Have just finished reading Tom Bower's fascinating book on the oil industry and the thing that grabs you the most about this book is the connection between oil and politics.
Oil is important not only because petroleum products are part of just about everything we buy and do – not just petrol for the car but also in the manufacture of food, clothing, plastics and various products. That means oil both shapes and is shaped by the political world which defines our universe.
You see it at the beginning of the book where Exxon's chairman and chief executive Lee Raymond and his deputy Rex Tillerson were negotiating with Russian leader Vladimir Putin. Exxon was about to invest in Yukos, a private Russian company which produced 20% of Russia's oil. At the time, it was controlled by Mikhail Khodorkovsky, a billionaire Jewish oligarch who had a 44% stake in the company. Khodorkovsky, who also happened to be an enemy of Putin and who was believed to have had several members of the Duma in his pocket, needed his leader's go ahead to secure the foreign investment. In that negotiation, Raymond told Putin that Exxon was not going to be a junior partner. The company would only buy 25% of Yukos with the view to eventually taking out total control. As Bower tells it, Putin did not flinch visibly but the translators heard the exasperation in his voice. A few months later, Khodorovsky was in jail and Putin, convinced that his opponent wanted to sell Yukos to fund his political ambition, was looking to seize the west's interests in hydrocarbon. Indeed, oil played a critical part in the downfall of Mikhail Gorbachev who diverted funds from the industry to pay for food and goods to secure the popularity of glasnost and perestroika. It was a profound miscalculation that produced a devastating oil crisis which eventually culminated in Gorbachev's arrest and his replacement by the corrupt, alcoholic populist former mayor of Moscow Boris Yeltsin who struggled to fix the industry. By the end of Yelstin's rule, Russia was on the edge of financial collapse, inflation was running at 200%, the rouble was getting weaker every day and the country was in danger of defaulting on its debt. Enter Vladimir Putin, the former KGB officer who saw the need for Russia to recapture control over its natural resources to restore its status as a superpower. Putin's model for success was Saudi Arabia and high oil prices were in the fabric of his plans. In 2002, Russia overtook briefly overtook Saudi Arabia as the world's largest producer and is heading that way again, more permanently.The United States now sees Russia as an ally against the oil producing states in the Middle East.
Links between politics and oil run deep through the book. BP's chief John Browne could get Tony Blair to call Putin when negotiations got tough, Bill Clinton apparently checked his popularity every week against the oil prices, and Dick Cheney, the US vice president and former chairman of Halliburton declined invitations to parties in Washington on the night of President Bush's second inauguration in 2005 and flew to New York for dinner with Raymond. And let's not forget the industry George W Bush came out of.
But oil has now become an unstable and unpredictable business. As Bower explains, we have several contradictory forces in play here: fear of peak oil, uncertainty about whether the oil majors would invest to develop new reserves, the weakness of the dollar, questions about the development of renewable energy and the sheer weight of money from hedge funds being bet on oil providing a 25% profit versus just 3% on bank deposits. These traders know they cannot predict a volatile price. What they do instead is bet on the volatility itself, trading huge volumes and making millions from just half a cent on each barrel.
The continuing financial crisis is likely to keep that volatility running as investors look for safer bets in commodities.
no comment untill now