The World For Sale by Javier Blas

Author:Javier Blas
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2021-03-15T00:00:00+00:00

The oil-for-food scandal was emblematic of the commodity industry’s new era of scarcity. For the next decade, low prices would be a distant memory, and commodity traders would fall over one another to secure the precious raw materials necessary to feed China and other emerging markets’ seemingly bottomless appetites for commodities. And oil was the most prized resource of all.

The commodity boom really picked up steam in the second half of 2003 and into 2004. The oil industry was already operating close to full capacity. Nearly two decades of low prices had curtailed investment in oilfields, pipelines and refineries, so there was not enough new supply to match booming global demand, which in 2004 had the biggest increase since 1978.17 Prices soared past $40 a barrel for the first time since the first Gulf War, and then surpassed $50 for the first time ever (see graph on page 334).

In many ways, it was a repeat of the 1970s. Politicians in consuming countries showed the same anxiety as OPEC regained its power. The price of gasoline became a staple of news bulletins. There were apocalyptic warnings about the exhaustion of the world’s oil reserves.

And for the traders, the race for oil meant a new era of riches. Growing Chinese demand required a drastic increase in China’s imports, and that meant that more commodities needed to be shipped around the world. Between 2000 and 2008, global trade in oil increased by 27.2%. That was more than twice the rate of oil demand growth over the same period.18 That, in turn, meant more business for the traders, whose core business was shipping commodities internationally.

Soaring prices also transformed the way the commodity traders made money. It was a time when pure and simple speculation worked: the market was clearly going up. Unlike the 1970s, it was now possible to bet on the price of oil on the futures markets, and many did. From 2001 until 2008, the average annual price for Brent crude was higher every year – the longest streak of yearly price increases in the history of the petroleum industry, going back to 1861.19

But speculation was not the only way that rising prices made the trading business more profitable. In some cases, long-term contracts that the traders had signed years earlier suddenly became enormously profitable. Glencore, for example, was able to buy alumina from Jamaica at a fixed price under its long-term contract, which had been renegotiated in 2000. When prices soared, the commodity trader was paying less than half the market price for its alumina.20

Even commodity deals agreed at market prices became highly profitable in the boom market. That’s because most physical commodity contracts include some tolerance on quantity, allowing the trader to buy or supply an agreed tonnage plus or minus a few percent. In normal times, this allowance, known in the industry’s jargon as ‘optionality’, meant that a trader wouldn’t be in breach of its contract if a shipment was found to be slightly larger or smaller than planned – an understandable possibility in a large-scale logistics business.

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