation of Petroleum Exporting Countries. OPEC would be an instrument for collective bargaining and self-defence. Change was coming, presaged by an Iraqi coup in 1958 that swept away the pro-British administration. In 1961 Iraq nationalised its oil industry as it looked to the appealing pan-Arab vision of Egypt’s Gamal Abdel Nasser. The days of “fifty fifty” were numbered.

Nasser used oil as a weapon to end western domination. In his Philosophy of a Revolution Nasser called oil one of the three fundamental pillars of Arab power (with unity and socialism). From 1955 Arab nationalist strikes hit oilfields across the region and fearful America decided not to finance Nasser’s Aswan Dam. In retaliation Nasser nationalised the Suez Canal, which provided half of Europe’s oil needs (1.3 mbd) and a lucrative income to owners Britain and France.

Britain and France secretly planned to reclaim the canal, with Israel set to gain the Sinai Peninsula. The plan fell apart when the US refused to support it and the USSR threatened to intervene. It was Nasser’s biggest triumph and was followed by ructions in the short-lived merger with Syria and the more profound rise of the Baathists in Iraq. Saudi king Faud considered an alliance with the seemingly unstoppable Nasser, despite Egyptian propaganda portraying the Saudis as corrupt servants of the Americans. Washington looked at ways to reduce dependence on Arab oil but were helped by Nasser’s overreach in a long and bloody war in Yemen and a surprise attack by Israel in 1967 which routed Egyptian, Syrian and Jordanian forces and set today’s Middle Eastern borders.

In response, Arab oil producers placed an embargo on the US, Europe and Japan. Despite supplying 80% of Europe and Japan’s oil, the embargo was unsuccessful. The US ramped up domestic production to meet the shortfall as did Iran and Venezuela and the embargo ended in a damp squib after a couple of months. Nasser died of a heart attack in 1970 and his pan-Arab mantle passed to new Libyan dictator Muhammad al-Qaddafi. Qaddafi immediately overturned the “fifty fifty” formula to a new 55-45 arrangement in favour of Libya and a 30% increase in its posted price for oil. It set the scene for a world oil shock in 1971.

Decades of overproduction and low prices came to a shattering end in a perfect storm of adverse circumstances. The world was reliant on Middle East oil with the US at full capacity by 1971 (ending the Texas Railroad Commission’s role as swing producer). The Nixon administration unlinked the dollar from the gold standard to devalue the currency while trying to introduce price controls to tame inflation caused by financing the Vietnam war without raising taxes. The artificially low oil price discouraged further investment.

A freezing 1969-70 US winter brought energy shortages while Iran and Algeria emulated Libya’s oil pricing arrangements. Despite rising prices, western demand went from 46 mbd in 1970 to 58 mbd in 1973. Nasser’s successor Anwar el-Sadat received Saudi blessing for his 1973 attack on Israel, backed with a huge OPEC price rise from $2.90 to $5.11 a barrel, with production cuts for each month Israel failed to withdraw from its 1967 territories. While the Saudi embargo was a failure and the Israelis won the Yom Kippur war, the perception of a crisis sent prices wild, rising tenfold since 1970. By June 1974 Saudi Arabia acquired 60 percent of Aramco as the Seven Sisters era came to an end. However the fundamental oligopolistic command of the oil market remained unchanged. The power the Seven Sisters inherited from John D. Rockefeller was now in the hands of OPEC.

History of oil – The rise of Saudi Arabia

saudi oil
Dammam No. 7, the first commercial well in Saudi Arabia, struck oil in 1938. (Photo: Wikipedia)

John D. Rockefeller profited vastly from the age of oil based on the illuminant powers of kerosene. But Thomas Edison found an even better way to provide lighting, needing oil’s backers to find a new use for the fuel. It was ideal timing for the newly perfected motor car, though no one person can claim credit for the invention. Across late 19th century Europe, several manufacturers and scientists were experimenting with internal combustion engines, notably Karl Benz, Gottlieb Daimler and Rudolf Diesel. The first true car was a 1901 Mercedes designed by Daimler’s assistant Wilhelm Maybach but early vehicles were a rare extravagance.

Henry Ford’s Model T (1908) was the game-changer, the epitome of Ford’s standardised production line. Customers could have them in what colour they liked, as long as it was black and by 1914 Ford had sold one million vehicles. Despite the war in Europe, that figure doubled by 1916 and ballooned to 10 million by 1924. As Ford evolved his production processes, he passed on the cost reductions to his customers, while continuing to pay his staff well, ensuring a quality product always left the factory gates.

Ford’s enlightened generosity was unique but his business genius was matched by Alfred Sloan, head of rival General Motors. Sloan saw that 1920s customers weren’t happy with the same black car year after year. Optimistic times called for more diversified products. Sloan brought in a new model each year and he insisted his brands – Pontiac, Buick, Oldsmobile and Cadillac – were responsible for their own profit and loss. By 1927 Sloan and Ford were producing four out of every five cars in the world transforming oil from a source of illumination into a source of power.

Winston Churchill was among the first to realise the profound implications of oil-based transport. Britain had a natural advantage with coal, but in 1913 Churchill as First Lord of the Admiralty, successfully convinced his navy to switch from coal to oil. Though it meant Britain was going to have to import more oil, it was necessary to keep ahead of German naval developments. To ensure continued British energy self-sufficiency, Churchill insisted on government takeover of the bankrupt Anglo-Persian Oil Company (now BP) to manage the oil concession in Persia. The ensuing First World War merely cemented the notion that ample access to oil was crucial in mass mobilisation of military forces.

But there was already alarm about peak oil. By 1919, demand outstripped supply of American oil while supplies from Russia were almost wiped out by the Bolshevik Revolution. A sick president Wilson gave his reluctant blessing to the Sykes-Picot agreement which divvied up the Middle East between Britain and France. Britain carved out its Mesopotamian oil concessions at the 1920 San Remo conference, though Iraqi revolts in Nasiriya and Fallujah would damage western interests (not for the last time).

A puppet regime in Iraq was sworn to London under an alliance treaty. The US objected to British control over Iraqi oil and finally extracted an agreement in 1927 that involved BP, Shell, Total and Exxon-Mobil to jointly manage the concession. Similar situations emerged in the growing oil industries of Mexico and Venezuela leaving most of the world’s oil controlled by the emerging seven sisters. That only left the initially unpromisingly Arabian Peninsula in play.

London was the semi-colonial power of this forbidding desert of shifting sheikdoms. It wasn’t until New Zealand mining engineer Frank Holmes arrived in the mid-1920s that its oil potential began to be explored. Holmes was constrained by financial problems and eventually sold his concessions to Gulf and Chevron. Another key early player was John Philby (father of Soviet spy Kim) who formed an alliance with the House of Saud, who in 1925 had finally defeated the British-supported emir Hussein for control of the peninsula. King Abdul Aziz ibn-Saud’s success was based on a power-sharing pact with a 18th century puritanical doctrine of Islam called Wahhabism, but his need for money saw him eventually take the advice of Philby. He signed an oil contract with Chevron in 1933 for the whole of the eastern al-Hasa province.

Drilling in the peninsula was a dangerous undertaking and Chevron brought Texaco in as half partners to spread the risk. Together they formed a new company called Caltex. By the 1930s there was a new oil glut thanks to advances in geophysics, seismic subsurface analysis and secondary recovery methods using injected natural gas. Soviet production had recovered from the revolution and Middle Eastern oil was coming on-stream. Gasoline stations emerged to fill an exploding American domestic market for oil, along with motels and drive-ins.

With the threat of another price war, the global companies got together at Achnacarry Castle, Scotland in 1928 to form the first ever global oil cartel. The deal committed each company to freeze the status quo by fixing sales and tying pro-quota increases to consumption growth. The Gulf-Plus system fixed the cheaper world oil price to the more expensive American price with phantom freight charges. But the Wall St crash submerged the market with a huge oil glut; a situation finally rescued by the Roosevelt administration’s federal quotas. Thanks to Texas’s leadership in oil production, the Texas Railroad Commission became the de facto setter of world prices by deciding when to switch on and off its taps, a situation that lasted until 1971 (The group that eventually took over the Railroad’s role, OPEC, learned well from the Texan model).

Despite oil’s growing importance as a global fuel, it still lagged well behind coal at the outbreak of the Second World War by a production factor of four to one. America produced 60% of the world’s oil and the search for new oil was a critical factor in the strategy of that war. The Baku oilfields were more important to Hitler than taking freezing Moscow. Japan was less interested in Australia than in the oil in Borneo and Sumatra, and Allies planes spent far more time destroying the Ploiesti refineries in Romania than it did bombing Nazi death camps. By the end of the war it was clear to all strategists no war could be won without clear and ample supply of crude oil.

In America, Secretary of the Interior Harold Ickes warned President Roosevelt of the steady decline in the ratio between US oil reserves and production. The government kept the price of oil low to aid the war effort but this had the side impact of discouraging exploration. Ickes convinced the president to initiate an oil alliance with Saudi Arabia, which was now known to have huge deposits. Caltex were already there and looking for military protection in case of a German attack. In 1941, the US charged their Egyptian embassy to look after Arabian affairs and by 1943 the peninsula was recognised as vital to American “defence”, receiving Lend Lease support.

In 1945 the new relationship was cemented when Roosevelt met ibn-Saud on the USS Quincy in the Suez Canal. With the start of the Cold War, America became a net importer of oil for the first time and oil policy was at the heart of the Marshall Plan, which set a doubling of European consumption by 1951. Exxon and Mobil joined Chevron and Texaco’s Arabian venture to form the Arabian American Oil Company, Aramco. Mobil took 10% while the three other partners took 30% and Mobil’s lack of boldness cost it dear when it became apparent Arabia’s Ghawar was the largest oilfield on the planet. The companies settled in with a “fifty fifty profit sharing” partnership with ibn-Saud and by 1949, there was a pipeline in place from Arabia to the Lebanese port of Sidon. Arabian oil was about to power the world, and the American oil companies and the Saudi royal family were the biggest winners.

John D Rockefeller and the birth of the modern oil industry

John D. Rockefeller may have been unfairly maligned as a “robber baron”.

In his book The Age of Oil, oilman and historian Leonardo Maugeri said oil slipped abruptly into modern life via the back door. Prior to the industrial age, Mesopotamians used seeping surface oil for asphalt in roadbuilding and waterproofing and as a component in medicine. But it wasn’t until the 1850s that chemists conducted experiments to use oil as a cheap and flexible source of light. In 1854 Canadian Abraham Gesner patented Kerosene for “illumination or other purposes” and its use quickly spread around New York as a cheaper and safer alternative than existing illuminants.

Oil remained hard to get out of the ground until 1859 when Edwin Drake first used a drilling machine in Pennsylvania, adapted from earlier oil experiments at Baku, Azerbaijan. Drake built a wooden tower with a large steam-driven wheel around which he coiled a cable with an iron bit at the end. The rotation of the wheel raised the cable and when it fell back it excavated a hole. Drake drove a pipe down the hole which his men drilled inside so water and loose particles did not impede the iron bit from going deep into the ground.

Drake’s other innovation was to use the Pennsylvania 42-gallon (159 litres) whiskey barrel which would become the fundamental oil production measure still in use today. His early success attracted others to Western Pennsylvania, men (and they were mostly men) who were called wildcatters because they could hear the cries of wildcats in the isolated areas where they drilled for oil. Within two years the first oil refinery was in operation with exports shipped to London and after another four the first successful pipeline. The Black Gold Rush was on.

In the early days recurring gluts flooded the market pushing prices down and bankrupting many investors. Drake was not immune and ended his life in poverty. The dramatic roller-coaster rise of early oil prices was a source of annoyance to many and one man in particular was determined to fix the problem.

John D Rockefeller was a trained bookkeeper and trader who landed in the refinery business in Ohio in 1863. Rockefeller saw the “invisible hand” of the economy as the problem and was determined to put his own architecture on the industry by suppressing competition entirely. While he saw the wildcatting exploration business as too erratic to control, Rockefeller began to tackle the downstream processes of refining, transportation, pipelines and ships. In 1870 he founded Standard Oil in Cleveland where he decided to consolidate the entire refining business.

In February 1872 he launched the Cleveland Massacre, taking over 22 of 26 refining companies bringing almost the entire American refinery and oil service industries under his control. Those that came into Rockefeller’s tent were well rewarded for putting ceilings on their production whereas those who resisted were ruthlessly squeezed out. With the help of his partner Henry Flagler (who later developed Florida real estate in Miami and Palm Beach), Rockefeller negotiated secret deals with the railroad companies to obtain heavily discounted oil transport fees for guaranteed petroleum transport. Rockefeller even won a 25 percent fee for every non-Standard Oil barrel of oil the railroad carried.

The only hope for his rivals was to build up pipeline capacity, a technology that had to be developed from scratch. But even here, Standard Oil quickly leveraged off their industry strength to dominate by the 1880s. By then Rockefeller controlled 90 percent of US refineries and pipelines, owned most of the transport rolling stock and shipping tankers and the entire production of high-grade railway lubricant, all at a time when the US had 85 percent of the world crude production and refining.

His agents monitored the price of oil and new discoveries across America. If a competitor lowered the price of kerosene, Standard Oil would go even lower, while increasing the price elsewhere to compensate. Rockefeller’s empire was almost complete, held back only by the lack of US law for federal incorporation, making his operation fragmented. His response was the Standard Oil Trust established in 1882. Rockefeller established companies in each state Standard Oil operated. These companies transferred their shares to a Board of Trustees in New York which would allocate a proportional quantity of trustee certificates to each shareholder.

The Standard Oil Trust was kept hidden until 1889 and by then many other large companies had also established trusts. By then kerosene was the US’s largest manufactured export to the world and Rockefeller was the richest person on the planet. Yet competition was slowly emerging. The brothers of dynamite-inventor Alfred Nobel, Ludvig and Robert, were busy developing the Russian oil industry at Baku. With investment from the French Rothschilds, the Russians built a railroad to transfer kerosene from Baku to Batum (now Batumi) on the Black Sea, opening up a route to world markets.

Standard Oil tried the same tactics in Europe that were successful in America but Rothschilds launched a counter-offensive into Asia. They were helped by an English businessman Marcus Samuel who designed a new class of oil tanker capable of passing through the Suez Canal. This slashed costs compared to Standard’s Cape of Good Hope route and Samuel began building onshore terminals and storage tanks in key Asian ports.

Samuel’s emergence as a key player was cemented in 1897 as he reorganised his business into a new joint stock company which he named after his father’s shell box company, Shell Transport and Trading Company, simplified as Shell. Russian oil production surged above America’s by 1900 and the picture was complicated further by the discovery of oil in East Sumatra by the Royal Dutch Company. Marcus tried to organise a merger with the Dutch led by Henri Deterding. But Deterding out-manouevred Marcus insisting on a 60-40 split in his favour. Royal Dutch Shell came into being in 1907 but the two companies maintained separate status in The Hague and London, kept together only by Deterding’s force of will. They didn’t evolve into a single company until 2005.

A century earlier, the fulcrum of the oil world moved to Texas with enormous finds bringing the word “gusher” into the English language. New American companies rose to challenge Rockefeller’s dominance: the Texas Oil Company, Gulf Oil and Union Oil.  There was another threat in the political sphere. New president Theodore Roosevelt campaigned on an anti-trust platform. Though Rockefeller had retired in 1895 it was kept a secret and he was the most visible target of the “trustbusters”.  Rockefeller became the archetypal “robber baron” which was unfair as he kept the kerosene price low for the general public and had never turned swindling into a business practice.

But the pressure mounted on the railroads as “common carriers” to stop fee discrimination while the media used its growing power to shine a light into Rockefeller’s secretive life. The pressure finally told in 1911 when the US Supreme Court ordered the dismantling of Standard Oil into 30 independent companies. Several of what would later be called the “seven sisters” of world majors (along with Shell) emerged from the Ashes: Exxon (Standard Oil of New Jersey). Mobil (Standard Oil of New York), Chevron (Standard Oil of California) and Amoco (Standard Oil of Indiana).  The ruling ended Rockefeller’s reign of setting oil prices though did little to stop anti-competitive practices. While Rockefeller lived another four decades in quiet retirement as the symbol of 19th century capitalism, a new use beyond illumination would put oil at the heart of 20th century capitalism. The age of the internal combustion engine would change everything.

The Asylum: How a bunch of rogue traders at Nymex took over the world oil market

asylumThe little-known but important story of how a bunch of potato traders at the New York Mercantile Exchange (Nymex) came from nowhere to set the world oil price is told delightfully in the book The Asylum by talented American journalist Leah McGrath Goodman. That no one exactly understood how oil prices are set is demonstrated by the book’s transcript of an extraordinary interview between right-wing Fox News pundit Bill O’Reilly and Nymex executive John D’Agostino in 2008.

At the time, the oil price was skyrocketing towards $150 a barrel and O’Reilly was anxious to blame Venezuelan left-wing president Hugo Chavez and OPEC’s “greedy sheiks” for the high prices. D’Agostino was having none of it. He told O’Reilly high demand and a low US dollar were more to blame. O’Reilly was flabbergasted as the conversation continued. “[OPEC] gave Cheney the middle digit… they can change whatever they want, right?” he says. D’Agostino replied, “No, OPEC only set the oil supply, the price of oil is actually set in New York”.

The rest of the conversation is worth reporting in detail:

O’R: Is there a guy who says $125 a barrel?

D’A: No. There’s a huge market that sets the price.  It’s filled with hedgers. It’s filled with speculators.

O’R: Somebody has to put the $125 on the barrel. Who does it?

D’A: They’re getting it from this market.

O’R: Who is “they”?

D’A: The oil producers…

O’R: The CEO of Shell or ExxonMobil says “We’re going to pay $125 a barrel”. Is that what they say? I thought it was the sheiks and Hugo Chavez.

D’A: No, No. They are all looking to the exchanges, the free markets, to set the price. The markets right now are saying the price of crude is about $120 a barrel. It’s going up and gasoline prices are directly related to crude oil prices.

O’R: But somebody has to make a decision.

D’A: It would be great if there was just one person doing that, because then we could go talk to him.

The exchange ended with an exasperated O’Reilly believing he was being hoodwinked. It was a sentiment shared by Fox News viewers who showered the station with angry emails unable to believe American capitalists were setting the price of oil not greedy Arabs and leftist dictators. But D’Agostino was right. The price of oil set by a bunch of anonymous traders off Wall St who thought nothing of bringing the global economy to its knees.

As Goodman said, traders are yellers. One trader told her they yell because they don’t have time to be polite. “It’s a world of super-assholes,” he said. “They’re all dicks, crude, manly men.” They work on the futures market which is a scarier version of the stock exchange. Energy traders bet on the price of oil in any of the months to follow, to a period of ten years. It is precise. Even if you correctly bet prices will go up in a certain year, if you get the month wrong you could lose millions. Traders not only bet on the future price but also on the difference from month to month in a practice called “spread trading”, which they hedge against the outright future bets.

The market was Darwinian where the strongest and loudest ruled. The trading floor was often violent and nice guys didn’t last. Traders were assisted by runners who wore goggles for protection from the constant shower of trading cards raining down on them. Traders were fined $100 for every card that didn’t reach the pit in one minute of trade and expertly flicked cards which would arch perfectly before landing across the two-storey high room. Position in the trading ring was crucial because if you stood close to a major trader you would have access to all their information.

Nymex was always a down-at-heel exchange compared to the New York Stock Exchange. The guys that bet on the blue chip companies looked down on the shabby traders of minerals and commodities. If NYSE traders took an academic and mathematical approach to the market, Nymex operated more from the gut. Overthinking was bad, trading was “freestyle” and the traders were street smart. Porn was common on the floor, as were drugs. There was reputedly firearms too. The cops left them alone as they contributed large amounts to the Police Foundation. The traders’ word was their bond and behind their bland trading jackets, there were many multi-millionaires. There were 816 seats in the exchange and they sold for $1.6 million a pop or leased out at $10,000 a month.

Nymex hijacked the oil market in the 1980s. Before that it was trading home of the humble Maine potato. For half a century, around 70 traders operated out of a redbrick mansion in downtown New York betting on spuds, unaware their world was crumbling around them. A rival market was emerging in Idaho potatoes while Maine’s annual potato crop was falling. The market was also corrupt with stories of bags filled with potato-shaped stones and spoiled Maine potatoes arriving at markets in the Bronx. Worse still, a national consensus was developing that Idaho potatoes tasted better than Maine ones.

Initially this led to volatile prices which the traders loved. The wilder the swings, the more opportunity for profit. When the supply ran out at the end of spring each year, prices would go crazy, with half the market betting prices would rise and the other half hoping they would fall. The trading pit was full of farmers, politicians, bankers and spectators who came to watch the show each May. Traders were obsessed with Maine gossip, Maine weather, Maine soil. Because future contracts were tied to actual quantities, traders had to get in, make money and get out quickly to avoid a pile of potatoes arriving on their doorstep. Traders skilfully exploited the expiration date right up to the last few seconds to end up “flat” in the market without any bets left on the table.

A futures market has practical value. It made it possible for farmers to lock in future profits at an agreed price. It gave them financial stability to plan their business years ahead with price risks transferred to the speculator who pocketed the resulting profit or loss. This underlying utility still drives the futures markets in commodities like oil.

Incredibly, Maine potatoes were the third most traded commodity in America in 1976. But an enemy at the gates was about to spoil Nymex’s party. JR Simplot was an eccentric Idaho farmer, nicknamed the Potato King. When he died in 2008 aged 99, he was worth $3.6 billion, the oldest person on the Forbes 400 rich list. Starting out as an onion farmer, he branched into potatoes winning the contract to supply US armed forces in the Second World War and then McDonald’s in the 1960s. Simplot was annoyed Nymex would not trade his Idaho potatoes. In the May 1976 rush he played against the Nymex traders selling millions of dollars of potatoes driving the price down. But unlike the traders he did not go “flat” at the close of trade.

Simplot was left with a contract to deliver massive amounts of Maine potatoes which to the consternation of the market, he did not have. However he did have plenty of Idaho potatoes which he offered in compensation.  Nymex refused to accept his Idaho potatoes and the market defaulted. Simplot was fined $50,000 but busted the Maine market.

Nymex lost all legitimacy and most traders resigned. In 1977 they appointed a 27-year-old trader named Michel Marks to be its unpaid chairman. Marks was the son of a former Nymex trader and a young prodigy. Reeling from the loss of potato futures, the exchange scraped by, betting on odd trades like Australian beef cattle (when it was supposedly tainted by kangaroo meat, the price oscillated wildly which traders loved). Rival exchange the Chicago Mercantile Exchange (Comex) overtook it and tried to buy cut-price seats at Nymex. The deal went south when Comex pulled out thinking they had paid too much money.

It left Nymex in a huge hole but in the longer term Comex suffered. Marks worked around the clock in 1978 to understand the business inside out. Some traders wanted to bring back a potato market but the Simplot scars were too deep. In any case the market regulator permanently banned potato trading. There was money in platinum and other metals but these markets were not volatile enough to be super profitable. Looking at what was dormant on the books, Marks hit on heating oil.

A far-seeing energy economist named Arnold Safer convinced Marks the free market would eventually set the price of oil. In the earliest days of oil the price was set by John D. Rockefeller with his “barrels”, before it was taken over by a consortium of the Texas railroad and oil majors. Since the 1973 Oil Crisis, OPEC flexed its muscle but Safer told Marks non-OPEC countries would eventually flood the market with excess oil destroying the Middle East cartel. He also advised Marks to only trade things whose prices weren’t fixed by the government. The opportunity came with the deregulation of the heating oil market in the late 1970s. Mark dusted off an old contract to sell heating oil to the Dutch. In an ingenious move, he scratched out Rotterdam and changed it to New York harbour so they could concentrate on local trade.

The futures market for heating oil opened on November 14, 1978. Volume was low on the opening day which was not a good sign. “Low volumes beget no volumes” was the conventional wisdom in the trading pits. Marks hassled the big traders, energy companies and banks to trade with him but no-one believed OPEC could be challenged. However because Nymex had no history with oil, the industry made the fatal miscalculation of ignoring them.

Heating oil merchants paid vastly inflated for their product while even OPEC struggled to turn a buck when its price for oil did not keep up with the changes to supply and demand. Private oil companies exploited the difference by hoarding oil contracts, locking in higher prices. They charged $10 more a barrel than the OPEC price but Marks decided to do exactly the opposite. His heating oil was 20c a gallon cheaper than Exxon. His customers were initially worried whether Nymex could guarantee continuous supply and they also worried Exxon might find out about the deal and punish them. But cheap oil is cheap oil and enough merchants bidded to give Marks the start he needed. Nymex traders didn’t care about the product or the price, what they needed were sufficient bids and offers to work the gaps.

Word slowly got out about the bargains at Nymex. Serious corporate customers arrived in the form of drillers, refiners and shippers of heating oil. Within months the daily number of bids went from hundreds to many thousands. For the first time, buyers and sellers of heating oil could tell exactly what the price was by looking at the Nymex trading board. It gradually attracted all the US heating oil contracts, turning the exchange into an invaluable source of information. People began to trust the exchange because it was a public market and because, unlike the oil companies, it did not rely on ever-increasing prices to make a profit.

Things took off in 1980 when the Iraq-Iran war broke out. When the news broke, over 50 traders immediately flooded the ring clamouring for heating oil. Within days the Nymex price doubled and would have risen further but for government-imposed price limits. The low and high price were the same as everyone was buying and there were no sellers. There was a vast underground trade into the higher-priced unregulated market controlled by the oil companies, an illegal practice but which flourished without supervision.

New US president Ronald Reagan gradually eased price controls and Marks debuted futures on leaded petrol (gasoline) in 1981. That market was so successful it continued for two years even after leaded petrol was banned in the US. In 1983 Reagan removed the last of the oil price controls and Nymex launched its crowning glory: a futures contract on sweet crude light oil, the bedrock of the industry. Marks opened a specific market to sell West Texas Intermediate light to the largest oil storage facility in the world at Cushing, Oklahoma.

The dots began to join. US oil production was declining and Americans were cutting usage. OPEC jacked up its prices as did the oil companies. But the supply scare had caused non-OPEC companies to increase production flooding the market with oil, plummeting the price. Panicked Wall St traders rushed to Nymex to hedge their expensive contracts. Nymex became a huge liquidation warehouse selling off oil at bargain-basement prices. The traders made a killing on each transaction. Suddenly power was no longer in Houston, Amsterdam or the OPEC HQ at Vienna but at a grimy rat-infested building in lower New York, inhabited as Leah Goodman said by “misfits and pranksters and gun-toting gangsters who had absolutely no knowledge of the oil business”.

Other players muscled in on the market but Nymex’s position was secure. Even the oil companies came cap in hand to the exchange and openly traded on the market. When Nymex moved to the World Trade Centre the market was so intense, it did not notice the smoke pouring into the room after the 1993 bombing and traders refused to evacuate. Nymex moved out of the WTC before 2001 which was prescient. But it was slower to see the oncoming of electronic trading and almost lost the market entirely to the more innovative Intercontinental Exchange (ICE). With Nymex’s power waning they agreed to a merger with its former enemy Comex in 2008 and finally the electronic boards replaced the whirring of paper in the pits.  A handful of traders still ply their wares in a small venue using the old open outcry system of the potato trading days. There are calls for it to be preserved. But Nymex is no museum. Although people like Bill O’Reilly never knew it, its traders still set the price of oil to this day.

Iran and the West: a tale of oil and Mohammad Mossadegh

Mohmmad,Mosaddegh2Iran’s nuclear deal has big ramifications for the county’s other major source of energy: oil. Iran has the fourth largest proven reserves of oil in the world but production has halved since 2011 when US and European sanctions took hold. Iran faces many challenges to double its output back to two million barrels a day, not least due to its ageing infrastructure, but the country has long history in the oil game and was the first country in the middle east to drill for oil in 1901. But Iran also has a long history of interference from the west and if suspicious Americans look back in anger to the hostage drama of 1979, Iranians look back further to the way the Americans and British sabotaged their young democracy in 1953.

Iran had been of massive interest to the Allied Powers in the Second World War and the site of one of that war’s most famous meetings. In December 1943 Stalin, Roosevelt and Churchill met on a sunny Tehran morning to discuss how to divvy up the post-Nazi world. They pledged to work together “in war and the peace that will follow”. After the photographers searched their faces for smiles on the veranda, the three great men retired to a hall for a more private conversation. Before they discussed weighty matters of empire, Roosevelt asked Churchill what became of Iran’s former Shah Reza, adding, “if I’m pronouncing it correctly”. Churchill told Roosevelt he became a Nazi and denied Britain and Russia the use of oil and a supplies railway. They invaded Iran in 1941 and Shah Reza was forced to abdicate in favour of his son Mohamed Reza Pahlavi. The father moved to a comfortable life in Johannesburg where he died not long after the Tehran conference. Roosevelt’s question showed up US ignorance of Iranian affairs.

Yet the choice of Tehran to hold the meeting was no accident. Iran had been zone of influence for Britain and Russia since a 1907 treaty shared the country’s spoils between them. The terms of the 1907 and 1941 conquests allowed Iranians to rule as long as they did not act against their powerful guests. An officially neutral Iran was of vital strategic importance to both. Roosevelt was happy to let the two fight it out over Iranian oil while the US maintained control of the bigger fields in Saudi Arabia.

The turmoil of the 1917 Russian revolution left Iran almost entirely a British colony. AIOC, the Anglo-Iranian Oil Company (then nationalised by Churchill, now corporatised as BP) was Britain’s main supplier of oil. Another Churchill decision, to convert the British Navy from coal to oil in 1913, saw AIOC become one of the world’s leading producers supplying Britain in two world wars. In 1947 it reported an after tax profit of £40 million and gave the young Shah’s country just seven million. It reneged on a 1933 deal with his hard-nosed father to provide the workers with better pay, more schools, roads, telephones and job advancement. The young Shah was a playboy and had little interests for his people’s problems but as long as he kept control of the military, Britain didn’t care how badly his country fared.

Mohammad Mossadegh was less sanguine. He knew Iranians chafed bitterly about their abject poverty. Born in 1882, he was a parliamentarian for over three decades, implacably opposed to foreign influence. In a wave of fervour, he was elected Prime Minister in 1951 with a mandate to throw AIOC out of Iran, reclaim the oil reserves and end the British influence. Mossadegh was in his seventies and in the manner of Proust, did much of his business in bed. But when he nationalised Anglo-Iranian, he became a national hero. Shortly after, Iran took control of the refinery.

The British were outraged. British Labour prime minister Clement Attlee was conducting mass nationalisation of British assets but would not grant Iran the same licence. His government declared Mossadegh a thief and demanded he be punished by the UN and the World Court. When neither would support Britain, they imposed an embargo that devastated the Iranian economy. Mossadegh was unmoved and said he “would rather be fried in Persian oil than make the slightest concession”. Mossadegh became a third world hero and delighted his admirers further when he ridiculed Britain at the World Court saying it was trying “to persuade world opinion that the lamb had devoured the wolf”.

Time Magazine made him their man of the year in 1951 saying he “put Scheherazade in the petroleum business and oiled the wheels of chaos”. They called him a “strange old wizard” in a region where, importantly, the US had no policy. Attlee warned President Truman not to interfere with the dealings of “an ally.” The US complied but would not support a British military invasion of Iran.

Events changed dramatically when Britain and the US turned to the right. In autumn 1951 the old warhorse Churchill denounced Attlee in several speeches on the election trail for failing to confront Mossadegh firmly. Churchill said the Prime Minister had betrayed “solemn undertakings” not to abandon Abadan. He saw the loss of Iranian oil as the loss of empire and considered Mossadegh “an elderly lunatic bent on wrecking his country and handing it over to the Communists.” Britain’s position toughened when Churchill won the election.

Truman was also up for re-election in 1952 but decided not to contest. As in Britain, a Second World War hero won and Dwight Eisenhower became the new Republican president. The Cold War was Eisenhower’s biggest focus and Iran was one of his first challenges. Britain cleverly played up to the new regime in Washington claiming Iran was in crisis under Mossadegh and could easily fall to the Communist Party backed by Moscow.

Eisenhower’s new team prepared to organise a coup in Iran. Eisenhower’s former wartime chief-of-staff and now undersecretary of state General Walter Bedell Smith linked the campaign with the State Department and the CIA. At the head of these organisations were a pair of remarkable brothers. John Foster Dulles was a world-class international lawyer now turned Secretary of State while Allen Dulles now ran the intelligence organisation. The brothers had a special interest in Iran and Allen went to Tehran in 1949 where he met the Shah and Mossadegh. The Dulles brothers were ideological warriors determined to prevent Communism in Iran.

Eisenhower gave implicit approval for Operation Ajax but presented a front of plausible deniability. Behind the scenes the two Dulles and Smith had full authority to proceed. They appointed secret agent Kermit Roosevelt to bring the coup together. Kermit, who preferred to be called Kim, was a grandson of the first Roosevelt president Theodore. Independently wealthy, he was a history professor at Harvard until he joined the newly established Office of Strategic Services in the war. His work in the OSS remains shrouded in mystery but he stayed on in peacetime when it was rebadged as the CIA.

Working from the US embassy in Tehran (a fact angry Iranians remembered in 1979) Roosevelt quickly liaised with his British counterparts in the Secret Intelligence Service – MI6. Iranian tribal leaders on the British payroll launched a short-lived uprising. Roosevelt met with anti-Mossadegh politicians and persuaded the Shah to sign a “firman” (a document of doubtful legality sacking the Prime Minister). By mid-August 1953 Roosevelt and his local agents were ready. He paid newspapers and religious leaders to scream for Mossadegh’s head and organised protests and riots turning the streets into battlegrounds.

But at the last minute Operation Ajax failed. On August 15 an officer arrived at Mossadegh’s house to present the firman only to find the Prime Minister was tipped off in advance. The Shah fled the country while units loyal to Mossadegh surged through Tehran. Roosevelt did not quit and three days later he organised a second attempt. Once again he launched a massive mob in the capital. Crucially Mossadegh did not call out the police to stop them. Armed units loyal to the Shah launched a gun-battle against Mossadegh’s supporters. The following morning Tehran Radio announced “the Government of Mossadegh has been defeated!”

Mossadegh was under arrest and the Shah flew home from Italy in stunned triumph. The New York Times wrote “the sudden reversal was nothing more than a mutiny by the lower ranks against pro-Mossadegh officers”. Roosevelt was understandably delighted. Barely a day earlier he had been ordered home, now he would be returning in triumph. Mossadegh was given a three year prison sentence. He served it until 1956 and was confined to home in Ahmad Abad until his death, aged 85 in 1967.

The Anglo-Iranian Oil Company tried to return to their old monopoly position after his overthrow. But the US had invested too much in the coup to let that happen. They organised an international consortium to assume control of the oil. AOIC held 40 percent, five American companies held 40 percent and the remainder was split between Royal Dutch Shell and Compagnie Francaise de Petroles. The consortium agreed to split the profits fifty-fifty with the Shah but never allowed Iranians to examine the books.

Though Mossadegh was a forbidden topic in Iran, new enemies emerged within. By the late 1970s the Shah had crushed all legitimate political parties and a new religious force filled the void. When he was forced to flee the country in 1979 as a reviled tyrant, the first government to replace him was determined to invoke Mossadegh’s legacy. New Prime Minister Mehdi Bazargan had been dispatched by Mossadegh to Abadan after the British fled in 1951. Another Mossadegh admirer Abolhassan Bani-Sadr was elected president. But behind the scenes Ayatollah Khomeini was consolidating power. Before long he was arresting all his enemies. Mossadegh had been defeated again, this time in death.

The Mossadegh coup had profound impact on America. Overnight the CIA became a central part of foreign policy apparatus. While Roosevelt went home in quiet retirement, the Dulles brothers used the new template to overthrow other rulers such as Arbenz in Guatemala (1954) and Allende in Chile (1973). The incident also changed how Iranians viewed the US. Before 1953, Britain was the rapacious and greedy enemy. Now the US was the sinister party, manipulating quietly in the background. The 1979 embassy hostage was a direct result of Carter’s decision to allow the Shah into America. But the reason the crisis last 14 months was a distrust going back to 1953.

This week’s nuclear deal between the countries won’t immediately heal half a century of hurt. But it is crucial it is ratified despite hardliners in both countries. The bleatings of Israel should be ignored as a country with its own nuclear arsenal can look after itself no matter what happens in Iran. Mohammad Mossadegh offered a template of what Iran might have been, had the west not been blinkered by its own suspicions. Now is the time to make good on his legacy and bring Iran in from the cold.