You Can't Stop the Flow of Oil

First you need a ship. It won't be the best ship. It won't even be

a good ship. Which, as you'll see,

is the preferred type of ship for the oil

smuggling business. Because you do not care

about the ship, you don't care

about the crew, you don't care why the oil

needs to be smuggled. All you care is that someone

who shouldn't be selling oil sold some to someone

who shouldn't be buying it, called you to pick it up

and get it to them. This is the shadow market

where buyers and sellers try to operate away

from prying eyes, from anyone asking,

where did you get this oil from? Served by

an informal armada of ships. Not that different

from the days when pirates were given the blessing

of their king or queen to do pirate things

to anyone who wasn't

a citizen of the kingdom. Except that oil is a unique

type of thing to smuggle. This video is sponsored

by DraftKings Predictions More on them later. The Sea Majesty was the first to find out. She'd loaded

700,000 barrels of crude oil from a Russian port crossed the Black Sea

overnight, arriving at the entrance

to the Bosphorus Strait early in the morning. The normal wait

of six hours to cross through the half

mile wide channel turned into 12,

then into 24, when another oil tanker had

shown up, dropped anchor and was now waiting

next to them. By the next day, six more had shown up. Swinging on anchor

in the cold December wind at the mouth

of the channel, where two sea currents

collide, by December 5th, there were

28 of these ships, 20 million barrels of crude

oil, enough to feed the United States

for three whole days, swinging on iron strings, nervously waiting to

get through the Bosphorus. This was the week

it became illegal to freely buy and sell oil

from Russia. There were six places to

load oil in the Black Sea. Two of them were on

Russian soil. Two weeks passed before the ships started to move. Unable to prove the oil they carried wasn't illegal. Four ships found themselves

being pulled by tugs escorted

by the Turkish Navy. The name on the hull. The ship logs, the captain. All the identifying marks of those four ships

were now taken down and labeled as known

ships in the Shadow Fleet a choke point. Seven ports, 28 ships. Oil flowing to those ports

from multiple countries. Rules

saying you can't buy oil from one of those countries. And the only thing

you need in order to get your cargo of oil

worth $75 million to the chokepoint is a piece of paper. This is a smugglers

Paradise. But none of these four

would matter if this one didn't exist. A normal law is based on

the idea that's permanent. Everyone in the country

has to follow it forever. Not sanctions. The Clean Air Act might stay

on the books for decades. The sanction might disappear overnight

if a treaty is signed. They are laws, yes,

but it's one country to another country explicitly intended to hurt the other country

to cause pain. To get the country

to conform to whatever the other country wants it

to do. You, South Africa, are not allowed to buy oil

until you end apartheid, a real situation that lasted for 20 years. Germany devised

huge parts of its military to securing oil during World

War Two. Japan attacking the U.S. so it had more time

to capture more islands

in the oil on them. Many wars

in the Middle East, if not explicitly at least partially over oil. Oil is not a nice to have. It is a requirement

if people are willing to kill over oil. Then some people began

thinking South Africa would probably be willing

to pay a lot more for any oil

I could deliver to them. A thought

that certainly went through the mind of Marc

Rich, the notorious and largest oil smuggler

of all time, operating from behind the fog of

Switzerlands privacy shield. Rich made somewhere

between 1 and $2 billion in profit delivering oil to South Africa

during those 20 years. It starts as a simple game of arbitrage. You have a ship. That ship can hold 1 million

barrels of oil. It can go to any port and

fill up its hold with oil. There are many countries

you can buy oil from. They have more oil than they

need. The prices are similar,

differing only a bit due to the quality of oil

or where it's located. There are many countries that will buy the oil

you carry. They do not produce enough oil, but because they can buy oil

from many countries for roughly the same price, the profit you'll make

filling your ship with oil in Saudi Arabia and selling it to Australia

is not that high. But a sanctioned country

like South Africa is willing to pay

a massive premium. What Marc Rich called

the apartheid premium. All you had to do

was pick up oil at the market price

and get it to South Africa, filling your ship

for 60 million. And after the four week

journey out of the Persian Gulf, down the coast of

Africa, docking in Durban, where you would collect

90 million, pocketing tens of millions more than

if you had taken that same cargo to Australia. Here are these countries

that want to sell oil. We're told

they're not allowed to. Countries

that want to buy oil, but told

they're not allowed to. Ships that vary slightly in color or size,

but all do the same thing carrying molecules of oil

that are also all about the same. How hard could it be? First you need that ship. You could go with

one of the new state of the art

giant crude tankers. No, what if it gets caught? That's a lot of lost money. What about a used mid-sized

tanker? The workhorse. Old,

reliable. About half the price. Nah, still too expensive. Now we're talking an old rust bucket tanker, 20 years old. This thing was on its way

to the scrapyard. Seriously, about 35 of

these old tankers were being scrapped

each year. Sold to ship rigging yards in India, Korea and China. The owners could get five,

maybe 6 million for the metal

and machinery in them. They'd take their last

voyage across the ocean

before intentionally being driven onto the shore. The year after Russian oil

was sanctioned, the number of scrapped oil

tankers went down to four. Only ten have been scrapped in total over the past

four years. Why scrap it for 5 million

when someone who wants to smuggle oil

will buy it for 15 million? The seller isn't

going to ask what are you using it for? Would you? We have our ship. With the easy part of acquiring

a ship out of the way, things will become

progressively more difficult because now

we're actually going to take possession

of illegal oil. We'll be criminals. Trying to stay hidden

from the long, and as you'll see, long, long, long, long arm of the law. There's a saying in politics that you should never let

a good disaster go to waste. People seek protection and umbrella from the storm, giving politicians an excuse

and cover to do things they otherwise

would not be able to get people

to go along with. It was very clear

that a set of rules would have prevented

the sinking of the Titanic, or at least increase the success

of rescue efforts. The documents started out

as 40 pages. It was all about safety,

lifeboats, radio requirements. Nothing that today

isn't obvious. But then

another disaster happened. The Exxon Valdez oil spill, 1989. Appetite

picked up for a requirement to put a transponder

on every ship that continuously announced

its location, direction, speed, name, country and cargo. 9/11, the poster child for never let a good disaster

go to waste. Pushed hard

for the acceptance of tracking systems

and cemented the transponder into international law. But in

what is one of the premier examples of what we call

function creep mission creep. The ratchet effect, or my personal favorite dual-use repurposing. Yes, the transponder

is safety enhancing. Ships

will run into each other less, but it is also given

every government around the world

the ability to monitor every ship,

even on the high seas. International waters. The open ocean. With the U.S. and Europe putting sanctions

on Russian oil. Russia is forced to sell it cheaper than everyone else. $25 per barrel cheaper. Our contact in India, he says if we bring it

to him, he'll buy it for $75 a barrel. That would give us

a cool $25 million profit, covers

what we spent on the ship and puts

a little on our pocket. All we have

to do is not get caught. Deal. A friend

of ours has a tanker that never leaves

the Black Sea. It picks up oil

at Russian ports and transfers it

to other ships. So those ships

never have to log that they were

at a Russian port. Just the kind of service

we need. We'll

have them pick up our oil and then meet up in

the middle of the Black Sea. International waters transponders off. As long as the weather

holds, we can tie

the ships together. Pumping all the oil from

that ship to our ship. It'll take 48 hours. But once done,

we'll be on our way with a load of Russian oil. And plausible deniability that we knew it was Russian. Now I know what you're

thinking. Someone is going to notice

two oil tankers tied up for two days

in the middle of the sea. But the ocean is on

the side of the smugglers. Under perfect conditions, you need to be within 15

miles just to see the ship as a tiny

dot on the horizon. And even if they did,

there's nothing technically illegal about transferring oil from one ship to another. Sure it's dangerous. Two metal bathtubs

full of oil banging into each other,

but these ships are effectively floating

pieces of the country they're registered to.

The only people allowed to board our ship when we're more than 24

miles offshore is the navy

of our own country. Fortunately, there aren't

any rules around what country

you register your ship to. So we picked We picked Bolivia. Bolivia doesn't have a navy because Bolivia doesn't

have a coastline. It's landlocked. Have you ever noticed

all the odd countries that ships are registered

under? This is part of the reason those countries

make it easy. They don't have

a lot of rules, and even if they agree

to the international rules, they don't have a Navy

who can enforce them. We call them flags of convenience and boy, they are convenient for our little operation

and for the country. For that convenience,

they're going to charge us $500,000 in registration

fees this year. Meaningful money

for an economy ranked 95th in the world. Everybody's a winner. But now we've got that hard part getting paid. Pause real quick. Thank you to DraftKings

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oil is now $90 a barrel, The price of oil

you hear about all the time. Crude oil prices are now seeing the biggest weekly spike on record. The price of oil

overnight jumped above $100 a barrel. Oil prices surpassed $100 per barrel

That is the price of oil. If you want it delivered

right now, say yes and a tanker

that has already been loaded with oil will change course

and head to you. I want my oil

now on the spot. So it's called the spot

market. Did you know that

the price of oil did not used to move

like this? Like how it does today? Oil is up 18% today. 90% over the past week. For the century before 1970, the price of oil was always between 1 and $3. Seven companies

controlled everything about oil, pulling it out of the ground,

moving it around the world, refining it into gasoline

or diesel, then pumping it in your car at one of their gas

stations. And then they didn't. Iran kicked the oil

companies out first, then Libya, Iraq By 1973, every single Middle East

country took back their oil fields from whichever of these

seven companies called the Seven Sisters, had

until now controlled them, controlled

the entire business of oil, including the price. They stated the price. People signed

long term contracts. That's what they paid. And that is why the Middle

East countries took back their oil fields,

like $3? No, no no more. You're basically giving

our oil away for free. This whole situation is an absolutely fascinating and untold part of history,

but that is for a future video. Oil fields

go back to the countries who are not actually

in the oil business, right? Moving it, refining it,

putting it in your car. Nope. They're like, we don't care. We're going to pull it

out of the ground. You all bid on it. Highest bidder takes the oil. The spot market. which is significantly

more sophisticated than I'm making it out

to be. You can buy oil and really any commodity

for immediate delivery for next month delivery,

a year from now. But for us

selling our smuggled oil, the spot

market was the unlock. Credit to Marc

Rich for being the first to realize that

without the big oil companies

controlling the whole thing, he could buy and sell a lot

of oil on the spot market, allowing him to fill in this critical line

on this critical piece of paper that whoever physically holds is the actual owner of the oil on an oil tanker. It is literally worth the value of oil

on the boat. You can sell this

piece of paper while the boat is moving

and now it's someone else's oil. Give it to a bank

as collateral. Give it to our bank. Who gives it to our buyers

bank and the buyers bank will send the buyers money. Where the oil came from, what kind of oil, All sorts of details, including

where the oil is going. If Marc

Rich gave this to his bank, who is the one who actually puts up the money

for the oil, and it said Durban

South Africa instead of on orders he'd be arrested. Banks are like one degree away from

being a government agency. If the government says

you can't sell oil to South Africa

and a bank loaned someone money

to sell oil to South Africa, that bank is going to be

in a world of hurt. But on orders, this means we just don't know

where it's going yet. We haven't sold it. We're going to sell it

on the spot market, get the oil to South Africa,

and the paper trail is clean enough to pass

through the banking system. Rewind real quick. This is where we got our clean

bill of lading. The boat we met?

Their paperwork said the oil came from Russia. Ours said STS-international waters and on orders, ship to ship

in international waters. And we're not sure where

we're going to sell it yet. These are legitimate

claims in the oil industry. It happens

all the time for ships that aren't doing anything

illegal. So us smuggling this oil. We're just going to operate

in the shadows. The shadows created by those not doing anything

illegal. Our boat arrives in India, shows the bill of lading. Sure it’s suspicious,

but it's also valid. So the compliance department

never flags it. And the money

successfully moves from that back to our bank. Have you ever heard the term nature abhors a vacuum? We are surrounded

by an atmosphere. Air that's pushing down

toward Earth. If you create a hole

of lower pressure anywhere, the pressure

of the atmosphere will immediately push air

in to fill that space. don't actually suck liquid up a straw,

and a vacuum doesn't actually suck things

into it. When you suck on a straw, you create negative pressure

inside the straw. The atmosphere pushes

on the liquid in the glass, which causes the liquid

to go up the straw. It seems bizarre, but it's totally provable. Create a very long straw, put it in a pan of water, and no matter

how hard you pull on the top of the straw,

the water will only ever go about 35ft up, where

the weight of the atmosphere equals

the weight of the water. Point being, there is only

one reason to smuggle oil. A vacuum appeared somewhere, a gap between what a country must have

and what it can get. Sanctions

create that vacuum. Or to use another science way

to think about this South Africa was effectively a complex living organism. Like all living things,

it needs energy. Oil is literally stored

energy. Stored sunlight in a way, if not used directly

as energy. It's used to grow other forms of energy

like corn or wheat. No energy, an organism breaks down. Chaotic entropy would be the formal term for the unrest, riots,

mayhem that would occur

within the country if its oil supply

went to zero. A lot of incentive

to jack up the price you'll pay

for a barrel of oil, which is then a lot of incentive

for someone to say deal. I'll buy an old boat and take some risk

for that price. We have some interesting footnotes for you

that didn't quite make it in

that I still want to share. But first, I have recently

found out that only 82% of you that watch Maxinomics videos regularly, You don't subscribe. Can you do me a big favor? If you've ever enjoyed

the video, please can you hit the subscribe

button? It helps the channel

more than you know. The bigger the channel is, the more videos

we get to make. And who doesn't want more

videos? The better

the videos are two. It makes a huge difference. Thank you very much. About those footnotes First, at the beginning those ships

stopped by Turkey, they were

technically stopped because they couldn't

get insurance. None of the 13 insurance companies that offer tanker

insurance were willing to take the liability

of covering crude oil

pumped out of Russia. Turkey has had two big

oil spills right around the Bosphorus, so they were like, nope,

we're not going to pay the billions for a clean up

if you crash, which is one more dimension to the long arm of the law,

because insurance being tightly wound

into the financial system means they have to abide by official sanctions. Second,

this financial system interweaving thing where a couple governments

can say, you can't do that

and enforce by preventing you

from moving money. That is a major reason

you hear about the aspiration

of a BRICs currency. If you don't control

the pipes and the gates, the banking system can just be turned off

or turned against you. Russia, China

and plenty of other countries do not like that hanging over their head,

understandably. Again, thank you and I will see you

in the next video. See ya