in late 1996, his job was to find gaps in the natural gas market. He was stunned to see how much money a person could make in this hidden niche of America’s energy industry.
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On the first day he reported to work at 20 Greenway Plaza, O’Neill held the obscure job title of analyst on the Gulf Coast Basis desk. The moment he sat down at his desk, Sam Soliman’s talent sifter began to shake back and forth, testing O’Neill’s instincts. O’Neill was perpetually aware that at any moment the tap on the shoulder might come, and he’d be escorted out of a job.
O’Neill did okay at first. He seemed to have an aptitude for the business. He was trading abstract natural gas financial contracts, but he quickly learned that even this abstract business was conducted according to the Koch way. The foundation of Koch’s natural gas trading business was a 9,600-mile-long collection of pipelines that ran along the Gulf Coast and snaked through several states in the Southeast. Koch purchased these pipelines and the company that owned them, United Gas Pipe Line Company, in 1992 in a deal worth at least $100 million. The timing of the deal was no coincidence. It occurred just one year after the George H. W. Bush administration revolutionized the gas business. The deregulation of America’s natural gas business was one of those historical episodes that garnered little attention but that created sweeping changes throughout the economy. These changes gave a handful of companies the chance to make a once-in-a-generation windfall of profits.
Prior to the first Bush administration, the history of the natural gas industry wasn’t too different from the crude oil business—the government intervened in deep and distortive ways to encourage production while protecting consumers from high prices. Back in the New Deal era, Franklin Roosevelt created a legal regime, headed by the Federal Power Commission, that regulated the business from the wellhead to the kitchen gas burner. The federal government capped the price that gas drillers could charge for gas, which kept natural gas prices low for consumers. But there were toxic side effects from these price caps: by the 1970s, the price was so low that producers didn’t even bother to drill new gas wells. Predictably, new supplies dried up and gas shortages ensued. Customers turned the gas valve, and nothing came out. Even a New Deal–era government monolith like the Federal Power Commission couldn’t force producers to drill for gas if they didn’t want to.
In 1978, President Jimmy Carter stripped away the price controls to unleash market forces that might encourage new supplies. But Carter’s “deregulation” was hardly a libertarian dream. It created a wildly complex set of rules and price controls that sought to let the wholesale price rise and fall while protecting consumers from the highest price spikes. This was a Faustian bargain that would play out repeatedly in US policy making from the 1980s on. Lawmakers repeatedly passed deregulation measures that only went halfway, stripping away some controls while trying to shield average people from the true volatility of the market. The ensuing market structures were usually defined by complexity and dysfunction, and the natural gas industry was no different.
The Federal Power Commission was replaced by the Federal Energy Regulatory Commission, which held hours of hearings and collected reams of public comment to parse out the minutiae of when companies could raise prices and when they could not. The regulatory state could never get the porridge just right. High prices in the late 1970s were replaced by supply gluts and falling demand in the 1980s.
George H. W. Bush tried to tear the system up and start over in 1991. The FERC issued a regulation, called Order No. 636, that broke apart the existing natural gas companies. This single order redrew one of the nation’s largest industries, and an energy system on which millions of people relied for heat and electricity.
Under the new regulatory scheme, the natural gas industry was divided into three components:
1) Gas drillers who sold natural gas
2) Pipeline companies that transmitted the gas
3) Consumers who bought the gas
The pipeline companies that transmitted the gas became like railroads—they didn’t own gas like they did in the old days, they just shipped it. Anyone could book space in a pipeline to have gas shipped. This created a new market. Now there was feverish buying and selling of gas at every node of a pipeline. A new class of merchants arose to traffic in this market, chief