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633. The Most Powerful People You’ve Never Heard Of

Freakonomics Radio

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  • How Coffee Trading Works
    • Big coffee roasters rely on commodity traders to source coffee from thousands of farmers globally.
    • Traders handle the complex purchase, transport, finance, and delivery process for roasters like Starbucks. Transcript: Javier Blas 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 small holders. 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. (Time 0:12:45)
  • Mark Rich Saves Jamaica’s Fuel Crisis
    • In a 1980s crisis, Mark Rich diverted oil tanker cargo to prevent Jamaican fuel shortage and chaos.
    • This quick action saved Jamaica’s government and built a profitable long-term relationship with the country. Transcript: Jack Farchy Single moments and single deals and single trades can shape the course of history. The Jamaican example was the early 1980s. 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 crisis and the Jamaican economy was pretty much on its knees. Each month, for a minute 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 300,000 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. And, 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. He thought there would be riots and revolution if they didn’t get any oil. This was a Friday afternoon, so he thought, who do I call? The only person he could think of to call was Mark Rich and Co., the company that is today Glencore. He 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, okay, 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. Stephen J. Dubner Because there might have been a new government in Jamaica by Tuesday if he hadn’t done that. Absolutely. What did Mark Rich get out of that? Jack Farchy 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 alumina 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. (Time 0:28:10)
  • Four Factors Shaping Commodity Trade
    • Four key historical factors shaped commodity trading since WWII: nationalizations, Soviet collapse, financialization, and China’s rise.
    • These events expanded commodity trade opportunities, risks, and profit margins dramatically. Transcript: Stephen J. Dubner 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. Javier 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 nationalized their industries. Stephen J. Dubner Say just a little bit more about the Seven Sisters and how the new players came in there. Javier Blas The Seven Sisters were seven vertically integrated American, British, and French companies that, until 1973, dominated the oil 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. (Time 0:31:46)
  • Libya Civil War Oil Deal
    • During Libya’s civil war, Vitol supplied the rebel army with gasoline on credit, betting on their victory.
    • The deal involved barter payments with oil as rebels lacked cash and formal recognition. Transcript: Stephen J. Dubner The chaos is actually pretty good for them. Give me some evidence for this argument with examples, please. Javier Blas 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. Stephen J. Dubner Most governments would have run away too, by the way, right? Javier Blas Everyone. The only people that were flying into Libya were oil traders, journalists, and spies. So not only Betel 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. 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 VTOL 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. (Time 0:41:00)
  • Commodity Traders Face More Scrutiny
    • Commodity traders now face greater government scrutiny and legal risks than 15 years ago.
    • Spend heavily on compliance as past abuses like bribery and price manipulation catch up to them. Transcript: Stephen J. Dubner 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. Do you own a business that’s ready to thrive? Let Intuit QuickBooks take things like unpaid invoices and tracking expenses off your plate to take things to the next level. Intuit QuickBooks is an all-in business platform that can help with day-to tasks like invoicing and expenses. Manage and grow your business all in one place. Intuit QuickBooks, your way to money. Money movement services are provided by Intuit Payments, Inc., licensed as a money transmitter by the New York State Department of Financial Services. What does it mean to live a rich life? It means brave first leaps, tearful goodbyes, and everything in between. With over 100 years experience navigating the ups and downs of the market and of life, your Edward Jones Financial advisor will be there to help you move ahead with confidence. Because with all you’ve done to find your rich, we’ll do all we can to help you keep enjoying it. Edward Jones, member SIPC. Freakonomics Radio is sponsored by Whole Foods Market. There’s so much to celebrate in May from graduations to pool parties and beyond. Whole Foods Market helps you save on everything you need with the quality and ingredient standards you expect. Look for hundreds of yellow low price signs that help you save without compromising the quality you expect. Find them with their no antibiotics ever ground beef, 365 by Whole Foods Market organic salad kits and more. Save on May celebrations with great everyday prices at Whole Foods Market. 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 U.S., 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 Farchi. Jack Farchy 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. (Time 0:45:35)
  • Commodity Traders & Russia-Ukraine War
    • Commodity traders helped keep Russian exports flowing despite sanctions and supported Putin’s regime financially.
    • Putin awarded Glencore’s CEO a top medal for services during the pre-invasion period of Ukraine. Transcript: Stephen J. Dubner How do you see the Russia-Ukraine war as connected to commodities and commodity traders? Javier Blas The invasion of Ukraine by Russia has a huge impact in the commodity markets. Both countries are 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 cargos 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. (Time 0:53:31)
  • Trump’s Impact on Commodity Traders
    • Commodity traders thrived during Trump era due to relaxed enforcement on bribery and increased market volatility.
    • They benefit from tariffs, sanctions, and restrictions that create trading opportunities without hurting overall economic growth. Transcript: Stephen J. Dubner Talk to me about the first few months of the Trump administration. How do you assess this administration the lens of commodity trading? Javier Blas 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 U.S. 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. (Time 0:55:41)
  • Mineral Trade and Geopolitical Rivalry
    • China and the US compete geopolitically over mineral resources, with Congo a key battleground.
    • Commodity traders exploit price gaps caused by tariffs, making profits at consumers’ and companies’ expense. Transcript: Stephen J. Dubner 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. Jack Farchy 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 kilometers 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 Trafagura, 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 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. (Time 0:58:14)
  • Why Commodity Traders Matter
    • Commodity trading is essential for modern global trade despite risks and secrecy.
    • This complex, risky business isn’t easy money and needs traders to manage flows through conflict zones and sanctions. Transcript: Stephen J. Dubner 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? Javier Blas 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 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 the 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. 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 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. Stephen J. Dubner 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? Javier Blas I suppose that the answer is no. If it was so easy to standardize commodity trading and make it, you know, the Amazon of commodity trading, it will 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 at times is the market? (Time 1:02:10)