Every piece of our modern life--from the coffee you may have had this morning, to the phone or laptop on which you are listening to this podcast, to the energy that charged it up--is built on the global flow of commodities. Coal, oil, metals, and much more. We don’t give much thought to where they come from or at what cost. But underlying today’s global economy is the secretive world of commodity trading, controlled for decades by a small number of firms led by a handful of billionaires.
In this edition of Columbia Energy Exchange, host Jason Bordoff is joined by Javier Blas and Jack Farchy, two Bloomberg reporters with decades of experience between them covering energy and commodities, and the authors of the new book The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources. In The World for Sale, Javier and Jack pull back the curtain on the shadowy world of commodity trading to reveal wild tales of adventure and financial booms, as well as corruption, bribery, and unethical behavior. They show how a small number of commodity trading firms most people have never heard of have shaped global trade, the environment, and the course of geopolitics.
Javier Blas is the Chief Energy Correspondent of Bloomberg. He was previously the Financial Times’ commodities editor and a reporter with the Spanish business daily, Expansion.
Jack Farchy is a Senior Reporter on Energy and Commodities at Bloomberg. He formerly worked as the Moscow and Central Asia Correspondent, and a Commodity Markets Reporter, for the Financial Times.
Jason Bordoff: Hello and welcome to the Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Every piece of our modern life from the coffee you may have had this morning to the phone or laptop on which you may be listening to this, to the energy that was used to charge up that device, is built on the global flow of commodities, coal, oil, metals and much, much more. We don't really give much thought to where they come from, or at what cost, but underlying today's global economy is the secretive world of commodity trading, controlled for decades by a small number of firms led by a handful of billionaires straight out of a John le Carré spy novel.
And then a great new book to Bloomberg reporters have pulled back the curtain on the shadowy world of commodity trading to reveal wild tales of adventure and financial booms as well as corruption, bribery and unethical behavior. They show how a small number of commodity trading firms most people have never heard of have shaped global trade, the environment and the course of geopolitics. Javier Blas is the Chief Energy Correspondent of Bloomberg. He was previously the Financial Times’ Commodities Editor, and a reporter with the Spanish Business Daily Expansion. Jack Farchy is a Senior Reporter on energy and commodities at Bloomberg. He formerly worked as the Moscow and Central Asia correspondent and a commodity markets reporter for the Financial Times. Javier and Jack, thank you so much for joining us today on Columbia Energy Exchange.
Javier Blas & Jack Farchy: Thank you for having us. Thanks so much.
Jason Bordoff: There's so much to talk about. I mean this for people who haven't read it yet, when you're isolated in COVID times and want to read a spy thriller, you can read fiction, or you can read this book, which reads a lot like crazy spy thriller stories of characters in the commodity trading industry. I was struck with the story you started with when the Libyan Civil War was happening, and which I think was February 2011. And trying to decide on things like whether we should release strategic stocks from the Strategic Petroleum Reserve, which took about five months to do. So I don't know if it was that timely when it ended up happening. It's fair to say a couple of commodity traders were moving much faster than policymakers in Washington were to respond to that crisis. Maybe you could start with that story and then we can go into what that tells us about what these companies and what these people do for a living?
Javier Blas: Well, the story of the Libyan Civil War is kind of paradigmatic of the commodity traders. They are able to go where very few other people business people will go, and also, they do have a political impact what they do? The rebels in Libya rose against the dictatorship of Muammar Gaddafi. And they were in a big oil producing country, but they didn’t have access to any refineries so they were running very short on gasoline and diesel that they needed to run their jeeps and every other machinery of the military, they wanted to win the war. Some gasoline was coming from a very large smuggling operation across the desert from AIG, but that was not nearly enough. So desperately, they needed to have some supplies and through an intermediary, they reached out to this company called Vitol, which very few people outside the oil industry knows, but these the largest independent oil trader, and Vitol send their CEO, at that point, the late Ian Taylor into Libya into Benghazi, which was a bit of crazy at the time, this is the middle of a civil war. And a year later, the US ambassador to Libya will die in Benghazi. So that's how dangerous he was. Ian Taylor arrives into Benghazi, is escorted off his way in on his private plane by NATO drawn lands into Benghazi and cuts a deal to supply the rebels with gasoline, so they can win the war. But the rebels don't have any money. They don't have a central bank. They don't have even a government and they are not internationally recognized. So what Vitol does effectively is open a big credit card to the rebels to the tune of a billion dollars. So for the next few months, Vitol sends tanker after tanker with gasoline and diesel and fuel oil on credit. The rebels win the war, and the company gets repaid. Will the rebels will have won without that gasoline, probably they will have found someone else to supply it or maybe not. But the truth is that that gasoline really made a big difference in North Africa. And Vitol looking for business, probably changed that country forever.
Jason Bordoff: I want to ask a couple of follow up questions. But I want to step back although I wanted to start with that story. Just you know, you spend a lot of time writing as reporters for and speaking about this book to people who follow the commodity trading industry really closely. Not everyone listening this podcast does. So people listening to this podcast may not have heard the names Vitol, Trafigura and Glencore just talk about what this book is about, what this industry is, why it's worthy of a book. Defer to Jack, if you want to take that, and then Javier?
Jack Farchy: Sure. I mean, so it's an industry of companies that trade commodities, as you'd expect from the definition, which is, you know, they are companies, they don’t produce commodities, they don't consume commodities, they stand in between the producers and the consumers. They'll buy oil, for example, from Libya, and sell it to refiners in Europe or the United States, or they'll buy cocoa beans in West Africa, ship them to a plant in Europe, and sell them on. And so in the book, we tell the story of the companies that are the largest commodity traders and really how they've gone from being a relatively niche part of the world economy, maybe 75 years ago, around the time of the Second World War, and then really driven by the enormous growth of global trade, but also the unlocking of markets, and markets becoming freer and more easily traded, and less locked up by particular companies and countries, that's really opened up an opportunity for the independent commodity traders. And that's like the companies you mentioned, which now have a very large share of some of the most important commodity markets. So just to give you some, some numbers and some examples, in the oil market, the five largest independent trading houses trade about 24 million barrels of oil a day, which is something like a quarter of global oil demand. In agriculture, the seven largest independent traders handle half of the world's global food trade. And in metals there’s about two traders that have a huge share Glencore alone, for example, controls about a third of the global cobalt market, and cobalt is a metal that's essential for batteries, not only in smartphones, but also of course, in electric vehicles.
Jason Bordoff: That's a great explanation. Thanks. So and help people understand why this is worthy of a book. Why is this industry? Why is it so important? Why did you take the time to do this? What is the significance of this industry, people produce cocoa beans, and then someone has to buy them, you need someone to help match those up the same with oil cargoes? It sounds like a pretty mundane matchmaker sort of thing. Why is this interesting to every -- Why should everyone be interested in this?
Javier Blas: Well, first of all, because of the size of the industry, you think about the largest, the four largest commodity traders, the volume that they handle is very similar. It's about $800 billion a year, which is very similar to what Japan exports in a year, and Japan is one of the most open economies in the planet. So the volume is just huge. But also, because in many countries, commodities and power go together. They are essential for producing countries in Africa, in the Middle East, in Central Asia. And because the traders become the conduit of those commodities into the global markets, they are essential for a number of countries. And they shape the politics of those countries. And at times, the traders go into places that have very little access to the global financial market. Otherwise, I'm thinking about countries like Chad and South Sudan, in Africa, or Tajikistan in Central Asia, and they became financiers of entire countries. Kurdistan in North Iraq, the main reason that push against the wishes of almost everyone in the Western world certainly Washington, London, Berlin, Paris, and he pushed for our independence referendum from Iraq was because he got funding from the traders $3.5 billion. And it’s that combination of the sheer volume of commodities that they move, the incredible increase in commodity prices over the last few years, and the fact that that goes together with power and political ambitions in some countries that make the traders not only a very important force in global business markets, but in the shadows, they make a force in global politics.
Jason Bordoff: And that's what you were saying before with the rebels and Libya, right? I mean, the question of could the rebels have won without access to the fuel they need and how important energy is as a resource we've seen that through in conflicts throughout time, World War One World War Two, the importance of access to energy supplies, switching the British Navy from coal to oil, the famous story the access to the energy resources you need are really important. There are many examples of that, maybe you could speak to that a little bit. You talk about supplying Fidel Castro's regime with energy, you talk about the continuing to supply do business with South Africa during apartheid. The decisions the commodity traders make have significant implications consistent with or in conflict with, you know, political geopolitical objectives that other nations have right?
Javier Blas: To me the example of Cuba is just fantastic because in a way the trade has replaced the Soviet Union in Cuba. Keep in mind we are in the early 1990s, the Soviet Union has to collapse and Cuba rely on Soviet oil for survival. So Fidel Castro needed Moscow and all of a sudden Moscow is no longer there. But it has a commodity that he can use, Cuba is a big producer of sugar at that point. So that becomes the commodity trading houses, this kind of anonymous business, most of them located in Switzerland. And they do a deal with Fidel Castro government, they will take the sugar and supply oil, but there is a mismatch. Sugar only gets harvest once a year, and Fidel Castro needs oil through the whole year. So they are dealing with they are swapping sugar for oil, but the traders are providing some of that oil on credit before the sugar is harvest later on the year. And at one point Fidel Castro is almost mesmerized by the fact that his government has no access to the financial market, to the global financial market, but these traders have found a way to continue providing cash and oil into the island. And he tells the CEO of a very large commodity trading house, I simply don't know how to raise a billion dollars for us, but we will repay you. Will the Fidel Castro revolution will have continued without the traders, we simply don't know. But they play a massive roll and those very difficult years of Cuba in the early 1990s when Cuba lost access to the oil and the money of the Soviet Union.
Javier Blas: And there are other examples like that where you know, governments are in trouble and don't know what to do and are facing they're going to go broke any minute now. And pick up the phone and call a commodity trader in the middle of the night. I think it was Mark Rich in the example I'm thinking of, is that right, Jack?
Jack Farchy: Yeah, that's right. One of the most fascinating stories we heard in the course of reporting the book was this tale of Jamaica in the 1980s. You know, also an oil importer also dependent on oil imports, and relatively high oil prices. In the 1980's, the country was really struggling economically, series of IMF programs, and was pretty much on the brink most of the time through that period. And I spoke to the Former Mining and Energy Minister who told me this incredible story of being in Parliament, one Friday afternoon. And suddenly, an official from the central bank came to see him and said, I'm really sorry to bother you. But we've got a bit of a problem. There's no money left. And that was a real problem, because Jamaica was buying one cargo of oil every month, to be processed in Jamaica’s refinery. And that was where all of the gasoline that was fueling the cars of Jamaica was coming from. And if the central bank couldn't raise a letter of credit in order to pay for this cargo, then it wouldn't come. And without that the petrol stations would have run out of gasoline and god knows what would have happened. You know, I think for a politician, like the guy I was speaking to it was probably meant the end of his government. So it was a Friday afternoon. He didn't know what to do. The only person he could think of to call was Mark Rich. And so he did, Friday afternoon in Jamaica two in the morning in Switzerland where Mark Rich was based. He wakes Mark Rich up, gets him out of bed, Mark Rich is slightly perturbed to be woken up by a Jamaican government official in the middle of the night. But he's a trader. So he quickly snaps to attention and says, okay, give me an hour. In an hour's time, a shipment of oil that Mark Rich has somewhere in his global network of oil trading is being diverted. It was going to go to the east coast of the U.S. and now it's on its way to Jamaica. Jamaica's crisis is resolved. And Jamaica doesn't run out of gasoline.
Jason Bordoff: And may have saved a government because someone woken up in Switzerland in the middle of the night was able to deliver the fuel they needed.
Jack Farchy: I mean, that is certainly the view of this guy who was one of the most senior government ministers yes that without that the government would have fallen.
Jason Bordoff: Out of colorful characters in this book. Mark Rich may be at the top of that list and not everyone listening will know who that is, talk a little bit about why he is significant. Obviously, there's Clinton pardon and things involved there, but in terms of the development of this industry and why it looks the way it does today and what role Mark Rich played?
Javier Blas: Mark Rich probably is, he's not the inventor of the commodity trading industry. But he did a lot to develop in the way that we know it. He's the kind of trader, ambitious, hardworking, extremely charming, magnetic, but at the same time willing to go where no one else will go to do business and very happy to do business one day buying copper with the regime of Pinochet in Chile, and the following day doing business with the Sandinistas in Central America, or with Fidel Castro in Cuba. He loved to smoke Cuban cigars. And he had started at a company based in New York College called Philip Brothers, which probably was the most important commodity traders at that time. At one point, he has a big fight about money, he wants more money from the company, a bigger bonus Phillip Brothers disagrees. And then he decides to create his own company called Marc Rich & Co., sets business in Switzerland and it starts trading everything but particularly oil. These are the days in between the first and the second oil revolution in the 70s. The oil market is breaking apart. Middle East governments have nationalized their oil fields, an industry that was vertically integrated and controlled by a small number of American and European oil companies all the sudden became a free for everyone and Mark Rich jumps into that opportunity and start trading with everyone and then gets in trouble with the US authorities, because he trades a lot of oil with the Iranian regime post the taking of the American Embassy in Tehran. So American young, ambitious prosecutor, known as Giuliani goes after Mark Rich is incredible how history comes back and forth. And Mark Rich is indicted of tax -- on tax evasion and trading with the enemy with Iran. So Mark Rich jumped on a plane and escapes from New York into Switzerland, and then remains a fugitive of the American justice for many, many years, until on the very last day of Bill Clinton at the White House. And to the surprise of many out of the blue Bill Clinton grand scheme, a part of that, he was never judged. He was never sentenced to anything. He was simply indicted. And he got that pardon, but he remained his force in global commodities. And then his company at one point known as Mark Rich & Co. got rebranded. It was a management buyout, got rebranded into a new company called Glencore. And today, Glencore is a publicly listed company in London, and it is the world's largest oil trader. And if you are using something metallic today, in particular, you have maybe a mobile phone that battery most likely will have a bit of cobalt. So you have two mobile phones, one of them most likely has some cobalt that was handled by Glencore. That's how powerful they are.
Jason Bordoff: And so the industry looks the way it does, for better or worse, and Mark Rich has a significant influence over that. And just to play the end of that story out, you noted Glencore is a publicly traded company. This was an industry sort of shrouded in secrecy. But some of that was lifted you describe in the book when Glencore went public. And I think if I remember that chapter, the parking lot fills up very early in the morning, because everybody wants to, the company wants to understand who owns what within the company, and which billionaires are going to be created that day. Can you describe that, Jack?
Jack Farchy: Yeah, absolutely. I mean, so it's an industry shrouded in secrecy, as you said, and not just to outsiders, but also to insiders. So we interviewed a number of former Glencore, including quite senior executives, and they all told us, one after another, nobody knew who owned how many shares in the company, other than three people in the company, the Chairman, the CEO, and the Accountant, that was it. And if you happen to have a conversation about how many shares you owned, somebody would very quietly tap you on the shoulder and take you to one side and say, no, no, no, we don't talk about that. So literally, nobody knew until the day finally when they were doing the IPO. So you know, selling shares to the public listing on the London Stock Exchange, becoming a part of all of these, at least to us in the UK or pension funds and on that morning, everyone including us journalists and the world that live was going to find out exactly how many shares who the top executives of Glencore owned, including the Glencoe executives themselves. So we were told by some people who were there, the parking lot filled up extremely early hour of the morning when this was going to be published, and everyone was waiting to see how many shares the top executives owned. Indeed, they did own an awful lot. So you know, Ivan Glasenberg, the CEO, who was the largest shareholder had a fortune of, I think $9 or $10 billion, he would have been in the top 100 wealthiest people in the world at that moment when they listed. And in total, there were seven billionaires among the top executives, which is a pretty astonishing thing for a company that again, most people have never heard of, I mean, doesn't make an awful lot of things. So, fundamentally, its core business is being a middleman sitting between a producer and consumer, rather than making things and yet here we are with seven billionaires. I think the top 13 people in the company, we added them up, were worth $29 billion on that day.
Jason Bordoff: I mean, the numbers and the scale of this industry, you talk about Apple and Coca Cola, I mean, it made household names. And this is an industry on par with, if not, in some cases bigger than in terms of annual revenue and profits some of these?
Jack Farchy: In terms of revenue, absolutely. Profits, we found pretty striking, if you take the top three commodity trading houses, Glencore, Cargill, and Vitol, and add up the profits that they made in the real boom era, which was kind of early 2000s until about 2011. They were larger than the profits of Apple over the same period. And when you think that Apple is a public company, owned by 10s of 1000s, millions of shareholders where, this was before the Glencore IPO, each of those companies was owned by a handful of people, essentially, particularly if you look at the top shareholders, you know, Cargill, owned by a very wealthy family in the United States. Vitol owned by its management and Glencore invites management, and yet they were making the same profits as Apple.
Javier Blas: One thing that I love it when we talk to the former top executives of Phillip Brothers, this company was based in New York and was at the time in the 50s, 60s and 70s, the largest commodity trader, and I spoke to the CEO, who recounted a story of a previous chairman of the company that they consider the balance sheet and the profit account of Phillip Brothers internally, as a secret at par with the Manhattan Project. No one need needed to know those numbers. That was the kind of mantra inside, this is top secret only for the top managers.
Jason Bordoff: So other than the upside of an IPO, I take it they preferred it to be shrouded in secrecy. So you deal a lot with people in this industry. How do they feel about the book about your writing the book? Why did they talk to you?
Javier Blas: I mean, we took a lot of time to convince everyone to talk to us. And we try as much as we could to convince everyone to speak on the record. So because we wanted to create a bit of a history that all of us can use in the future, and we want it to be that people can see the quotes and when the interview was done, etc, etc, the reaction of the industry has been mixed. Some people like it, some people don't like the book. I love it. When we sat down, I think the first time we sat down with Ian Taylor, this CEO of Vitol, the same executive went into Benghazi into Libya. And we were talking initially about the book he said to us, I will rather prefer that you don't write the book. So that has been a bit of the reaction from the industry. But some people have said, look, this is a fair description of us, some people don't like the publicity and would prefer that the industry remains into the shadows.
Jason Bordoff: And how did your view of the industry change? I mean, you know, on the one hand, we're describing some unsavory stuff, you have stories of corruption and suitcases full of cash and bribery in this book. On the other hand, a bunch of people are producing commodity like oil, and a bunch of people need it. And something might happen in the world where markets change, and someone has to be a market maker to help make sure the commodity moves around in an efficient way and responds to price signals and all the rest. So are these, how should we feel about the people in this industry? And how do you feel about them?
Jack Farchy: I think it's not black and white, I would say. We had this conversation quite a few times in the process of both thinking about the book before we wrote it and also while we were writing it, is this an industry full of bad people and should we be writing about them as these devils of the world on the other hand, you know, should we be writing something about how brilliant they are and they're magnificent because they make all this money and they perform this essential role in the global economy? I think the short answer is neither. They do perform an essential role. They have done some not admirable things, and indeed some illegal things in their time and we recount that in the book. And then the other part of it is that many of these people are enormously charismatic, individuals with very magnetic personalities, it's hard not to, at least recognize that and enjoy their company in some instances. So you do end up with a slightly kind of conflicted feeling towards them, yes. They perform an essential role; the world wouldn't turn without them. Our modern economy couldn't work without them. They're often excellent company and fascinating to spend time with. And at the same time, you know, you can see, in some instances, that they've done some pretty unpleasant things.
Jason Bordoff: When you say the economy could not operate without them. I understand why that may have been the case in the 1970s, when information was scarce, and it was slow. Now, we all have devices in our pockets that probably tell us at any second, what relative prices for a commodity are in different parts of the world. Is this industry still necessary? Is it being? And will it continue to be disrupted in pretty significant ways? Are the days you describe in the book days of the past, not the future?
Javier Blas: The industry is being disrupted. You're absolutely right, that everyone can see now, what is the price just looking at their iPhone, and I will see what is the price of every commodity on the exchanges, but at the end of the day, these guys are not just trading commodities on a computer, as some people may do just betting where oil prices are going to go up or down on the financial commodity market. These guys are moving the actual physical barrels of oil, the actual tonnes and pounds of metal, the actual bushels of corn and soybeans and you still need them to perform that role because a farmer in Iowa is not going to be arranging the shipment of his small crop all the way into China. Myself in West London, I'm not going to be arranging for a delivery of coffee beans from Colombia. So I need someone to perform that job. And even the companies who are involved in those businesses, sometimes for them, it's easier to rely on a commodity trader to do the job of the logistics, to handle not only the price exposure, but also the crate exposure to take care of the logistics. I mean, this is a very logistics heavy business is every of their trading houses everyday may have about 1000 ships on the water, transporting commodities and handling those logistics are very important. And in some cases, they build the logistics, some of the producing countries of the commodities don't have fantastic infrastructure, so that you may need a new port, and it's going to be the commodity traders who are going to build that. So they smooth out all the wrinkles of global trade.
Jason Bordoff: I mean, maybe, you could go online and buy her coffee directly from Colombia. But the example that came to mind as you were talking was when a pandemic strikes, I ran out, I think like many people and scrounged for masks and hand sanitizer. These folks were scrounging for empty tankers. And just talk about what happened and then how should we think about that? Is that profiteering in some nefarious way? Or is that helping to deal with the fact that we're about to have a massive oversupply of oil that's going to cause prices to go negative at one point, Jack?
Jack Farchy: Yes. So that's exactly what was happening. In the early days of the pandemic, probably most of us were worrying about getting sick and ourselves and our families, the commodity traders, particularly oil traders, were going out and hiring tankers, hiring oil tanks, preparing for a world which was going to be awash with oil, because they could see that pandemic meant that people weren't going to work, people weren't going to be flying too much internationally, and so oil demand was going to collapse. Indeed, that's exactly what happened. Oil demand did collapse. Production took quite a longer to collapse, because Saudi Arabia and Russia got involved in a price war. And so we had a world massively over supplied with oil. And that was a situation in which the commodity traders could profit. Also massively buying up oil at very low prices, and then selling futures, which were much higher prices. And in doing so, lock in a profit, but also provide I would say, I mean, they're pretty essential function to the market. Somebody had to go in and buy that oil. You know, it existed, it was produced and somebody had to buy it at some price or other, without them doing that, what would have happened? The price would have gone lower and would have stayed much lower for longer. We see already that what happened in 2020, the price of the U.S. benchmark, oil WTI, were negative, very briefly. If the commodity traders hadn't been around to step in to buy up that oil and store it until the world needed it as they did, then the price of oil would almost certainly have been low or negative for a very long period of time. And what impact would that have on oil producers around the world, it would have been much worse.
Jason Bordoff: And when they're trying to make these bets or thinking about what prices will be in the future. You describe in the book that meant buying and selling physical barrels of oil, holding them and then putting them back in the market. Can you talk a little bit for people just on the difference how we think about what physical versus paper means and why the development of these futures markets was so consequential and had such a dramatic impact on the commodity business?
Javier Blas: Well, the oil futures market didn’t exist until the 80s. So any trader that was just dealing on a cargo, every day was taking full price exposure of what was going to happen overnight. The price went up, it was making money, the price went down, it was losing a bit of money, the price went down a lot, it may lose the whole company. When the oil futures market started in New York in the early 80s and a bit later in Europe, for the first time, the traders can buy a cargo of oil and can lock in the price through the futures market that has two big consequences. One is that all the sudden, because they can reduce the exposure on prices that traders are able to handle much larger volumes, as they are not betting the house every evening when they go home. But also it makes the traders they win access to a very easy way to bet on what is going to happen with the price of oil. Previously, the only way to bet it was to get a cargo of oil if you were bullish, because then you know the price will go up. If you were bearish, you try to short that that cargo and buy it much, much later when the price was going to be lower, but all the sudden they get the futures market and that gives them a fantastic opportunity to speculate. And because they have better information than many others in the market, they can use the information that their physical network around the world gathers and then make a bet on the financial market. Just in mind, you are this true big middleman, you are going to get before anyone else whether an OPEC countries cheating and is producing a bit more or whether refineries in the United States are demanding more oil, because the final consumption of gasoline or jet fuel is a bit stronger. And all of that information is unique, is fantastic market intelligence, you have access to that. And you have a futures market, you could really play in the casino, but knowing, you are almost like playing the roulette, knowing what is going to be the number and win. And some of these trading houses start to play on the financial market and make substantial amount of money use going in debt on the futures market. Andy Hall, who became one of the most important oil traders, he worked at BP, at Phillip Brothers, and at Citigroup. And his one day out of his salary at Citigroup was $100 million. And Andy Hall made about $800 million during the First World War in 1990-1991 on the oil market, but then he got it wrong. And on the night that the American troops attack Saddam Hussein to liberate Kuwait, he lost $100 million in 1991 in mind, the number $100 million, 1991 in just one night.
Jason Bordoff: Your point about the development of these futures markets. It was interesting when you talk about coal and Glencore in the book that if you want to bet on future prices, you go into the futures market, right, but well, what if they don't exist? What do you do them? They went in the bottom of the coal mine. So that's how you bet on coal prices Jack?
Jack Farchy: Yeah, exactly. I mean, so Glencore today is not just a trader, it's a big miner. And one of the reasons for that is a series of deals that the current CEO Ivan Glassonberg did in the 1990s. And the origin of that of those deals was he wanted to bet on the coal price. He thought the coal price was too low, that miners couldn't continue making money at the price that was in the market at that moment. And he wanted to go long to bet on rising prices, but there wasn't a futures market. So what did he do? He went and started buying mines. And eventually he bought up enough mines that Glencore became the world's largest shipper of coal in the international market and one of the largest coal producers. And now that's transformed into a company that is not just a big trader, but also one of the world's largest miners.
Jason Bordoff: Part of the reason that I don't know if that was exactly the bet he was making. But a big part of the commodity super cycle boom you discuss for a 10–20-year period was the rise of China. Can you just talk about how significant that was, how it impacted this business and how people saw it coming and how it changed the industry?
Javier Blas: China changed completely the commodity industry. I mean, it went from being for many, many years and after thought, I mean, as recently as 1993, China was an exporter of oil. And they will be not a country that anyone will be thinking when we were talking about the oil market. And then in the space of 20 years, it just became the largest importer of oil, but not only oil, copper, soybean, iron ore, one of the largest importers of coal, you can almost name a commodity and China became from being almost a non-player to be the largest one. And in some cases, China at the top of the market was taking about 60% of the global trade of soybean, this crop that is so important for the U.S. Midwest. So it changed completely the economics. And because the increase in demand was so high, so large, and so quickly, it just started pushing prices higher because producers were struggling, we are coming. This is the commodity super cycle established in the early 2000s. And through the previous decade, in the 90s, prices of commodities have been relatively low. So very few companies have been investing into new production. So when these new source of demand comes, which is related to the fact that China very rapidly urbanized and industrialized, there is simply no supply. So prices need to start going up to make sure that capital is directed in new oil fields, new mines, more farming, and prices move in the case of oil will go from about $9 a barrel in 1999 to 150 in 2008. That's the kind of the transformation and alone, the traders just enjoy that wave of a rise in prices and rising demand. And they just made, well the profits of their lives.
Jason Bordoff: And what's next meaning China's still a massive commodity consumer not with the same rates of annual growth we have seen in the past, is that Indiam is that Southeast Asia, eventually Africa, as they grow, are those disruptive days of a force in the market like that, something we're not going to see again?
Jack Farchy: Well, China is still a hugely important part of the markets. And it's 50% of demand for a lot of metals, certainly, and still a large importer of pretty much everything else as well. And yes, the growth rates have slowed, but it's important to remember it's growth of a much, much larger base. So in terms of additional demand for imported commodities every year, actually, China is still driving a lot of the markets at the moment. If we're looking forward and saying as a lot of people are at the moment. Is there another commodity super cycle on the horizon? Yes, I think India is the obvious next candidate of the size and scale of China that if it were to industrialize and urbanize, as China did, in the current 1990s and 2000s that would have an absolutely enormous impact on commodity markets. The caveat I would say is that people have been waiting and hoping and expecting for India to do that for many, many years and it hasn't happened, I'm sure one day it will happen. But I'm not sure anyone can tell you, it's going to happen -- it's going to happen tomorrow. The development in markets that I think probably is more interesting and more traders are looking at with interest and licking their lips, is the electrification of the global economy investment in power grids in electric vehicles particularly in the West, where we have governments in the U.S. and in Europe, stimulating you know, putting in place green stimulus plans, providing subsidies for electric vehicles and looking to build out green infrastructure. And that really could mean a step change in demand, particularly for the metals that underpin that, so things like copper, but also aluminum also potentially nickel, cobalt, lithium. So, maybe there's a super cycle coming in metals.
Jason Bordoff: But in terms of the disruptive forces affecting this industry, I mean, use the phrase licking their lips when they see the transition that may be coming for electrification and what it means for lithium, copper, cobalt. We've been spending most of this time so far talking about things like coal and oil. So what does the urgency of dealing with climate change and the social pressure to move much faster on that? What is that going to mean for this industry? Does that mean the days of Apple sized profits are over?
Javier Blas: But it's bad news, because if we see a decrease in demand for fossil fuels, that is the core business of many of these companies. If we see a drop in consumption it’s going to mean a drop in trade, and therefore less profits for them. They are doing a couple of things, they are moving into natural gas, which could be a bridge fuel, in between oil and a full electrification, they're moving into LNG so all of them are building trading businesses around those commodities. And they're also investing a bit in power trading, although that's a very regional market. But what is more surprising talking to the executives is how little, at least on the surface, when we were talking to them, they appear to be worried, perturbed, ethically concern by the fact that a lot of their business relies on commodities that they are really bad for the planet and that we are trying to reduce the consumption. And they don't seem to mind that the business is based on fossil fuels that they are really bad, bad news.
Jason Bordoff: They don't just to be clear, they don't mind from, you know, an ethical standpoint, or they just don't believe the world's going to be using less of this anytime soon, or both?
Javier Blas: I think both. I think that they believe that that the demand is going to remain higher than in general, many people think. And also, I mean, they use what answer from then is, well, we don't make the choices. The consumers are the ones who are demanding oil, we just simply provide the transportation, which is a very easy way to try to avoid a question, but they don't seem to be particularly concerned about the impact that the business makes into climate change.
Jack Farchy: I think it may even be fair to say there's some climate change skeptics among the senior ranks of the commodity trading industry.
Jason Bordoff: That's shocking. I'm shocked to find out there's gambling going on here. You describe a few other exogenous forces that are going to may mean this is a very is a different looking industry in the future than it's been in the past. One of those is about the increasing attention being paid to diversity in corporate leadership, and in many dimensions, but I have in mind gender, because this is not a very gender diverse industry. And is that something that is seen as a concern and changing?
Javier Blas: I think that some companies recognize that there's a problem, and they are trying to address it, but you are absolutely right gender is a big problem for the commodity trading industry. A visit to some of the commodity trading houses, shows that they are few, very few women, they are even fewer at the senior level on their management committees. So much they make Wall Street looks like a champion of diversity. And we counted the number of women in senior positions in the commodity industry, and it was fewer than 5% of the total. So I think that the industry has a big problem. Some companies have addressing it. But generally the industry has not yet really properly addressed. And in some cases, the industry doesn't even recognize that there is a problem.
Jason Bordoff: And the other exogenous force. I mean, there were several actually but talk about how we talked a little bit about this with increased access to information, but how is technology disrupting this industry?
Jack Farchy: Yeah, I mean, it's an industry where the big profits were made, at least in part, in a past era, because the commodity traders had so much more information than everyone else in the market. So you know, we've talked to traders who told us stories of going to Peru, say to buy copper in the 1980s. And the Peruvian miners, who they were buying from the last price of copper that they knew about was the price of copper from last week. So if the price of copper had gone up, in the meantime, the trader knew because they knew the price of copper all the time. And yet the miners didn't because they didn't have access to the market price of copper on a day to day or minute by minute basis, and so they could make money out of them. Similarly with oil. You know, Ian Taylor, I think told us about being able to go and buy oil from the UK subsidiary of Exxon up until the 1990s at the price of yesterday. So again, if the price was going free money for the trading house, that's changed a lot in the last 10-20 years, you know, everyone has access to the internet today, the price of commodities is widely available there to everyone and particularly if you have access to a data service, then you can have lots and lots of granularity and color on the price of all different types of commodities, at different points of the world. But it's more than that, the commodity traders used to have by dint of having offices in many, many countries of the world, a really privileged view of what was happening in the global economy in supply and demand of commodities. You know, maybe there was a bit of a slowdown happening in Japan, they knew because they had an office in Japan, not many other companies did. Now, there's so much more data available to everyone. So just, for example, in one example in oil trading where the commodity traders would be keeping an eye on all of the shipments of oil going all around the world, seeing which country was increasing production or where demand was strong or weak and being able to trade on that information and make money out of it. Now, there are tanker tracking services that use satellites to keep an eye on all of those tankers. And to provide that same service to any paying customer for, yes, for a fee, but a fee that pretty much any investor could afford, any major investor could afford, the hedge fund or asset manager, you name it, can afford to now keep an eye on all those tankers traveling around the world that previously was the preserve of the commodity traders and them alone.
Jason Bordoff: By the way, when you were talking Javier about lack of women in leadership, I was thinking of Patricia Wirtz, I think is the woman who led Archer Daniels Midland was so unusual and having a woman as the CEO and that made me think of a story in the book I'd never heard before, which was we talked about suitcases full of cash. And we have problems with the Renewable Fuel Standard in the United States, resulting from a mandate that a certain amount of ethanol be put into our fuel supply. A directive given by President Nixon and you describe the CEO of ADM giving Nixon’s Secretary $100,000 in cash. Is that true?
Javier Blas: Yes, it did happen. And he made that payment in cash. And that money was in a safe in the basement of the White House for I think about a year and a half while Nixon was investigated on Watergate.
Jason Bordoff: I was shocked. I had not heard that before. Was that the bribe or is that not clear?
Javier Blas & Jack Farchy: I think that it will be described as a probably a friendly donation. I think the phrase was an anonymous campaign contribution.
Jason Bordoff: Anonymous campaign contribution. I was unaware of that. And we only have a few minutes left. But I think maybe the final disruptive force you sort of describe for the future is this is an industry that depends on global commerce and global trade. And we're having to some extent retrenchment from free trade and an increased focus on protectionism in some parts of the world. How consequential do you see that trend being for the commodity business, the commodity trading business moving forward?
Javier Blas: Well it is significant because that the traders thrive on a period of liberalization of global trade. So open borders, open trade, and also a predictable trade. It's very, very important for them and what we have seen on the last few years, particularly during the Trump time at the White House, it was anything but that, it was a retrenchment of international trade. It was a lack of predictability, the use of all kinds of tariffs and embargoes, etc, etc. And also the U.S. Treasury increasingly or the U.S. administration increasingly using sanctions targeting commodities as a way to force change of behavior of some countries. So for the traders, all of that is potentially bad news. I mean, think about what happened when China stopped buying agricultural commodities from the U.S. all the sudden, all the shipments that were going from the U.S. have to be redirected, most of them ended in Europe, China was then all the sudden buying humongous amount of agricultural commodity from Brazil. Some of that opens an opportunities for some traders, but a lot of them they lost money, because all the sudden it’s one of the few things that traders cannot predict these days. I need the political will of someone and certainly no one was able to predict what President Donald Trump was going to say or write on a tweet every morning. So yeah, that was a big problem. But what I will not be as certain is whether that was the start of a trend or it was a kind of a four year interruption on a long journey towards more open trade and that's now continuing.
Jason Bordoff: Yeah, I lied because there's one more trend I want to ask you about. Only we've focused on it quite a bit here at the Center on Global Energy Policy, my colleague, until a week or two ago, Richard Nephew, who is now for U.S. Deputy Iran envoy, which is the increased use of sanctions as a tool of economic statecraft. And Richard has warned that we may be an overuse of sanctions as a tool of economic statecraft. How is that impacting this industry? And what's it going to mean moving forward Jack?
Jack Farchy: I think it's impacted the industry a lot. You know, we were talking from the very beginning about the political role that commodity traders have played, particularly in their ability to do business with anyone, and to finance, countries, regimes that may not have otherwise access to international markets. And that obviously has included countries and regimes that have been pretty unpalatable to the taste of the U.S. government. I think that's becoming harder and harder to do as sanctions proliferate as a tool of foreign policy. You see, most obviously, at the moment in the oil market sanctions on Iran, sanctions on Venezuela, for the kind of companies that we're writing about here the very biggest traders who have a network of banks of U.S. and European banks as their finances, they simply can't afford to be caught trading Iranian oil and fall foul of U.S. sanctions, that's just not an option for them that would mean game over and a business tomorrow. And so that simply means they can't trade Iranian or Venezuelan oil, that's a bit of the market that maybe in a previous era and Mark Rich, for example during the embargo on apartheid, South Africa, he traded with apartheid South Africa. Today, I think probably that the tool of sanctions has been honed by the U.S. government in the past few years to the point that that's simply not an option for today's largest commodity traders. And so, to the extent that the U.S. government does use sanctions as a tool of foreign policy and the commodity traders, maybe want to do business with countries or individuals who are not to the taste of the U.S. government, that closes off some options to them and opens it up to maybe traders from other countries that don't have such a reliance on the western financial sector.
Javier Blas: Yeah, the other thing that has been very important, just going on parallel with that has been that our authorities in a number of countries have started to clamp down on the worst aspects of commodity trading, which involve still corruption and bribery, the U.S. Department of Justice, but also UK authorities, and the Swiss authorities are now investigating a number of the largest commodity traders for corruption and bribery. And that's a new trend that in the past have not happened. But now we begin to see a more serious attempt to clamp down on the worst successes of the industry.
Jason Bordoff: Thank you, Javier Blas and Jack Farchy, you've been really generous with your time. It really is a fascinating book, The World for Sale, encourage people to go out and get it. I know how busy you are. So I know how busy you are normally, when you're not reading books, you're just reporters, because I'll get emails particularly from Javier, nine or 10 at night my time, which means he's up writing articles in the middle of the night. So I don't know when you found time to write this book at all. But it really was fascinating to read. And I'm glad we had a chance to talk about it here today. Thanks for being with us on Columbia Energy Exchange.
Javier Blas & Jack Farchy: Thanks so much for having us. Thank you.
Jason Bordoff: Javier and Jack, thank you again for joining us on this episode of Columbia Energy Exchange. Congratulations again on the new book, “The World for Sale”, which I encourage everyone to pick up a copy of and read. Thank you to all of you for listening to this episode of Columbia Energy Exchange. For more information about the Center on Global Energy Policy, please visit us online at energypolicy.columbia.edu or follow us on social media @ColumbiaUEnergy. I'm Jason Bordoff, thanks again. We'll see you next week.