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The Secret World of Oil, by Ken Silverstein
THE title of this book is somewhat misleading. While there is much about the secret world of oil, there is as much about other extracted commodities as well. That said, this is both an engaging and shocking read.
It is easy to think of oil as something pumped from the ground and refined into the petrol that fuels your car. However, no economy anywhere in the world can function without a transportation network, which is overwhelmingly fuelled by petrol derivatives such as gasoline, diesel and jet fuel.
Between the oil well and the pump there is a wide range of actors who take a cut from the profits of an industry worth trillions. These are the middlemen who broker deals between energy companies and government officials in countries with energy reserves: these are the “fixers” and “traders”.
Corruption the other constant
It was Dick Cheney who said: “The good Lord didn’t see fit to put oil and gas only where there are democratic regimes friendly to the United States.” Enter the other constant of the energy business - corruption.
The process for awarding oil contracts and concessions in Third World countries and unstable regimes is highly politicised and centralised. In many of these countries, from Africa to swathes of Asia to the former Soviet republics, you cannot do any large deals without the president’s approval. One popular technique is to partner with a local company that is owned by a president, or oil minister, or some other top official that needs to be appeased.
Prior to the harsh anti-corruption laws in the oil-thirsty developed economies, fixers and traders boarded “a plane with money straight from the bank to spread around; that’s how deals were done”. Today the same fixers sign contracts with offshore companies owned by the relative of the government official you need.
Companies are always looking for an advantage, and often having the right “fixer” or “trader” can be the way to achieve this. “Fixers open doors for corporate clients and arrange introductions to the various potentates they know,” author Silverstein explains. “Fixers funnel money to dictators to obtain concessions for oil companies, set up shell firms and front companies to move money.”
Typically fixers will have excellent political contacts, which they can leverage on behalf of clients. Ely Calil and Friedhelm Eronat are two very prominent, reclusive and press-averse fixers, interviewed by Silverstein. “Talk about being a friend of the president, the next thing you know the president doesn’t want to be your friend.”
Fixers have grown enormously wealthy through brokering deals for Russia, Kazakhstan, Nigeria and others through their web of political ties stretching from Africa to the Middle East and the United States.
Consumers “want their gasoline cheap,” Calil explained, “but it’s not possible without cutting a few corners.”
Multinational giants, such as ExxonMobil and Chevron, with their vast global experience in high- and low-risk countries, handle their own affairs. “We were so damn big that we usually didn’t need a middleman,” a former BP executive told Silverstein.
“We worked directly with heads of states in the countries where we operated, and we could deliver [to those heads of state] geopolitical contacts back home that served their aspirations.”
Corruption in the oil industry is probably not more prevalent because people in the industry are more corrupt, but rather because of the huge sums of capital that are involved.
“A million dollars here or there doesn’t make any difference to the overall economics of a project, but it can make a huge difference to the economics of a few individuals who can delay or stop or approve the project.”
Outrageous behaviour of dictators
The outrageous behaviour of dictators is well described in the book through the example of the Obiang family of Equatorial Guinea. The country has a population of only 650 000 people, but plenty of oil. Revenues in 2010 were well over $4bn, giving the country a per capita annual income of $37 900, equal to that of Belgium.
Obiang was placed eighth on a list by Forbes of the world’s richest leaders, but his population lives in abject poverty, and one in three dies before the age of 40.
This is just one example of a state that has degenerated into a kleptocracy, with an “intense personalisation of authority and the voraciousness of a small state elite and their core constituents”. The state budget is seen as nothing more than a funnel to move money into the hands of the few.
Oil traders pioneered the practice of commodity swaps with outlaw regimes, frequently in war zones. They have traded with Iran during the hostage crisis, South Africa during apartheid, and Cuba and Libya during US trade embargoes.
The biggest oil trading firms are the Swiss-based Glencore and Vitol.
Glencore was valued at $60bn, higher than Boeing or Ford despite making nothing but trades. China’s manufacturing base “could not exist without Glencore, because it is dependent on raw material imports, many of which Glencore plays a major role in trading and producing”.
The conventional view of oil traders is that they earn their keep by leveraging information to buy cheaply and sell high. Behind this view is expertise ranging from hedging and currencies to shipping, logistics and pricing. However, there is much to suggest that political connections are even more vital than technical expertise.
“Everyone knows we need better rules and regulations,” Silverstein was told, “but the people who are making money don’t want the rules to change.”
Most of the literature about oil has given scant attention to the actors behind the darker parts of the industry. However, it is precisely these players who keep the energy industry thriving and prospering, and knowing more about them adds to our understanding.
This is a light and engaging read that feels more like fiction than the non-fiction it is.
Readability: Light +---- Serious
Insights: High -+--- Low
Practical: High -----+ Low
*Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works. Views expressed are his own.
