Shaky industry that runs the world

Ian Mann: Every aspect of our lives depends on the refinement of crude oil into energy, plastics, chemicals and drugs, and little is likely to change soon.

The Squeezeis the saga of BP, Shell, ExxonMobil, Chevron, the major traders in oil, the Russian oil barons, and the environmentalists. To get his information, Bower interviewed about 250 people who had worked in the oil industry, and their accounts are supported by the reports of government regulators, company reports, articles in specialist magazines and major newspapers in the US and Britain, as well as the best of the huge library of books already published on the oil industry.

The subtitle -Oil, money and greed in the 21st century - hints at what you will learn about the world's biggest business.

Bower's findings are hardly surprising, considering that many economists regard the oil industry as among the least stable of business sectors, with supplies being so dependent on corrupt, despotic "petro-states" with uncertain futures.

Until 1939 Europe imported 90% of its oil from the US, but after 1945 it switched to the Middle East where a barrel cost 20c to produce compared with 90c for oil from Texas.

Until 1973 the "Seven Sisters" - as the seven major oil companies were known - controlled 85% of the world's oil reserves. With a near monopoly and a surplus of oil, the seven chairmen would travel as statesmen to the Middle East and tell the Arab producers what price they were going to pay for oil in the next year, usually about $3.60 a barrel.

The Arab producers meekly signed the fixed-term contracts. But in 1960, resentful of the cartel, Saudi Arabia and four other leading Middle East producers formed Opec to challenge the major oil companies for their reserves.

In 1967 Opec declared an oil embargo, and later demanded higher prices. The Seven Sisters tried to present a united front, but this didn't last long. Sensing their weakness, the Libyan and Iraqi governments began partial nationalisation of Western oil interests, and soon the buyer's market for oil ended, with oil prices rising 400% from $2.90 a barrel to $12. This led to the disintegration of the Seven Sisters and the industry's transformation.

Oil was no longer a concession or a product for refining: it became a tradeable commodity. The market was unregulated, subject only to finance from banks and counter-party risk, and was very attractive to ruthless traders.

With huge quantities of oil traded daily (about 90 million barrels at the moment) there are equally large profits to be made. But the biggest profits came from breaking embargoes - including the embargo against the apartheid government. This sector saw the most wily and opportunistic traders in operation - the men comfortable with bending rules or, in the case of traders like Marc Rich, just breaking them.

The discovery by BP of a huge reservoir of "Brent" oil in the North Sea provides an excellent example of the kind of ruthless trading that was common.

In 1984 Peter Ward, Shell's senior trader, formalised the idea of "15-day Brent". On the 15th day of every month the oil majors were assigned a cargo of 600000 barrels of Brent crude oil for delivery the next month. At that point the "Dated Brent" could be traded.

Since the quantity of Brent available each month was limited, profits could be made by traders buying large quantities for future deliveries. BP's aggressive trader, Andy Hall, was able to "squeeze the market" by buying huge quantities and thereby compelling rival traders needing oil to fulfil their own contracts, to buy at a premium. A rival trader's scream was seen as an invitation to squeeze harder. Tankers carrying 600000 barrels of oil were sold and resold 100 times before reaching a refinery.

Trading in oil is much more sophisticated and profitable than commodities such as gold, with differing prices from differing terminals, politics and intrigue, and the differing cultures of producers and intermediaries.

Bankers, oil traders, the oil companies and the Opec producers are all plotting against each other to master and manipulate the market. With accurate prediction impossible, and the volatility of oil prices capable of swinging 30% in either direction, oil trading is not for the faint hearted.

And then there are the seven outsiders who laid their hands on Russia's vast oil wealth. The Independent Monetary Fund estimates that, on average, companies worth $17-billion were sold for $1.4-billion as the Russian economy imploded in the '80s. One company, Gazprom, was sold for a 20th of 1% of its real value of $119-billion.

The book is completely engaging in the way usually only found in well-crafted fiction, except that The Squeeze is not fiction, and we live with the consequences of the oil industry's workings every day. Just this week, economist Tony Twine said we are looking at a 17c a litre increase in petrol in February.