Philippa Kaur

IN THE 1950s the oil market was in the gift of the “Seven Sisters”. These giant Western firms controlled 85% of global crude reserves, as well as the entire production process, from the well to the pump. They fixed prices and divvied up markets between themselves. Trading oil outside of the clan was virtually impossible. By the 1970s that dominance was cracked wide open. Arab oil embargoes, nationalisation of oil production in the Persian Gulf and the arrival of buccaneering trading houses such as Glencore, Vitol and Trafigura saw the Sisters lose their sway. By 1979, the independent traders were responsible for trading two-fifths of the world’s oil.image: The EconomistThe world is in turmoil again—and not only because the conflict between Israel and Hamas is at risk of escalating dangerously. Russia’s war in Ukraine, geopolitical tensions between the West and China, and fitful global efforts to arrest climate change are all injecting volatility into oil markets (see chart 1). Gross profits of commodity traders, which thrive in uncertain times, increased 60% in 2022, to $115bn, according to Oliver Wyman, a consultancy. Yet this time it is not the upstarts that have been muscling in. It is the descendants of the Seven Sisters and their fellow oil giants, which see trading as an ever-bigger part of their future.The companies do not like to talk about this part of their business. Their traders’ profits are hidden away in other parts of the organisation. Chief executives bat away prying questions. Opening the books, they say, risks giving away too much information to competitors. But conversations with analysts and industry insiders paint a picture of large and sophisticated operations—and ones that are growing, both in size and in sophistication.In February ExxonMobil, America’s mightiest supermajor, which abandoned large-scale trading two decades ago, announced it was giving it another go. The Gulf countries’ state-run oil giants are game, too: Saudi Aramco, Abu Dhabi National Oil Company and QatarEnergy are expanding their trading desks in a bid to keep up with the supermajors. But it is Europe’s oil giants whose trading ambitions are the most vaulting.image: The EconomistBP, Shell and TotalEnergies have been silently expanding their trading desks since the early 2000s, says Jorge Léon of Rystad Energy, a consultancy. In the first half of 2023 trading generated a combined $20bn of gross profit for the three companies, estimates Bernstein, a research firm. That was two-thirds more than in the same period in 2019 (see chart 2), and one-fifth of their total gross earnings, up from one-seventh four years ago. Oliver Wyman estimates that the headcount of traders at the world’s largest private-sector oil firms swelled by 46% between 2016 and 2022. Most of that is attributable to Europe’s big three. Each of these traders also generates one and a half times more profit than seven years ago.Today BP employs 3,000 traders worldwide. Shell’s traders are also thought to number thousands and TotalEnergies’ perhaps 800. That is almost certainly more than the (equally coy) independent traders such as Trafigura and Vitol, whose head counts are, respectively, estimated at around 1,200 and 450 (judging by the disclosed number of employees who are shareholders in the firms). It is probably no coincidence that BP’s head of trading, Carol Howle, is a frontrunner for the British company’s top job, recently vacated by Bernard Looney.The supermajors’ trading desks are likely to stay busy for a while, because the world’s energy markets look unlikely to calm down. As Saad Rahim of Trafigura puts it, “We are moving away from a world of commodity cycles to a world of commodity spikes.” And such a world is the trader’s dream.One reason for the heightened volatility is intensifying geopolitical strife. The conflict between Israel and the Palestinians is just the latest example. Another is the war in Ukraine. When last year Russia stopped pumping its gas west after the EU imposed sanctions on it in the wake of its aggression, demand for liquefied natural gas (LNG) rocketed. The European supermajors’ trading arms were among those rushing to fill the gap, making a fortune in the process. They raked in a combined $15bn from trading LNG last year, accounting for around two-fifths of their trading profits, according to Bernstein.This could be just the beginning. A recent report from McKinsey, a consultancy, models a scenario in which regional trade blocs for hydrocarbons emerge. Russian fuel would flow east to China, India and Turkey rather than west to Europe. At the same time, China is trying to prise the Gulf’s powerful producers away from America and its allies. All that is creating vast arbitrage opportunities for traders.Another reason to expect persistent volatility is climate change. A combination of increasing temperatures, rising sea levels and extreme weather will disrupt supply of fossil fuels with greater regularity. In 2021 a cold snap in Texas knocked out close to 40% of oil production in America for about two weeks. Around 30% of oil and gas reserves around the world are at a “high risk” of similar climate disruption, according to Verisk Maplecroft, a risk consultancy.Then there is the energy transition, which is meant to avert even worse climate extremes. In the long run, a greener energy system will in all likelihood be less volatile than today’s fossil-fuel-based one. It will be more distributed and thus less concentrated in the hands of a few producers in unstable parts of the world. But the path from now to a climate-friendlier future is riven with uncertainty.Some governments and activist shareholders are pressing oil companies, especially in Europe, to reduce their fossil-fuel wagers. Rystad Energy reckons that partly as a result, global investment in oil and gas production will reach $540bn this year, down by 35% from its peak in 2014. Demand for oil, meanwhile, continues to rise. “That creates stress in the system,” says Roland Rechtsteiner of McKinsey.Future tradersThis presents opportunities for traders, and not just in oil. Mr Rechtsteiner notes that heavy investment in renewables without a simultaneous increase in transmission capacity also causes bottlenecks. In Britain, Italy and Spain more than 150-gigawatts’-worth of wind and solar power, equivalent to 83% of the three countries’ total existing renewables capacity, cannot come online because their grids cannot handle it, says BloombergNEF, a research firm. Traders cannot build grids, but they can help ease gridlock by helping channel resources to their most profitable use.Europe’s three oil supermajors are already dealing in electric power and carbon credits, as well as a lot more gas, which as the least grubby of fossil fuels is considered essential to the energy transition. Last year they had twice as many traders transacting such things than they did in 2016. Ernst Frankl of Oliver Wyman estimates that gross profits they generated rose from $6bn to $30bn over that period. Other green commodities may come next. David Knipe, a former head of trading at BP now at Bain, a consultancy, expects some of the majors to start trading lithium, a metal used in battery-making. If the hydrogen economy takes off, as many oil giants hope, that will offer another thing not just to produce, but also to buy and sell. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. 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Luck plays a big and often unacknowledged part in career success, starting in the womb. Warren Buffett has talked of winning the “ovarian lottery” by being born in America when he was, and being wired in a way that pays off in a market economy. Good looks are associated with higher pay and a greater chance of being called to interview in hiring processes. Your experience of discrimination will reflect your circumstances of birth.The early way-stations in a career are often marked by chance: a particularly encouraging boss, say, or an assignment that leads you off in an unexpected but defining direction. Luck can affect the pathways of the most rational-minded professions. A paper published in 2022 by Qi Ge of Vassar College and Stephen Wu of Hamilton College found that economists with harder-to-pronounce names, including within ethnic groups, were less likely to be placed into academic jobs or get tenure-track positions.Names can work against economists in other ways. Another study, by Liran Einav of Stanford University and Leeat Yariv, now of Princeton University, found that faculty with earlier surname initials were more likely to receive tenure at top departments, an effect they put down to the fact that authors of economics papers tend to be listed alphabetically.Performing well can be due to luck, not talent. In financial markets, asset managers who shine in one period often lose their lustre in the next. The rise of passive investing reflects the fact that few stockpickers are able persistently to outperform the overall market. The history of the oil industry is shot through with stories of unexpected discoveries. A recent paper by Alexei Milkov and William Navidi of the Colorado School of Mines found that 90% of industry practitioners believe that luck affects the outcome of exploration projects. The authors’ analysis of 50 years of drilling on the Norwegian Continental Shelf concluded that the differences in success rates between individual firms were random.There is a long-running debate about whether luck affects executives’ pay. A recent paper by Martina Andreani and Lakshmanan Shivakumar of London Business School and Atif Ellahie of the University of Utah suggests that it does. The academics looked at the impact of a big corporate-tax cut in America in 2017, an event which resulted in large one-off tax gains and losses for firms that were based on past transactions and that could not be attributed to managers’ skills. They found that larger windfall gains led to higher pay for CEOs of less scrutinised firms; tax losses did not seem to affect their earnings. Lucky things.Just as some people blindly believe that merit determines success, so it is possible to get too hung up on the role of chance. CEOs may well be rewarded for luck but slogging to the top of companies involves talent and hard work. Although some have argued that entrepreneurs are simply people fortunate enough to have a large appetite for risk, skill does matter. A paper from 2006 by Paul Gompers of Harvard University and his co-authors showed that founders of one successful company have a higher chance of succeeding in their next venture than entrepreneurs who previously failed. Better technology and greater expertise reduce the role of chance; the average success rates in oil exploration, for example, have gone up over time.But if luck does play a more important role in outcomes than is often acknowledged, what does that mean? For individuals, it suggests you should increase the chances that chance will work in your favour. Partners at Y Combinator, a startup accelerator, encourage founders to apply to their programmes by talking about increasing the “surface area of luck”: putting yourself in situations where you may be rejected is a way of giving luck more opportunity to strike.An awareness of the role that luck plays ought to affect the behaviour of managers, too. Portfolio thinking reduces the role of luck: Messrs Milkov and Navidi make the point that the probability of striking it lucky in oil exploration goes up if firms complete numerous independent wells. If luck can mean a bad decision has a good result, or vice versa, managers should learn to assess the success of an initiative on the basis of process as well as outcome.And if the difference between skill and luck becomes discernible over time, then reward people on consistency of performance, not one-off highs. Mr Buffett might have had a slice of luck at the outset, but a lifetime of investing success suggests he has maximised it.■Read more from Bartleby, our columnist on management and work:Trialling the two-day workweek (Oct 12th)How to make hot-desking work (Oct 5th)What if Hollywood blockbusters were remade as workplace dramas? (Sep 28th)Also: How the Bartleby column got its name More

“We’re fed up with falling behind,” declared Shawn Fain, the boss of America’s United Auto Workers (UAW), last month after the union began a campaign of intermittent strikes at Ford, General Motors (GM) and Stellantis, America’s “big three” carmakers. A month in and the two sides are still at loggerheads. Jim Farley, Ford’s chief executive, has argued that the 36% pay rise over four years demanded by the striking workers would cripple his business. The UAW has countered that the average pay of the big three’s CEOs is 40% higher than it was in 2019, compared with 6% for the union’s members, which is well below inflation. Last year Mr Farley raked in $21m in pay, Carlos Tavares, his counterpart at Stellantis, $25m and Mary Barra of GM, $29m. The average full-time UAW member made less than $60,000. (Exor, the biggest shareholder in Stellantis, part-owns The Economist’s parent company.)America’s bosses are certainly well compensated. After languishing in the 2000s, median pay for CEOs of big companies in the S&P 500 index has climbed by 18% over the past decade, adjusting for inflation, twice the rise in the median full-time wage in America. The typical S&P 500 boss earned more than $14m last year, according to figures from MyLogIQ, a data provider. That is around 250 times as much as the average worker. It is also more than bosses earn in Britain (where chiefs of FTSE 100 firms took home just shy of $5m), let alone in France and Germany (where CEOs are paid even less). Some American corporate chieftains rake in many times that. In 2022 Sundar Pichai of Alphabet, a tech titan, received a $218m stock award, following a similar-sized bounty in 2019. In 2021 David Zaslav of Warner Bros Discovery, a media giant, received stock options worth an estimated $203m (subject to hitting certain performance hurdles).Investors, for their part, do not seem overly bothered. Last year only 4% of S&P 500 companies failed to win majority support in (non-binding) “say on pay” votes, according to Meridian, an executive-compensation adviser. As Lucian Bebchuk of Harvard Law School explains, America’s big institutional investors pay little attention to the market-wide level of compensation, focusing instead on what share of individual CEOs’ pay is tied to their firm’s performance, and on how much they earn relative to other bosses. American CEOs’ pay is “so stratospheric we have become numb to it”, says Amy Borrus of the Council of Institutional Investors, which represents pension funds and other asset managers. Ordinary Americans, though, are furious. A survey in 2019 by David Larcker and Brian Tayan of Stanford University found that 86% of them thought bosses were overpaid. Is it time to rein in ceo pay?One consideration is what the benchmark should be. CEOs are far from the only group rolling in cash, notes Alex Edmans of the London Business School. Last year LeBron James made $127m throwing balls in hoops and endorsing shoes. Tom Cruise pocketed $100m for acting in “Top Gun: Maverick”. Such celebrities do not seem obviously worthier than bosses steering colossal corporations responsible for many billions of dollars of capital and tens or even hundreds of thousands of jobs.And bosses’ pay looks like chump change when compared with the scale of their companies. The total compensation of S&P 500 CEOs last year was equal to 0.5% of net profit of the index’s firms, and 0.03% of their combined market value. Investors seem to believe a good boss is worth many times that. On October 12th Dollar General, an American discount retailer, announced its previous boss would return to the helm after lacklustre results under his successor. Its share price jumped by 9% the next day. As companies have grown bigger—the average S&P 500 firm last year generated more than twice the revenues it did in 1990, after inflation—and more global, the CEO’s job has also become more difficult, argues Steven Kaplan of the University of Chicago Booth School of Business.Judging by the European experience, paying bosses less is not obviously a good idea. The earnings gap between American and European bosses is partly the result of less competition for executives in Europe, which has fewer big firms. It also reflects a more egalitarian attitude to pay that has not translated into better performance. Europe’s firms exhibit lower sales growth, profitability and shareholder returns, and its workers are less productive. All that contributes to the continent’s sluggish economic growth.Earlier this year Julia Hoggett, head of the London Stock Exchange, warned that Britain’s companies risked being hamstrung by their inability to attract executive talent. Last year Laxman Narasimhan quadrupled his pay by abandoning the top job at Reckitt Benckiser, a London-listed consumer-goods company, to run Starbucks, an American coffee chain. In Japan, where CEO pay is even lower than in Europe, companies like Toyota have started beefing up compensation packages with stock-based incentives.Greed is good. Right?All this sounds like a compelling argument in favour of letting American CEOs off the hook for their rich rewards. In practice, though, shareholders should watch for two things. For one, the American market for CEOs is far from perfectly efficient. Many bosses loom large over their boardrooms, and may cow notionally independent remuneration committees. Two in five S&P 500 CEOs also chair their boards. A recent survey of American company directors by PwC, a consultancy, showed that one in two thought executives were overpaid. Any reservations they may harbour, and express in the comfort of an anonymous survey, dissipate when confronted with a flesh-and-blood chairman.A more immediate concern is that paying vast sums to bosses when times are tough for common folk can have unwanted consequences, if it emboldens employees to make demands that their companies cannot afford. This risks happening in Detroit, which must compete globally with lower-cost carmakers. The free market for CEOs, in other words, is also subject to political economy. ■ More

AMERICA MAKES no bones about wanting to stop China, its autocratic rival for geopolitical supremacy, from getting hold of advanced technology. Any day now the White House is expected to extend restrictions on sales to the country of advanced microchips used in training artificial-intelligence (AI) models. This is the latest set of export controls designed to prevent cutting-edge tech that America helped create, meaning most of it these days, from making its way to the Chinese mainland. It is also meant to close a loophole, which allowed Chinese firms’ foreign subsidiaries to procure chips that their parents were barred from purchasing.The loophole is almost certainly not the last one that will need closing. Just this month America itself created room for a few more. Last year it imposed sweeping restrictions that cut off people and firms in China from many advanced technologies of American origin, including types of cutting-edge chips, software to design them and tools to manufacture them. On October 9th it granted two South Korean chipmakers, Samsung and SK Hynix, indefinite waivers to install chipmaking equipment that falls under these restrictions in their factories in China. Four days later TSMC, Taiwan’s chipmaking champion, also received a dispensation. The carve-outs were secured (and announced) by governments in Seoul and Taipei, which are keen to protect their domestic firms’ vast commercial interests in China. They also shine a light on the knotty nature of the American-led global export-control regime.American sanctions’ global pretensions depend on the co-operation of allies. In principle, democratic governments in Asia and Europe are similarly wary of China, and devising their own export controls. In practice, their policies are not always aligned with Uncle Sam’s. The result could be a mesh of rules that, once in place, would impose costs on technology companies without doing much to bolster national security in the way that the regimes’ architects envisioned.This is not the first time that the democratic world has attempted to stem the flow of technology to undemocratic adversaries. After the second world war 17 countries, led by America, established the Co-ordinating Committee for Multilateral Export Controls to limit exports of strategic resources and technologies to the Communist bloc. The body was disbanded in 1994, once the Soviet threat was no more.America’s efforts to co-ordinate some of its anti-Chinese restrictions have so far been much more piecemeal. The closest President Joe Biden’s administration has come to co-ordination is an opaque agreement sealed in January with Japan and the Netherlands. This was important to America because Dutch and Japanese firms such as ASML and Tokyo Electron, respectively, are the sole manufacturers of sophisticated chipmaking tools without which it is almost impossible to make the most advanced semiconductors. In July Japan’s government introduced rules limiting the exports of advanced chip technology. The Dutch followed suit in September.Look closer, though, and the nuts and bolts of the three countries’ export controls vary considerably. The Bureau of Industry and Security (BIS), America’s export-control agency, publishes an “entity list” of thousands of companies, including plenty of Chinese ones, that are barred from being sold certain types of technology. Japan has no such public entity list. Instead, it has announced a list of 23 specific types of product which require an export licence. The Japanese government has assiduously avoided mentioning China specifically, for fear of sparking the ire of a big trading partner. The Netherlands’ controls, too, are “country-neutral” and applied to a handful of products.Various national regimes diverge in other meaningful ways. American allies in Europe and Asia have not tried to copy the long, extraterritorial reach of American sanctions. As a result, Asian and European companies that wish to continue selling technology to Chinese customers can in theory establish subsidiaries in places without strict export controls (at least as long as the firms do not rely on American inputs).The situation in Europe is complicated further by the division of responsibilities between national governments and the European Union. For now individual EU members retain discretion over export controls related to their national security. But given the bloc’s single market in goods, which lets technology flow across borders unimpeded, Eurocrats in Brussels want a greater say. On October 3rd the European Commission presented a list of areas deemed critical to the bloc’s economic security. It would like the ability to impose EU-wide export controls in these areas, which include advanced chips, quantum computing and artificial intelligence. It is unclear how long it will take the 27 EU members to reach the consensus required to grant the commission such powers—if it can be reached at all.Things get blurrier still when it comes to enforcing the rules. In most countries the bureaucratic capacity to police export-control regimes is limited. America’s BIS, widely considered to be better endowed than similar agencies in other countries, has fewer than 600 employees and an annual budget of just over $200m—a modest figure given the outfit’s global remit. Its Asian and European counterparts must make do with far less.The relevant agencies often lack the expertise to assess exporters’ requests for a licence to sell products abroad. That requires an understanding of how a particular piece of equipment could be used. It is almost impossible to tell how such equipment will actually be used once it arrives in China. This year the BIS set aside a relatively piddling sum of $6m for inspections to be conducted abroad—and little if any is likely to be spent in China, which does not exactly welcome American inspectors with open arms. Many of the BIS’s poorer cousins in other countries rely entirely on the exporting companies themselves to determine the actual end-use of their products—something the firms cannot know for sure either.The result is a mishmash of opaque rules and fitful enforcement actions. Manufacturers of sensitive technologies are left guessing about what business they can and cannot do with Chinese firms. Four Taiwanese firms—Cica-Huntek Chemical Technology Taiwan, L&K Engineering, Topco Scientific and United Integrated Services—recently found themselves under investigation by Taiwan’s government after reports surfaced that they were involved in building a new network of chip factories in China. The four companies all deny that they have broken any sanctions.Lack of co-ordination may also explain why the system is not keeping high tech out of China as intended. In South Korea, SK Hynix is looking into how some of its older memory chips ended up in the latest smartphone made by Huawei. SK Hynix denies doing business with the Chinese telecoms giant. The Huawei smartphone in question, the Mate 60 Pro, also sported advanced microprocessors furnished by SMIC, China’s biggest chip-manufacturer. Both Huawei and SMIC feature on BIS’s entity list and were thought incapable of such chipmaking feats. Export comptrollers in America and its allies are still trying to work out how exactly the two companies pulled them off. This is unlikely to be the last China-related surprise they have to deal with. ■ More

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