Hey there, it's Stephen Dubner, and we are slipping into your feed with this bonus episode.
It is an update of an episode we made last year about commodity traders, and it suddenly feels even more relevant now.
The war in Iran has already scrambled the global oil markets.
In January, after US forces captured Venezuelan President Nicolas Maduro, President Trump immediately moved to take control of the Venezuelan oil economy.
Among the industry leaders he invited to the White House were senior executives from two major commodity traders Vital and Trafigura.
And it's not just oil.
American soybeans and rare earth metals have become bargaining chips in the ongoing trade war with China.
And behind just about every headline is a commodity trade.
That's what this episode is about.
We have updated facts and figures when necessary.
As always, thanks for listening.
For the past couple of years, I've been letting a very good book collect dust on my shelf.
A friend had told me about the book and I did read the introduction, a wild introduction about the CEO of a British company who flies his private jet into the middle of the Libyan civil war to make an oil deal with the rebel army, an army which happened to have the covert support of the governments of Britain, Qatar and the US.
So yeah, I probably should have kept reading, but I had 30 other books I wanted to take a look at.
A dirty little secret about me.
There are a lot of books where I read only the introduction or a couple chapters, even books I like.
This may strike some people as a wasteful practice, but I recommend it.
Anyway, as fascinating as I found that introduction about the oil trader in Libya.
The book didn't seem relevant at that moment.
But last year, as the US was signing a mineral deal with Ukraine and Donald Trump was expressing his appetite for the natural resources in Greenland, in Canada, even at the bottom of the ocean and, of course, in the middle of an on-again, off-again trade war with China, the book started to seem very relevant.
It's called The World for Sale, Money, Power, and the Traders Who Barter the Earth's Resources.
So I finally took it off the shelf, read it, and...
Well, wow.
The traders in this book are not the kind who sit at a desk in New York or London and buy and sell the options on commodities.
These are the people who finance, procure and trade the actual commodities petroleum products, agricultural products and metals.
This is high stakes territory.
If you think about a commodity trader, it has to have a bit of the Wolf of Wall Street character.
It has to have a bit of James Bond character.
And it has to have a lot of the character of Pirates of the Caribbean.
The authors of this book are two Bloomberg journalists who also used to work together at the Financial Times Javier Blas, whom you just heard, and Jack Farchi.
The main subjects of their book are trading firms that you have likely never heard of.
Glencore, Vital, Trafigura, Gunvor Group, Mercuria, and Cargill.
These firms operate all over the world, and their reach is massive.
Here is Jack Farchi.
The revenues of the four largest is just under a trillion dollars last year which, in terms of global exports, would make them, I think, the fourth largest country behind the US, China and Germany, and ahead of Japan.
Have you ever thought that you really understood something, that you were looking into the heart of it, only to realize that you were just looking at the surface layer?
That's the sensation I had while reading The World for Sale.
These commodity traders are often at the center of big political and economic events.
Civil wars and military coups seem to be a specialty, but they usually operate deep in the shadows.
Today on Freakonomics Radio, with the help of Javier Blas and Jack Farchi, we try to shine a light.
This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Stephen Dubner.
Last year, there was a record $35 trillion in global trade.
Commodities make up about a third of that.
Here are the two journalists who tried to follow that money.
My name's Jack Fauci.
I'm a senior reporter covering energy and commodities at Bloomberg News.
How did you get onto this beat?
I started my journalism career at the FT.
I started out in 2008, just as the financial crisis was happening.
Good timing for you, really.
Yeah.
Yeah. much better than I had anticipated.
I thought I was interested in geopolitics, global affairs.
I didn't think I was very interested in finance or business or markets or economics.
Then I sat in the middle of the FT, not understanding half of what was going on, as the global financial system was collapsing and taking the world economy with it.
And I realized, actually, I was wrong.
I was looking for my first reporting job.
And Gillian Tett back then was the capital markets editor said why don't you go and work with Javier for writing about commodities?
My name is Javier Blas.
I'm a commodities columnist for Bloomberg Opinion.
And for the last 25 years, I have been writing about energy and natural resources.
How did you become interested in that or were you shoved into it?
How did that work?
I went to college.
I wanted to become a journalist.
I ended writing about the Spanish economy and was quite bored at my job.
My dream was to be Jerusalem bureau chief or Beirut bureau chief.
One day the oil correspondent in the newspaper I was writing left so there was no one to write about the oil market.
I raised my hand and they say yes.
I started talking to a couple of oil companies and I went to see how they were buying crude oil.
The trader that I was sitting with was a gentleman called Paco Garcia.
He was working at Repsol, the Spanish oil company.
Basically he was babysitting me, because everyone on that trading floor realized I have not a clue what I was even asking.
Literally, I didn't know what they were doing.
He invited me to the trading floor and gave me his second headset and said do you want to buy some barrels of oil?
I say, sure.
How?
When?
And he said, now, on the phone.
He was negotiating a deal for two million barrels of Iranian oil out of Kar Island, the main export terminal of Iran.
They argue about the price.
It's all on the phone.
They agree on a price.
And one said, do we have a deal?
The other one says, we have a deal.
That was it.
I said to the trader, what just happened?
He said, we just bought the oil.
And I was like, what do you mean?
I mean, that was on the phone.
Did you sign a contract?
He said, no.
I said, we have a deal.
He said, we have a deal.
And that's it.
We better find a tanker to bring the oil.
And I became hooked and I became an oil reporter.
Explain the difference between the commodity traders you write about in your book and the people who buy and sell financial instruments on commodity exchanges?
These traders are very different to what people think about a trader behind a computer screen, trading on the keyboard and the mouse.
Wall Street, Goldman Sachs, JP Morgan.
These traders work in physical stuff.
They are buying actual barrels of oil.
They buy an actual consignment of copper.
They buy a full ship load of wheat or soybeans.
Something that most commodity traders spend a lot of time trying to explain is they don't tend to care very much which way prices go.
Oil traders, for example, for the most part when they buy a cargo of physical oil, will at the very same time hedge the price of oil by selling a future on the futures exchange.
So the oil price element of what they're doing, they don't care about at all.
Whereas your trader on a screen, that's exactly what they're trading.
They're betting on the ups and downs of the prices and they're saying okay, there's a trade war, prices are going to go down.
I'll sell.
Or actually the trade war fears are overdone, I'm going to come and buy.
Whereas the physical commodity traders do definitely bet on outright prices sometimes, but they're also on a day-to-day basis trading a whole load of other factors.
For example, they're lending money to some producer in a country where they don't have much other ability to borrow money, or they're trading differences in prices between copper in Africa and copper in the US, or they're trading differences in prices between one grade of oil and another grade of oil, and maybe they have several different producers who they have contracts with and they're buying oil from all three of them and blending it together and then they can sell it for a higher price than the three barrels would have got individually.
So, Jack, you said you thought you were interested in geopolitics and so on.
To me, the irony is that by coming in this side door, I'm sure you've learned a lot more about geopolitics than a lot of people who might have been on that beat directly, don't you think?
To understand what's going on in politics, you have to understand the money.
And a lot of the time not all of the time obviously, but a lot of the time the money is commodities, because commodities are a huge source of global trade, a huge source of profits for some companies in some countries and costs for others.
In a lot of places in the world, be it Russia or the Middle East or South America or Asia, following the money means following the oil, means following the copper, the soybeans.
So if you don't understand that, then you're missing a huge part of the political picture.
I'm sure that a lot of people would think that they can follow the money by following the publicly traded markets.
But if I have it right, a lot of the deals that you write about are totally hidden from public view.
And so you're offering what strikes me as an almost secret window into how a big part of the economy operates.
Am I giving you too much credit?
Probably, but I would agree with you.
I think that's right.
That was our experience in coming to this trading industry specifically.
Our job was to explain why the oil price was up or the copper price was down.
And we found ourselves more and more hearing about this handful of privately owned, often very secretive commodity trading companies, people in the market telling us oh well, if you really want to know why the oil price is moving or what's going on in Nigeria, then you need to talk to these guys.
And as we did begin to talk to them, realising that there were these stories going on behind the news headlines, I think it would be an overstatement of the importance of the commodity traders to say oh yes, they're always the hidden hand behind moving political events.
Occasionally they are, but a lot of the time they're not, but they're very often there.
The number of examples, including in recent history.
We see where there are big geopolitical shifts and the first people there are the commodity traders, be it the Libyan civil war or when South Sudan became independent.
Within days after South Sudan declared independence, a whole team of traders from Glencore arrived trying to do an oil deal.
And in fact, with $800,000 in cash to pay bribes at the same time.
Let me back up and ask a super basic question.
What is a commodity and what is it not?
It's a fungible raw material.
It has to be something where one is as good as any other.
A ton of pure copper.
It doesn't matter if it comes from Chile or Peru or Congo or Poland, they're all the same.
There's one price and you can exchange one for another and it doesn't matter too much.
Whereas a bottle of fine wine is not so much a commodity, because they're all different and connoisseurs will pay a huge price for one and pay nothing at all for another.
Okay, so that's a commodity.
Javier, give me an example of a commodity trader's role in a given transaction.
Just imagine that you are a big coffee roaster, the Starbucks of this world, and you need lots of coffee.
You are not going to go yourself to different producing countries and farming companies.
And in some cases, these commodities are produced by smallholders.
You will need to be talking to... thousands of farmers to get the commodities.
So you call say Cargill, the world's largest agricultural trader, a very discreet company based near Minneapolis in the United States.
And you say, we need coffee.
So Cargill will go into the business of procuring coffee on your behalf.
They will go to Brazil, they will go to Vietnam, they will go to Colombia, they will go to West Africa and they will buy coffee from many suppliers on those places.
They will move those commodities often in trucks and then into ships into whatever port in the United States, often the New Orleans area.
That's where they will perhaps roast the coffee on your behalf and then deliver it to the final destination.
Sometimes they are financing the whole crop and harvesting operation.
It's a very complex business, from the first purchase to the final delivery, from the first finance to the final payment.
They may be six months. where the commodity is in transit and where the finance needs to be there.
Let's hear about the history of this book.
I'm just curious to know how the collaboration started and then how the work happened with the book.
The desire to write the book came from a frustration.
As a journalist, when you are assigned to a new sector, the first thing that you do is you go to the person that was doing the job before you and then you ask okay, so what is the basics?
Can you share with me your phone book and also what I should read?
You go to cover Wall Street, you're going to read a book on the history of J.P.
Morgan or Goldman Sachs, etc etc.
When Jack and I started working together at the Financial Times, Jack asked me what I should be reading.
And I think Jack was a bit perplexed that my answer was like, well, there is not a book.
He didn't believe that in this important industry no one has the book with capital letters that everyone will read.
Considering it's such an important topic, considering how much money is at stake, considering how many people are affected by commodities and commodity trading, why was there no book?
I think that there was no book because it was difficult to write about the industry.
The industry wanted to keep everything secret.
As we were writing the book, some of the executives told us we'd rather have you abandoning this project.
I suppose also that during much of the 90s there was not a lot of interest in commodities because prices were relatively low.
Therefore, why you're going to write a book about commodity trading if no one is really interested in commodities.
A lot of people were writing books about those financial commodity traders the Wall Street type, the hedge fund manager type but not about the people who were buying and selling the stuff.
At some point the question moved from how is that no one has written the book to maybe we should write the book.
Describe the research and the reporting.
What was your methodology?
We started going through every source, whether it was public records, to contacts at banks, at commodity trading houses, anyone who have worked in these companies that kept an annual report that was confidential, but they have it at home.
It was very easy to get from some companies the annual report from say 1975.
It was a lot more complicated to get the annual report from 2015.
Then we use phone email to everyone in the industry that we knew and said we're going to write a book.
Would you sit down to talk to us on the record?
And surprisingly, a lot of people say yes.
A lot of the old hands of the industry really help us because I suppose that they were long retired.
The people who were active in the industry were a lot more complicated.
Some of them said to us, What I'm going to tell you is not all the true and nothing but the true.
Others arrived to the meeting with their personal lawyer alongside the public relations officer.
You left the interview with them after two hours and you felt that you had been boxing almost physically exhausted.
But generally, for an industry that thrives in secrecy, a lot of the old hands were wide open and willing to tell stories that often you couldn't believe.
It sounds like you're saying they are willing because what they did was kind of extraordinary.
These people who were retired, they were telling you deals that they did in Angola in 1975, or in Cuba in 1985, or in the Soviet Union after the collapse of the Berlin Wall.
They were very proud of what they did and how they made money.
Also, it was a bit of a different world where...
Perhaps corruption was not seen as is today.
These were executives which made business in very difficult corners of the world, and they were operating from Switzerland, a country that not only allowed companies to pay bribes overseas, but allowed companies to deduct bribes.
The payments as a tax credit bribes were tax deductible in Switzerland until about a decade ago.
To understand how Switzerland became the epicenter of this industry.
It helps to understand a commodity trader named Mark Rich.
Blas and Farchi write about Rich a good bit in their book.
There's also a very good Mark Rich biography called The King of Oil by Daniel Amann.
At least the chapters I read were very good.
Here's Farchi again.
Mark Rich was the godfather of the modern commodity trading industry.
To a significant extent invented the industry.
Rich was born into a Jewish family in Belgium in the 1930s.
Like many other Jews in Europe in the 1930s, and like many of the people who would go on to be big players in the commodity trading industry, moved to the US because of the rise of Nazism in Europe.
In the post-war period got his apprenticeship at Philip Brothers Fibro, which was in the 1950s and 1960s the dominant force in commodity trading and really kind of invented a lot of the ways in which commodity traders do business and make money.
But there was something gentlemanly and genteel in Philip Brothers.
And Mark Rich was this super aggressive, totally driven, always focused entirely on money and nothing else character.
Philip Brothers was too small for him.
In 1974, Rich and his trading partner Pincus Pinky Green left Philip Brothers to form their own firm, which would become a powerhouse.
It was called Mark Rich & Co.
He got his big break when the oil market began to fragment and the Seven Sisters, these big American, European oil companies, began to lose control of the oil market.
And he started trading oil again with abandon, at a time when the tradable oil market was only just becoming a thing.
Talk about the ways in which he did things differently from everybody.
Or maybe another way to put it is the risks he was willing to take, the different actors he was willing to engage with, etc.
A lot of what you needed to do to make money in the oil trade in those early days was to have a good enough relationship with one of the big oil producers that they would sell you oil at a price that was probably too low.
One of his big trade flows was through this extremely secretive pipeline that went through Israel.
That was built as a joint venture between Israel and Iran before the fall of the Shah, in great secrecy.
And Mark Rich would be buying Iranian oil, putting it through the pipeline, supplying Israel, but also supplying Europe through this pipeline, which then became enormously valuable when the Suez Canal closed in 1967.
After Israel launched an attack on Egypt and Syria, this brief war was over, but the Suez Canal stayed closed until 1975.
And for Mark Rich, that was a gift from the gods, and he made huge amounts of money.
Mark Rich became this almost larger-than-life figure in commodity trading the most profitable commodity trader ever.
We spoke to a number of former senior people at Mark Rich who said that the company made a billion dollars of profit in 1979, the year of the Iranian revolution, which is in those days would have made it one of the 10 largest companies in America.
And this was a company owned by a small handful of people that only people in the commodities industry had ever heard of.
But that didn't last, because Mark Rich caught the attention of US law, and particularly of Rudy Giuliani, then a prosecutor, who indicted him for tax fraud and for trading with Iran during the hostage crisis.
So he and his partner Pinky Green fled the US to Switzerland, became fugitives from US justice and then carried on their business of being the world's largest commodity trading house, despite this US indictment hanging over their head.
And that continued for a number of years.
His real undoing came when he lost money in 1991 1992 when one of Mark Rich's zinc traders, under the influence of Mark Rich himself, attempted to corner the zinc market.
And it went horribly wrong.
Mark Rich lost about $170 million on this attempted zinc corner.
That was really the last straw.
His underlings rounded on him and forced him out of the company.
The company was renamed as Glencore and continues as one of the largest commodity traders today.
Glencore is not only the world's largest commodity trader, but it's also a conglomerate.
They do everything and anything.
They trade a lot of energy, whether it's crude oil, natural gas, refined products, a lot of coal.
They used to trade a lot of agriculture, and they trade a lot of metals and minerals.
It strikes me that the commodity traders are performing a variety of big functions.
They're acting like bankers.
They're acting as sort of a government coming in to help another country try to stabilize itself, or maybe more like one of the big financial institutions, like a World Bank.
Can you think of any in history parallels to the functions that these commodity traders were performing?
The commodity traders look like one of those Swiss knives where you could have everything.
Out of them.
They are the bankers of last resort, when no one else will take your phone call for a credit line.
They will offer you money.
They are the McKinsey, the consultant for lost causes where someone doesn't know how a market works.
They will come there and explain it to you.
And they're almost like diplomats for hire where you have a foreign affairs problem.
They can't explain how to make it work.
The joke in the oil trading industry was that Beetle, the world's largest oil trader, was the trading arm of MI6, the secret service of James Bond.
There is a grain of truth behind that joke.
I can't imagine the same joke doesn't exist for the CIA, correct?
The CIA, I don't think that they have an in-house trading house.
However, Philip Brothers of Fibro, a big American trading house of the 70s and 80s, was known to have very close links to the CIA and, just generally, the American government.
At times Fibro will help American governments and at times the American government will be a bit surprised to find out that things were happening against the interests of American policymakers and diplomats, because Fibro was helping the other side.
Coming up after the break.
When the political situation gets turbulent, the commodity traders are often the first people to step into the breach.
There comes a time where governments need things to happen, where having a commodity trader helping may come handy and where everyone can deny their involvement.
I'm Stephen Dubner.
This is Freakonomics Radio.
We'll be right back.
The book we are talking about today is called The World for Sale Money, Power and the Traders Who Barter the Earth's Resources.
The authors are Javier Blas and Jack Farchi, a pair of financial journalists at Bloomberg.
I once had a professor who said that when historians write books they always search for the big macro thesis, all the different events and populations that contribute to producing whatever.
It is a war, a new country or whatever.
But that often it really is the product of two people sitting in a room making a deal, having conversation, shaking a hand.
To that end, I'd like you to talk about Jamaica for a minute and the story you tell in your book single moments and single deals and single trades can shape the course of history.
The Jamaican example was the early 1980s.
And this was told to me by a guy called Hugh Hart, who was at the time the Minister for Mines and Energy in the Jamaican government.
The Jamaican economy was in pretty tough shape.
It was reliant on oil imports, and oil prices had surged in the oil crises, and the Jamaican economy was pretty much on its knees.
Each month, Jamaica would import about 300,000 barrels of oil.
Just like one tanker, yeah?
It's one tanker of oil, exactly, by the standards of today's big tankers.
A fraction of a tanker.
It would import 300000 barrels of oil which would go to the refinery in Kingston and that would supply Jamaica's oil consumption for the month.
In order to do that, the central bank would open a letter of credit which would allow Jamaica to pay for the oil.
So Hugh Hart was in his office one Friday afternoon and someone came to see him from the central bank in a state of agitation.
He said, what's going on?
What's the matter?
He said, we've got a problem.
Problem is we don't have any money.
We can't open the letter of credit.
Without that, Jamaica wouldn't be able to buy this cargo of oil.
They would run out of oil over the weekend.
And they're literally burning oil for electricity, right?
Yeah, and fueling cars.
You know, the petrol stations would run dry and there would be chaos on the streets.
This was a fairly febrile time in the Jamaican economy and Jamaican politics.
And he thought there would be riots and revolution if they didn't get any oil.
And this was a Friday afternoon.
So he thought, who do I call?
And the only person he could think of to call was Mark Rich & Co, the company that is today Glencore.
He called his contact at Mark Rich, who was in New York, who said, I can't help you.
I'm a metals trader, but try Mark Rich himself.
And so he calls Mark Rich in Switzerland.
It's two in the morning.
He gets Mark Rich out of bed.
Mark Rich says, who are you?
What do you want?
He says, well, I'm the minister of energy in Jamaica and I need some oil.
And Mark Rich says, huh, OK, call back in an hour.
And in that hour, Mark Rich has arranged for a tanker of oil that was going from Venezuela to the US to be diverted to Jamaica, delivers the oil, averts the crisis without even a contract being signed, without any payment, and saves Jamaica's day, as Hugh Hart told it to me, which is an amazing story of a commodity trader, very likely changing the course of history.
Because there might have been a new government in Jamaica by Tuesday if he hadn't done that.
Absolutely.
Absolutely.
What did Mark Rich get out of that?
Mark Rich got a very long relationship in Jamaica that made him an awful lot of money.
Jamaica was then a really big producer of alumina, which is the raw material for aluminium.
Mark Rich came in and struck a whole series of deals to buy Jamaican Illumina below the global market price and made hundreds of millions of dollars over the years, to the point that later Jamaican governments turned around and said Mark Rich was taking advantage of the country.
They were making far too much money and Jamaica was losing out, which probably was true.
But at the same time, there was a moment in the early 1980s where Mark Rich saved Jamaica's skin.
So this relationship between Mark Rich and Jamaica deepened and took all kinds of interesting turns, to the extent that Hugh Hart later on took a portfolio in charge of sport.
And when Jamaica was putting together a bobsleigh team for the 1988 Olympics, Mark Rich actually helped to finance this bobsleigh team that then, of course, became the star of the Disney film Cool Runnings.
And that was paid for by Mark Rich.
Mark Rich died in 2013, but before he did, he pulled off one more mega deal.
He got himself a presidential pardon from Bill Clinton.
Critics called this contemptuous.
Even Clinton himself would later say he regretted it.
So how did commodity traders like Rich come to be so powerful in the first place?
In their book, Javier Blas and Jack Farchi point to four key factors since World War II that have shaped the industry.
Here's Blas.
The first one is nationalizations of the oil industry, starting from 1950 but really culminating in the 1970s, where a lot of Middle East and North African countries took control of their oil destiny, kick out foreign powers and nationalize the industries.
Say just a little bit more about the Seven Sisters and how the new players came in there.
The Seven Sisters were seven vertically integrated American, British and French companies that, until 1973, dominated the oil market.
At that point, typically a barrel of oil will be produced in an Exxon oil field, transported in an Exxon pipeline or an Exxon tanker into an Exxon refinery and an Exxon fuel station.
Every step of the chain Exxon has its name, and the same for BP, Shell and what is today Total of France.
At one point that is broken apart and The companies lose a lot of access to the production and that production is nationalized.
It's no longer the Saudi American oil company but the Saudi Arabian oil company that does the drilling in Saudi Arabia.
They have a lot of oil to sell and found that commodity traders were willing to buy the oil and also that they didn't ask too many questions and they were very happy to pay a few bribes in the process.
Also, it's a time where oil goes from a rather boring commodity to really a big business.
Prices explode.
They go from a couple of dollars to $5 to $11 to $30 in the space of about 15 years.
A lot of these companies make a lot of money because they replace the traditional vertical integrated oil company with something in between.
They became the link between the new, very rich Middle East petro-states and the consumers in America and Europe.
OK, that's the first big factor you identify.
Number two is the collapse of the Soviet Union.
Walk me through how that shaped the commodity trade.
We have to remember that at the time of the end of the Berlin Wall and the Soviet Union, Moscow was one of the world's largest producer of commodities not only gas but crude oil, aluminum and a number of other metals and also a significant producer on agricultural commodities.
All of a sudden, the commodity traders have a lot of new production free and available for them to intermediate.
These countries were connected only among themselves.
Russia was making business only with communist countries, largely.
They didn't have the experience on how to place oil or wheat or aluminum into the international market.
They didn't have the money to finance all of those commodity flows.
And the commodity traders have the expertise and the money to help.
In some cases they help literally getting bags of money flying into an aluminum smelter in Siberia and saying to the manager here is the money for the salaries on the last day of the month.
You pay the people.
You keep producing the aluminum.
I will take care of that aluminum into the global market.
So in a very short timeframe, between 1989 and around 1994, billion-dollar-sized fortunes were made just buying and selling what the Soviet Union had to offer to the global economy.
You write that around the same time, there was another big development, which was the financialization of the global economy.
Why was that so important to the commodity traders?
One of the big problems of a commodity trader is that you are taking a lot of risk price-wise.
You are buying a cargo of oil.
That oil sits on a tanker for, say, 40 days.
Until you sell it, you have no way to hedge that price, risk the financialization of the global economy.
Introduce a new number of commodity derivative contracts in Wall Street that allows the commodity traders to hedge the risk.
They can buy and immediately sell a cargo in the paper market, guaranteeing the price that they're going to get.
That allows them to try more to secure profits and allows them also to raise finance more easy so they can expand very quickly, and also makes their business Just a touch more safe.
One of the problems of the commodity traders before the 1980s and 1990s is that they went up very quickly and then collapsed because they lost money on a big transaction and that was the end of the day.
Commodity traders started getting bigger and there were few failures after the financialization started.
Okay, and the fourth big development you cite, the most recent, is quote the spectacular rise of China that spurred a massive commodity boom in the early 2000s.
Tell me about that.
China needs a lot of commodities and It goes to the very same players that everyone else have gone through the 70s, 80s and 90s.
It goes to the commodity traders, who see the opportunity and start shifting flows of commodities from the typical end users in Europe and in the United States Canada Australia Japan, into the new buyer, which is China.
It is a spectacular growth in demand, and that demand is met mostly by commodity traders.
They see the pie of global trade increasing very rapidly.
It also increases the price of most commodities.
You have more demand, larger margins, so the commodity traders start making money like they have never done before.
After this huge expansion of Chinese imports, you then had a situation in 2010 when the market was pretty tight.
And then you had this massive Russian crop failure, a huge drought in Russia that caused Russian supply to reduce a lot.
And importers of grain, of wheat and barley, particularly from Russia, started to panic and started to panic buy.
Prices rose very rapidly.
There was this key moment in the crisis when the head of Glencore's grain unit in Moscow went on Russian TV and encouraged the government to ban exports.
A couple of days later, that's exactly what the government did.
What was panic buying by some importers turned into a huge panic and massive buying.
And you had this enormous price spike.
It's not very clear what Glencore was trying to achieve and whether that was an official Glencore position or whether it was just one guy from Glencore's Moscow office doing what somebody had asked him to do.
But regardless of that, the impact was it gave the Russian government political cover to do something pretty extreme, which was to ban exports, caused a massive run up in prices and panic from importers around the world, which caused prices to run up even further.
As a result, between middle of June 2010 and early 2011, the price of wheat had more than doubled.
Glencore, by the way, did very well out of that, made a record profit, as often happens in these moments of huge commodity price spikes.
But the political implication was more significant because a doubling of the price of wheat.
The people who were most severely affected by that were the poorest people in the world, the people who depend on wheat as a staple and who don't have a lot of money to buy bread.
And when the price of wheat doubled in a few months, that caused huge inflation, particularly for the poorest people in the Middle East and North Africa.
And what happened in early 2011?
Well, the Arab Spring began when a young fruit seller set himself on fire in Tunisia and set off a chain of events that led to the Arab Spring.
Now, can we directly say the Russian export ban caused the Arab Spring?
No, we can't.
Was the doubling of the price of wheat an important factor?
Yes, absolutely it was.
You describe how sanctions and wars and any kind of chaos are impediments for most people, but for commodity traders they can be opportunities.
The chaos is actually pretty good for them.
Give me some evidence for this argument with examples, please.
I don't think I have ever seen any sector of global business with the exception obviously, of the manufacturers of weapons that actually thinks that a civil war can be a business opportunity.
And for commodity traders, often that's the case, and in very incredible, imaginative ways.
Let's go back to Libya about 15 years ago, when the ease of the country rises against the dictatorship of Muammar Gaddafi.
The Eastern rebels are short of money.
Surprisingly, for a country as oil-rich as Libya, they don't have much gasoline and diesel.
And you cannot fight a war without gasoline and diesel.
You don't have gasoline, the trucks are not moving.
They don't have that because they don't have refineries or why?
The rebels didn't have any working refinery.
All the big refineries were controlled by the troops of Gaddafi.
So they are trying to get refined products into the areas that they control to fuel their military.
A big political and financial backer of the Libyan rebels was Qatar.
So the Qataris, on behalf of the ragtag army of Libya, calls Vitol, the world's largest oil trader, and said will you help these guys on our behalf?
Here is a Middle East country asking someone to get into business with an army of a country in the middle of a civil war.
And by the way, the army is the rebel army.
It's not recognized by anyone.
They don't have a central bank.
They don't have a prime minister.
They don't have anything.
Most businesses will have run away as fast as they could.
Beatles say, yes, of course.
Most governments would have run away too, by the way, right?
Everyone.
The only people that were flying into Libya were oil traders, journalists, and spies.
So not only Beetle agreed to provide gasoline and diesel with the rebels but say look, since you guys don't have money but you control an oil field where you can produce crude, we will take barrels of oil in payment for the refined products.
Then there was a problem because Gaddafi blew up the pipeline of Most companies.
Again will have said well, sorry guys, we were prepared to do this very complicated barter agreement.
Crude oil for gasoline.
But since you don't have crude oil, you cannot pay us.
So we are out.
And Beetle said, no, no worries.
Actually, we can help you.
Let us extend you a credit card of a billion dollars and you buy from us gasoline with that credit card.
When the war ends and you win, you pay us back.
So they were effectively taking a bet on who was going to win the civil war in Libya.
You make it sound as though Vital took this deal and fronted them the money sort of just the way you make a deal with anyone.
Say, I know you're good for it.
When in this case, it wasn't clear that they were good for it at all.
They have to win a war.
But there's more to it than that, right?
Because Vital knows that Qatar theoretically could make them whole if the rebels had totally imploded.
Yes,
This is where the political connections of the commodity traders come at play.
And that is a very important element of the commodity traders.
They are really well connected politically, not only in places like Libya and Qatar, but also in London, in Brussels, in Berlin and in Washington.
There comes a time where governments need things to happen in the market and in politics, where having a commodity trader helping may come handy, and a situation where everyone can deny their involvement.
Was Qatar acknowledging that they were asking Vettel to do what they did?
No.
Was the British government telling Vettel oh, you should go to Libya, do this deal, because actually London is supporting the rebels?
No.
But I think that the conversations behind the scenes, everyone was tapping the shoulder of Vettel and say come on guys, do it, but keep it quiet.
Would you say it's gotten harder, or at least different, for commodity traders to operate today than 15 or 20 years ago.
One thing that has happened pretty recently, the last five, 10 years, is that governments, and in particular the US government, has started paying an awful lot more attention to them.
Coming up after the break, what does this attention translate into?
And what happens when the U.S. government itself gets into the commodity trade?
I'm Stephen Dubner.
This is Freakonomics Radio.
We'll be right back.
In their book The World for Sale, Javier Blas and Jack Farchi describe a multitude of bribes and handshake deals with a multitude of warlords and dictators.
Today, the top commodity trading firms will tell you, they have changed their ways.
In 2022, Glencore pleaded guilty and agreed to pay more than a billion dollars for making and concealing corrupt payments and bribes and for manipulating oil prices.
That case was brought by prosecutors in the US, Britain and Brazil.
That same year, Glencore released its first ever ethics and compliance report.
The firm's chairman said that the company aimed to operate quote transparently under a well-defined set of values, with openness and integrity at the forefront.
This kind of corporate speak has been echoed by other big commodity trading firms.
Here's Jack Farchie.
We have seen in the last five years, almost all of the largest commodity traders have pleaded guilty to misconduct, mostly corruption, but also market manipulation.
As a result, we've seen them all invest a lot in compliance and due diligence.
It's fairly clear that Commodity traders today can't do the kind of things that Mark Rich was doing in the 1970s.
Fewer suitcases full of cash.
Certainly fewer suitcases full of cash.
Probably these days it's a thumb drive with some crypto on it.
If Mark Rich were starting out today, what would he be doing?
He'd probably be trying to trade Russian, Iranian, Venezuelan oil, selling it to India and China.
Those are the dodgy bits of the oil market, where there is huge amounts of money to be made and which rely on having good connections and a willingness to bend or break the rules.
Now, somebody is doing that plainly.
Lots of people are doing that.
For the most part, not the principal characters of our book, because the principal characters of our book have become such enormous companies that they're too reliant on the US dollar system to risk falling foul of the US government.
For the most part, that Russian oil flow, for example, Iranian oil flow, which is subject to even stricter sanctions, has gone into the hands of more shadowy traders.
There's this new set of traders that that has popped up in Dubai, who changes name every few months, including sometimes because they get sanctioned by the US government, which is involved in trading a lot of the Russian oil.
A lot of the Iranian oil gets traded or even bartered directly by Chinese companies and Chinese buyers, sometimes gets shipped via Malaysia, where it gets rebranded as Malaysian oil and then imported into China as Malaysian rather than Iranian oil.
There are political scientists who make the argument that sanctions often fail for a variety of reasons.
Do they factor in what you're talking about right now, which is just that there are shadow dealers essentially, who are finding ways to get around the sanctions one of the key arguments for why people say that sanctions don't work, particularly sanctions on things like commodities, because if commodities are produced, then as a rule they tend to flow and they tend to find a market because they're fungible.
It's quite hard to trace them.
I wouldn't say it's universally true.
For example, in 2012, when the US and Europe ratcheted up sanctions on Iran, Iranian oil production and exports did fall pretty substantially.
And is that because that was the period when the bigger firms were a little bit more concerned with compliance and there hadn't yet arisen these smaller, more shadowy firms to fill the space?
Yes, and because it takes time to build up new networks of trading to circumvent sanctions.
At the end of the day, the US is very powerful.
It probably was more powerful then than it is now in terms of being able to exert its influence on countries like India and China.
And so there was an ability for the US to unofficially say to China we'd like you to significantly reduce your purchase of Iranian oil, and for it to happen.
So predicting the future, as we all know, is really hard.
But let me ask you about a past prediction and why it was so wrong.
Peak oil, which was an argument that was really prominent in mainstream media just about everywhere for a long time.
And then it turned out to just be wrong.
Why do you think the estimates were so off?
And what role did commodity traders play in the reality?
The estimates were so wrong with peak oil supply because people keep betting against two things.
One is American engineering.
If you give an American engineer enough time and enough money, it will solve any problem.
And the second one, they bet against American capitalism.
We got $100 oil.
It was just a question of time that someone in America was going to find a way to make money out of that.
And that was the shale industry.
The commodity traders were very helpful because all of a sudden, these are not the typical American big oil companies like ExxonMobil or Chevron, or Occidental Petroleum or Conoco.
These are a bunch of with all due respect cowboys in Texas with small companies drilling oil wells in a different way and they need to sell it.
All of a sudden, the US government, who have banned the export of crude oil for many years, says okay guys, it's fine, you can export the crude oil.
Small oil producers which need finance, which need expertise, which need advice and a government which is willing to let the commodity to flow into the international market.
It's almost like if all of that was written by the executives of a commodity trader on like my Christmas shopping list of all what I need and bang, you got it.
There have been some pretty significant events in global politics and economics since you published the book.
How do you see the Russia-Ukraine war as connected to commodities and commodity traders?
The invasion of Ukraine by Russia has a huge impact in the commodity markets.
Both countries are huge players in natural resources.
The commodity traders were one of the most active Western business interests in Russia.
I don't think that Putin will have made it all the way from Crimea to the final invasion if the commodity traders have not been helping Russian companies to sell their cargoes in the market.
These are against U.S. sanctions, correct?
They were against some American sanctions, but not European sanctions.
So all this business was legal all the way until the final invasion of Ukraine.
But a lot of companies didn't really want to get into that business.
There were some restrictions, but they were not breaking the law of the respective countries where they were doing it.
But they were very, very important for Vladimir Putin, to the point that Putin personally gave One of the highest medals that you could get as a foreigner to Ivan Glassenberg, the CEO of Glencore, for service to Russia in that period.
In between, Crimea was invaded and the rest of Ukraine was invaded.
The big firms that have reformed to some degree, as you're describing, are they still doing well financially?
They're doing better than they've ever done before.
This period of the last four or five years, the energy crisis in Europe COVID.
The oil price went negative.
It feels like a lifetime ago, but it happened.
2022 was a bonanza year for all of them because oil prices and gas prices...
There was massive volatility.
Many of them had contracts to buy from Russia and then the price of Russian commodities collapsed and they were buying at very low prices and making a lot of money.
The four largest commodity traders made profits of 48 billion in 2022, which is more than Amazon Meta, NVIDIA and Tesla combined that year.
Talk to me about the first few months of the Trump administration.
How do you assess this administration through the lens of commodity trading?
For the commodity trader, Trump has had some very important and perhaps not very widely appreciated benefits.
One is that Donald Trump has instructed the Department of Justice to effectively don't care about foreign bribery.
Considering that some of these commodity traders have to plead guilty in US court of very serious crimes related with foreign bribery and pay hundreds of millions of dollars in fines, that is huge news for the commodity trading.
One commodity trader told me that this is like we are back to the 70s.
We can do whatever we want again.
The other thing has been that all the trade policies of Donald Trump have introduced a lot of volatility in commodity trading.
Tariffs sanctions restrictions, those kind of things as long as they don't affect economic growth, they are good for commodity traders because typically they open trade opportunities that were not there before.
The problem for commodity traders is that a lot of the current policies from the White House are probably going to lead to lower economic growth.
Typically, commodity traders want a healthy economy because the more the global economy grows, the more it consumes commodities, the more it demands the business of a commodity trader.
Early in his second administration, President Trump prioritized a mineral deal with Ukraine in exchange for supporting Ukraine in its war with Russia.
The deal which was signed in April gives the US a cut of future revenue from Ukraine's natural resources.
These include minerals used to make electronics, what are often called rare earth metals.
I asked Javier Blas how rare these metals actually are.
The rarity is not their concentration.
The rarity is to find enough of them on a place where you can process them into the actual metals that you can use.
They are also very small in size.
The United States imports about $170 million worth of rare earth metals.
Let me put it this way.
The price of rare earth metals could go up by a factor of 25 times And the import bill of the United States for rare earth metals will just start to approach the import bill of that absolutely commodity essential for the American economy, that is, the Mexican avocado.
Another commodity that has become central to the global economy, primarily for its use in batteries, is cobalt, which is a byproduct of copper mining.
It's estimated that more than 70 of the world's cobalt comes from the DRC, the Democratic Republic of Congo.
Congo is in a fascinating place at the moment, in that it is this focus of this geopolitical struggle between the US and China.
China has invested a lot there in the last 10, 15 years.
It's Chinese companies that have driven a lot of the growth in copper production.
Cobalt used in EV batteries.
It's a relatively difficult place to operate.
It's fairly corrupt.
It's in the middle of Africa and supply chains are difficult.
There's thousands of kilometres on trucks or rail and truck to get from the copper and cobalt mines in the middle of Congo to a port.
And so commodity trade is a big player there.
From the Congolese government point of view, there's a sense that the Congolese feel like They're rather over-dependent on China.
From the US point of view, Congo is one of the richest sources of minerals that we know about in the world.
So there's this attempt to do a minerals trade deal between the US and Congo, much like the deal that Trump is trying to do in Ukraine, what he wants to do in Greenland.
At the same time, you have these commodity traders, people like Trafigura Mercuria Glencore, who are striking deals to buy copper from the Congolese government.
And then the place that they're taking it all to is the US.
And the reason is one of these dislocations that's been driven by Trump and by the trade war, because Trump has threatened to put tariffs on US copper imports but he hasn't actually done it yet.
So you have a situation where because there's a threat, the price of copper in the US has gone up.
Usually the price of copper in the US is trading like 20 30, 50 more than the price of copper in, I don't know, China or London.
At the moment, it's trading $1,500, $2,000 more than the price of copper in China or London.
So there's $1,500 a ton of opportunity for traders to make.
The winners there are pretty obvious.
Who are the losers?
It's very clear that the losers are US companies and US consumers.
The price of copper in the US is has been trading anywhere between 10 and 25 above the price of copper in the rest of the world, where usually it's the same.
The price of aluminium, the same.
The price of steel, the same, because of threatened or actual tariffs.
It'll take a while for that to feed through into very meaningful inflation for end users, but companies see it straight away.
The companies will pay a copper price that's based on the US copper contract.
That is now 20% more expensive than the rest of the world.
Since we first published this episode, a lot has happened in the world of copper.
The US and Congo signed a formal strategic partnership agreement explicitly trading security support for mineral access.
Soon after Mercuria and Glencore signed agreements to route Congolese copper and cobalt to US buyers.
Last August, the Trump administration imposed a 50 percent tariff on semi finished copper, but carved out raw and refined copper, which caught traders off guard.
The price difference collapsed almost immediately, and the traders who had rushed copper to the US in anticipation of broader tariffs saw their window close fast.
I asked Jack Farchi whether commodity traders who try to take advantage of pricing inefficiencies have played an inflationary role in commodity prices.
I'm not sure I would see it like that.
In that example, the driver of the inflation is the tariffs.
The arbitrage is essentially bringing it down, right?
The commodity traders in this example are buying copper at the cheap price and selling it at the more expensive US price.
If you add all of their activities together, the impact of that is to bring up the price of copper outside of the US and bring it down inside the US.
Now if the US turns around and says oh, actually the tariff on copper is going to be 5, not 25, in that case it will come down.
But broadly speaking, moving material from where the price is cheap to where it's expensive, both in location and in form and in time.
That's closing those price gaps at the margin.
And so...
In a world where you have perfect commodity trading with unlimited capacity to trade and to finance trades and to take risks, probably brings down inflation rather than pushes it up.
Having read your book, I could make a pretty compelling argument.
I think that trading resources has shaped the world, the geopolitics, the national economics and societies of countries for the past hundred years and probably a couple thousand years before that.
So how do you assess the relationship between this practice the trading of commodities and all those downstream political, economic and social effects?
Commodity trading at this moment is as large as it has ever been.
We are consuming record amounts of almost every natural resource.
Even the resources that we think we are leaving behind.
Think about thermal coal.
The global demand is at an all-time high.
The consumption of oil, the consumption of copper, the consumption of wheat, the consumption of rice, all of them are at a record.
Therefore, you need commodity traders more than ever to arbitrage those flows, to buy from where those commodities are produced and sell where they are needed.
At one time I was criticizing the business to Deanne Taylor, who was the CEO of Beetle, the world's largest oil trader.
I suppose that I presented trading as something that it was easy that they were taking money from the table under the noses of consumers and producers.
And then he turned to me and said well Javier, if you think that this is so easy, why not?
Everyone else is doing it.
Why is it only us who is doing it?
This is a more difficult business than you think.
This is not free money that we are taking from the table.
This is not the big bully from high school taking the lunch from the children.
We are putting our money at risk and clearly the global economy needs us because if not, they will have got rid of commodity traders a long time ago.
But it's not like you have to have all or nothing.
Other products and services have... well-established transparent markets.
And there are certainly trading markets and commodities that are similar to those markets I'm talking about.
But this is a whole other layer.
It could have been replaced by now by more centralized clearinghouse, couldn't it have been?
I suppose that the answer is no.
If it was so easy to standardize commodity trading and make it the Amazon of commodity trading, it would have happened already.
I suppose it's a combination of the quantity and the differences of commodities, also the origins of where a lot of those commodities are coming and where they are going, and also how politicized at times is the market.
There's a market where you need to navigate coup d'etat, civil wars, American sanctions.
It just strikes me that the two of you have exposed a pretty large and foundational layer of the global economy that many people either don't want to know about or don't have the resources to find out about.
But when it comes to the government, it still just surprises me that there's so little appreciation for the depth and wealth of this industry.
So do you see that changing in the US and UK at least?
I think there's been a vast amount of complacency from governments in the West about commodities, thinking that's the past, that's the old economy, the market will sort it out.
We don't need to worry about that.
We don't need to have lots of policy to do with that.
Leave it to some technical specialist and probably don't fund that technical specialist very well.
There's not an awful lot of consideration to commodity markets, because they maybe don't affect ordinary voters much quite so directly as other things of the economy.
But I think it's a mistake.
The last few years has borne that out.
Suddenly we've woken up in Europe to how being complacent about commodity supplies and commodity security has suddenly left Europe extremely vulnerable and is essentially in the process of killing a lot of the heavy industry of Europe through high energy prices.
Governments need to pay much more attention to this and need to think much more strategically and more long-term about that.
I don't necessarily think that everything that the current US administration is doing is a good idea, but commodities have risen up the list of political priorities and I think that's probably a good thing.
Do you feel your book has changed the way commodities are traded or will be traded in the future?
I think that the book has helped to bring a bit of transparency to the industry.
We find more policymakers that are aware of who these companies are.
It really concerns me that from time to time, a government may invite Jack or me to speak to them as if we were the source of expertise in the industry.
While it's very flattering, I'm thinking geez, if the governments are calling us as the experts, they really have no clue what's going on.
That is really the level of understanding of the industry, where basically the word for sale has become the de facto.
If you are interested into commodity trading, you need to read the book.
Are the traders changing the behavior? because of our book.
I don't know, but we know that an oil trader from Beetle, which is the world's largest oil trader, was recorded by the FBI on a secret web tab.
And he was talking about us.
He was talking about our questions and the fact that we were writing stories about commodity trading.
And he said that the company that employed him was a bit nervous so they needed to keep a bit of a low profile.
So in so many ways, when we saw our names on the FBI wiretap and then you know, he did call us an idiot.
But it was quite good because we thought, well, maybe we do have a bit of an impact.
Javier Blas and Jack Farchi have certainly had an impact on me.
I hope you as well.
Their book is called The World for Sale.
Let us know what you think.
Our email is radio at Freakonomics.com.
We will be back very soon with a new episode.
Until then, take care of yourself.
And if you can, someone else too.
Freakonomics Radio is produced by Stitcher and Renbud Radio.
You can find our entire archive on any podcast app, also at Freakonomicscom, where we publish complete transcripts and show notes.
This episode was produced by Tao Jacobs.
It was mixed by Jasmine Klinger with help from Jeremy Johnston.
Thanks to Michael Haberkorn for the original book recommendation.
Thanks also to Ivo Sarjanovic, Jonathan Kingsman and Scott Irwin for their good insights on commodity trading.
The Freakonomics Radio Network staff also includes Augusta Chapman, Dalvin Abouaji, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Ilaria Montenacourt and Zach Lipinski.
Our theme song is Mr. Fortune by the Hitchhikers, and our composer is Luis Guerra.
As always, thanks for listening.
Oh, Jesus Christ.
Hold on one second.
That I need to check because I cannot remember.
Jack, do you remember how much oil these guys controlled in the 1970s?
Stitcher.
