New Book Reveals Who Controls Global Oil Prices

By Tim O’Shei

HOUSTON BUSINESS JOURNAL | Friday, Apr 8th 2011

Who controls the global oil prices?

Powerful banks? Massive hedge funds? Big Oil? OPEC?

There’s never been a straight answer to that question – until now.

Leah McGrath Goodman, a former special writer and editor for The Wall Street Journal and 1998 graduate of St. Bonaventure University, spent the last seven years writing a book that reveals where oil prices have been set for decades: the New York Mercantile Exchange. Or, as the title of Goodman’s book calls it, “The Asylum.”

Published this year by William Morrow/HarperCollins, “The Asylum” takes readers into the boardroom and onto the trading floor of Nymex. Goodman paints a warts-and-all portrait of the often rough-edged traders, for whom she claims making or losing millions in a day was as commonplace as fistfights, drugs and pornography.

By executing both their own deals for oil contracts and orders from big banks and hedge funds, the Nymex traders set the benchmark for global oil pricing. They still do, though Nymex is now part of a group that includes its former competitor, the Chicago Mercantile Exchange, and most of the trading action happens online rather than on the floor.

Business First Managing Editor Tim O’Shei, a classmate of Goodman’s at St. Bonaventure, recently talked to her about the book and about the oil market. Following is a truncated version of that conversation:

What’s your overall take on Wall Street and the oil market’s effect on the country today?

Goodman: The underlying problem in the oil market and in the broader market in this country is that ordinary Americans are now seen as a resource to be exploited by those who are in power – the wealthy and those with political influence. We’re seeing Washington and Wall Street working so closely together that you really can’t tell the difference between them anymore. The figureheads of each like to go back and forth between both locations, picking jobs, then switching and going back again. The government officials we are trusting and paying to look out for Americans are using those positions to get really nice, high-paying jobs in private-sector places, including Wall Street, that are effectively being used as bribes. It’s a problem, and it is obvious that it’s a threat to the long-term prosperity of this nation.

Let me put it this way: If you can imagine a country where the rich and the influential have managed to take over pretty much every last power center, can you imagine a situation different than the one we see here in the U.S. today?

The Asylum has several examples of that, but what really stuck in my mind were some of the crazy things – the drugs, sex, gambling – that you describe happening on and near the Nymex trading floor. The charges are explosive. What kind of reaction have you been getting?

Goodman: There has been no denying of how bad things are in terms of the traders and their behavior. There has been a lot of incredulity over who controls the market for oil itself. I saw someone wrote on the Amazon page that Nymex wasn’t really the market that calls the shots on oil, anyway, that everyone knows oil prices are controlled by OPEC and the banks and the oil companies and the hedge funds. These guys just pushed the orders through and had no idea what was going on. While it’s true that banks, oil companies and hedge funds now dominate the market, the Nymex traders handled almost all the orders and traded right alongside them, generating huge volumes. The idea that they had no idea what was afoot is a perception a lot of people have been enjoying putting out there. Because if you’re going to accept that these people were running the show, then you have to have a conversation about how we can have politicians and important, key figures in the city of New York visit this trading floor, and nobody ever said, “Maybe we shouldn’t have people doing drugs and bringing strippers and drinking alcohol while trading the benchmark global oil contract.” People would actually have to assume responsibility for what took place. And that’s out of the question. It’s more, “Oh, they weren’t running it anyway.” But they were running it.

I can see where people get confused. The long-held belief is that oil and gas prices are controlled by Big Oil, OPEC, banks and hedge funds and the like. But you make it pretty clear that the traders, who were executing the deals for big clients, could also make their own bets on the floor – and time them around massive trades from big players.

Goodman: At the end of the day, it was the traders in the pit who decided how everything was going to go down. My book tells what, exactly, took place behind closed doors in the traders’ own words, as Americans struggled to come to grips with rising oil and gas prices. It is all true. The traders talk openly about how they could arrange things around [big trader orders] so they could benefit. That happened frequently. The traders would take big orders from big players and get the best of them as a way to profit.

What kinds of reactions have you gotten from people you wrote about in the book?

Goodman: When you’re a trader who works in a place for decades where the inconceivable and outrageous is commonplace – and there is no one to tell it to who will believe you – there is a need by those subjected to the situation to talk about it in an almost confessional way. For many of the traders, market executives and government officials featured in the book, the telling of their personal stories was a cathartic experience. Some of them made huge fortunes while others were treated horribly. And the reasons for their respective fates didn’t always have much to do with whether or not they truly deserved them. Interviewing these people could be an emotional experience, for me and for them. It is no small thing to look someone in the eye, hear their story in their words and then go home, sit at your desk and render it as best you can. There is a lot of agonizing over the details and last-minute meetings and phone calls. You do not necessarily have an attachment to the person you are writing about – although you often do – but you feel a strong affinity for and loyalty to the integrity of his or her story. That said, the reactions have been a real mixed bag. Interestingly, I have heard from traders from the New York Stock Exchange and the American Stock Exchange who have told me, “This could have been a book about what we did in the stock market.” I’m not sure if that’s supposed to be reassuring, but it says a lot about the New York attitude toward running the markets. I have noticed the Amazon page for my book is essentially a lot of arguing among the readers and the oil traders. Some of it looks just terrible, but clearly this is an emotional subject for many. Some traders have called me to unload vitriol, while others have called to express their thanks. One pit trader wrote to me: “At last, someone who is not afraid to tell the truth.” Another trader, who I won’t name, rang me up throughout the entire writing of the book saying things like, “Am I going to have to wring your neck like a chicken?” I have fielded no few physical and legal threats. Thankfully, I live in a private, gated compound that is known for its surveillance and pit bulls.

Most trading now happens online. Can traders still time their trades in a way that benefits them personally?

Goodman: Can a trader still do that? Absolutely. It’s not considered to be legal within the rules of the market. If you’re caught doing things like that, you can be punished. The problem is technology has been moving so quickly – trading can be done now in milliseconds – that it’s pretty hard to catch people doing something.

If Washington were inclined to do something, what could be done?

Goodman: If members of Congress were of the mind to do something – and they’re not – they already know precisely what they can do. Traders are allowed to make very large bets with almost no money down. Right now in the oil market, for example, you can put about 5 to 10 percent down on a billion-dollar trade, which is going to have a huge effect on the price, and this is already a very fragile market. If there was a rule that said you have to put 30 or 40 percent down to do a trade, traders would think a lot harder before jumping in. The market would automatically reign itself in. People don’t like to put cash down for anything.

Wall Street has made it clear to Congress that having to put more money down to do trading is considered the nuclear option. That’s why it hasn’t happened yet.

What effect will the nuclear issue in Japan have on oil prices?

Goodman: All of these things are bad in terms of lessening our dependence on oil. As a child, I remember Chernobyl. I remember how that felt – this horrible dread toward the entire subject, and that never quite went away. This country has had a real aversion toward dipping our toe into the nuclear power pool, whereas France has given it a central role in its energy portfolio. Japan will only re-trigger all those fears about nuclear power that have been dormant in us for the past two decades. I don’t think that’s going to be good for nuclear development in this country, which means we’re going to need other things to offset it.

What about the unrest in Libya?

Goodman: Libya produces about 1.6 million barrels of oil a day, and oil fields have been threatened by the conflict. Yet in Libya they are paying 54 cents a gallon right now for gasoline. Which is very interesting. It shows oil countries are charging their own citizens much less than they are charging us. And it looks like Americans are okay with that. Or at least our nation’s key decision-makers are. In the U.S., we don’t have an oil shortage, but there’s a heightened fear that’s not going away, because oil demand is going up again on a global scale and the world doesn’t have the ability to ramp up production as quickly as demand is capable of spiking. Even though Libya itself is not really the bottom line, every last drop is seen as something that really counts -and everyone who is active in this market is busily counting it.

Both Japan and Libya are not good in terms of bringing down oil prices. It’s only going to make us more nervous, more obsessive about oil — how much we have, and how much more we’re going to get before it runs out.