Oil Industry Rife with Corruption? Who’d Have Thunk It!

Shocking news this morning courtesy of a Fairfax/Huffington Post investigation…

Brace yourself folks, this is big…

Get this: the oil industry is rife with corruption!

Can you believe it?

From today’s Sydney Morning Herald:

A massive leak of confidential documents has for the first time exposed the true extent of corruption within the oil industry, implicating dozens of leading companies, bureaucrats and politicians in a sophisticated global web of bribery and graft.

Look, all credit to Fairfax and Huff Post for actually doing some investigative journalism for a change, but this is hardly a revelation.

The story revolves around an allegedly dodgy family company from Monaco (first alarm bell!) who basically acted as a middleman between Western contractors and oil-producing governments.

It’s role as a middleman was to pay the bribes to the right people, so the contractors would get the job.

This might sound like an outrage to timid Western ears but, in large parts of the world, it’s how you do business.

And it works this way across the entire oil-producing world. If you ask my mate Phil Anderson, editor of Cycles, Trends and Forecasts, he would explain it like this:

Oil patches are hot properties. There is considerable ‘economic rent’ available. When governments lease these patches out (they are too valuable to sell) they go to the highest bidder, with the bid usually containing a hefty bribe.

The lease value is the economic rent. If the oil-producing country operated under a benevolent dictator (let’s pretend there is such a thing) this economic rent would flow back to the people via lower taxes, better infrastructure, education, etc.

But that doesn’t happen in malevolent dictatorships. The economic rent goes straight to the top. And it stays there. Of course, plenty of others try to siphon this economic rent off along the way.

That’s certainly the business model behind the Monaco based family company, Unaoil, at the epicentre of the Fairfax story.

It’s not surprising that the article refers to the family as being part of the ‘global elite’. They reside in Monaco, home to a large portion of this ‘global elite’ — a brilliant euphemism is there ever was one. In Monaco you don’t pay income tax, and it’s a convenient place to network.

As an aside, the pricey land prices in Monaco are precisely due to the fact that the principality is a tax-free enclave. The tax-free status of the microstate is capitalised into the land price.

Are you surprised that a large portion of the ‘global elite’ resides in Monaco? It’s only working chumps that pay their taxes. And then get thrown into jail if they try to avoid them!


Let’s finish off with what’s happening in the markets. Stocks closed around 0.5% higher again in the U.S overnight, as expectations of tighter Fed policy continued to fade.

“>Oil held firm but gold gave up all of yesterday’s gains, despite a weaker greenback. Does the Fed’s ongoing timidity around rate rises mean it’s all on for ‘risk on’…and no need to hold ‘risk off’ assets like gold?

It’s too early to say. The market isn’t providing any definitive clues. Gold is simply correcting and consolidating after a strong run. The market is bouncing back after a deep early-year selloff.

The bears have gone back into hibernation for the time being, but the bulls aren’t running about just yet. It’s a bit of a standoff. Perhaps this is just the calm before (another) storm.

Greg Canavan,
For Markets and Money

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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