David Rosenthal: prediction

Transcript context

…Unfortunately, classic for this story. Classic. This is not the last time we're going to hear something to this effect in people's personal lives in the Enron story. Right as he arrives in Houston at Transco, two things are happening: (1) As I've been talking about all along here, deregulation is finally percolating through to industry. Carter signed the Energy Act. It's in full swing. But (2) surprisingly here in 1982, energy prices fall for the first time in a decade. As a result, right after Lay shows up, Transco runs into a problem. It's contracted to buy a whole bunch of oil and gas assets from various producers, various drillers around Texas and around the country. Those contracts have Transco buying the assets at an ever increasing price, because the prices of oil and gas have only been going up for the last decade, but market prices have just fallen. They're really in the lurch here. People think that Transco might go under. Lay—remember, he's a PhD economist and he's really quite brilliant—comes up with an idea based on all of the economic theory that he knows. He's like, what if we set up a trading market for this oil and gas that we're contracted to buy, especially in natural gas, which is now deregulated enough that I think we can do this? Rather than us as the pipeline company buying all of this gas from the producers, we'll just operate the pipelines in the middle, and we'll make this market. We'll let the end consumers at the gas—the factories, the utilities, consumers aren't buying this directly but the utility companies are—through us, trade with the producers, and we can create a spot market for energy. This becomes a huge success. This is a massive, massive innovation. So Transco is doing this?…

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