The King of Oil: The Secret Lives of Marc Rich

by Daniel Ammann

  The trade in metals was only the start. The real revolution began with crude oil.

  The CRUDE AWAKENING

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  he revolution started as revolutions usually do—quietly and un-spectacularly. Alan Flacks, who directed a small office in Milan for Philipp Brothers, flew to Tunis in the summer of 1969. He had heard by chance that Tunisia was interested in selling its oil to an independent trader for the first time. Only five years had passed since oil had been discovered in Tunisia, which was one of the first of the African nations to achieve independence. Now the country was auctioning twenty-five thousand metric tons of crude oil for immediate delivery. Flacks purchased the oil and sold it to an Italian refinery. He had already found a willing buyer when he bought the oil, making the trade a risk-free, fast-profit deal. Traders call such deals “back-to-back trades.” The dealer purchases a commodity and immediately sells it on to a prearranged buyer.

  Although Marc Rich was thrilled when he got word of the deal in Madrid, he was at the same time deeply disappointed that it was Flacks who had managed to bring off the deal and not him. For quite some time, Rich had been trying to find a means of trading oil using Philipp Brothers’ worldwide organization. At that time oil was never traded on the open market, which meant that oil was not a commodity in the classical sense. He first began thinking of openly trading oil during the Six-Day War in June 1967. Egypt’s President Nasser had disrupted Israeli shipping when he ordered the blockade of the Gulf of Aqaba in May 1967. This cut off the port of Eilat from the rest of the world. Most of Israel’s oil was imported through Eilat, which provided Israel’s sole access to the Red Sea. When Egypt, Jordan, and Syria began massing troops at the Israeli border, Israel launched a daring preemptive strike. On the morning of June 5, Israeli jets attacked the opposing air forces, successfully destroying all of the enemies’ planes. Thanks to Israel’s resulting air superiority, within only a few days its forces were able to occupy the Sinai Peninsula, the Golan Heights, the Gaza Strip, the West Bank, and East Jerusalem.

  The World’s First Oil Embargo

  The Six-Day War produced the world’s first oil embargo. Analysts had been discussing the “oil weapon” for years, and this weapon was now primed and ready for use. The most important Arab oil-producing nations—Algeria, Iraq, Kuwait, Libya, and Saudi Arabia—pledged to stop supplying oil to countries that were friendly to Israel: the United States, Great Britain, and to a certain extent Germany, which had established diplomatic relations with Israel in May 1965. The embargo might have been effective, as three-fourths of Western European oil demand was met by imports from the Middle East and North Africa.1

  Yet the embargo was an ineffective weapon. The United States, Great Britain, and Germany met their import shortages with oil from non-Arab sources. Venezuela increased production, as did Iran and Indonesia. The loss of income meant that the real losers were actually the boycott’s organizers. Within two months after the oil embargo had been announced, they resumed deliveries to the affected countries. However, the Egyptians continued to block the Suez Canal, through which the majority of the oil from the Persian Gulf destined for Europe passed, until 1975. The paradoxical effect of the two-month boycott was that, due to increased production, there was now a greater supply of oil than there was demand for it.

  This state of affairs sounded like a wonderful opportunity to a resourceful trader like Marc Rich, and while he was in Spain he realized that there was money to be made in trading oil. He had already discussed the idea with Alfredo Santos Blanco, his economist friend who worked in the Spanish ministry of labor. Fascist Spain, which did not recognize Israel, maintained excellent relations with the oil-rich Arab world. Rich was determined to take advantage of this special situation, but then along came Alan Flacks in 1969 and threatened to steal this new market from under his nose. Rich was lucky in that Philipp Brothers was not organized along a strict set of rules—there was no “first come, first served” rule, for example. Whoever had better ideas, better contacts, or just better luck was the one who could make the deals. Displaying the same persistence and determination that would always set him apart from other traders, Rich set out to take on the oil business.

  “Oil was a product that was moved in huge quantities and had a big value, but it hadn’t been traded in a transparent and competitive market. I just thought it should be possible to trade oil despite the Seven Sisters,” Rich told me. “If I see a situation in the market and it makes sense to me, then I do something about it.”

  The Seven Sisters

  “The Seven Sisters” was the nickname for the seven companies that dominated the world’s international oil trade in the mid-twentieth century: the Americans Chevron, Esso (Standard Oil of New Jersey), Gulf, Mobil, and Texaco, British Petroleum, and the Anglo-Dutch Shell.2 In the 1960s, the world of oil was quite different from what it is today. Oil was not traded according to free-market principles, and there was very little latitude for price dynamics. Oil-producing nations sold nearly all of their oil to the Seven Sisters at fixed prices agreed upon far in advance (up to two years), and only around 5 percent of crude oil was traded freely according to the laws of supply and demand. Whoever wanted to buy oil had to deal directly with the corporations. Only rarely did the major oil corporations trade on short notice on the open market—when they wanted to sell a temporary surplus or to correct an unexpected shortage, for example.

  The Seven Sisters’ domination of the global oil trade after the Second World War extended vertically as well as horizontally. They controlled every aspect of production and distribution, ranging from extraction at the well, refining, and transport to the gas stations where the oil was sold as gasoline. The Seven Sisters formed what economists call an oligopoly—a situation that exists when there are only a handful of suppliers that dominate the market. They were able to dictate prices independently of the forces of supply and demand. The Seven Sisters were primarily interested in securing long-term contracts at fixed prices. Such contracts allowed the oil oligopoly to control both oil prices and distribution more easily.

  The Seven Sisters’ dominance meant that the oil industry was under the tight control of American and European oil corporations. These companies controlled three-fourths of the oil that was not produced in the United States or in Communist countries.3 Their profit margins were huge compared to those of other industries. It only cost 40 to produce a barrel (forty-two gallons) of oil and deliver it to the United States, but the Seven Sisters could demand prices of 2.50 a barrel or more of their buyers.4

  The price for a barrel of oil remained more or less constant—2.50 to 3 per barrel—from 1948 to 1970. It tended to rise slightly in times of crisis, such as during the 1950–53 Korean War or the 1967 Six-Day War. This situation must have been a great annoyance to the oil-producing nations, as the prices for industrial goods had increased considerably over the same period of time. Not only did the oil-producing nations receive a relatively low price for their oil, the money they received from their oil exports also declined in value when compared to their expenditure on imported goods. It was something of a paradox. The demand for oil had increased steadily since the Second World War, but when compared to the oil-producing nations’ purchasing power, the price of oil from 1948 to 1970 actually sank by almost 40 percent. This meant the industrial nations were profiting from the low prices (or, in comparative terms, the falling prices) for oil and energy.

  A Wave of Oil Nationalizations

  The oil-producing nations attempted to break this trend and at the same time strengthen their hand against the oil companies. The countries of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela had already founded the Organization of the Petroleum Exporting Countries (OPEC) in 1960. They came together in order to counter the pressure exerted by the oil companies, who wanted to keep both the price of oil and the royalty payments as low as possible. In the early years, OPEC was committed to negotiating a larger share of the oil companies’ profits for themselves as well as grea
ter control over production quotas. In the 1960s OPEC called for wide-scale nationalization of the member states’ oil fields, but the member states would do very little to realize these ideas over the next ten years. However, the situation suddenly exploded in the 1970s, and within a short period of time the entire oil trade had been shaken to its very foundation.

  This radical break with the past had its roots in two important developments. In August 1971 President Richard Nixon abandoned the gold standard, whereupon the dollar immediately lost 20 to 40 percent of its value against most other currencies. As the global oil trade was based on dollars, this meant that the oil-producing nations were earning even less “real” income in terms of purchasing power. In effect, these countries had to spend more of the devalued dollars they had exchanged for oil to purchase goods on the international markets. Several important oil-producing countries now began nationalizing their domestic oil industries. The North African nation of Algeria was the first to do so, in 1971, and it was soon followed by neighboring Libya. The floodgates were opened when Iraq, one of the world’s largest producers, nationalized the concessions belonging to British Petroleum, Royal Dutch Shell, the French Compagnie Française des Pétroles, Mobil, and Standard Oil of New Jersey (now Exxon) on June 1, 1972. Six months later OPEC pushed through a plan of gradual nationalization of all Western concessions in Kuwait, Qatar, Abu Dhabi, and Saudi Arabia, and in spring 1973 the Persian shah nationalized all of Iran’s oil assets.5

  Within only a few years the dynamics of power within the oil industry had been completely turned on their head—forever. Today, in 2009, the corporations that made up the Seven Sisters no longer control the global oil trade. There are now ten state oil companies that control three-fourths of global oil reserves.6 The most important oil-producing companies are politically fragile states: Saudi Arabia (Saudi Aramco), Russia (Gazprom), and Iran (NIOC).

  “I Was the Right Person at the Right Time”

  In 1969 no one could have expected such a radical shakeup of the global oil trade, but the writing was on the wall for those who could read it. Developments in the oil market offered opportunities for those who were the first to recognize them and were willing to take the risks. As history has shown, times of upheaval and insecurity usually provide good pickings for commodities traders. An increase in insecurity and volatility within a commodities market goes hand in hand with an increasing demand for independent traders who can guarantee supplies for solid cash. These traders allow buyers to compensate for market fluctuations.

  Alan Flacks was the first trader at Phillip Brothers to break into the oil trade, but he held back from taking these trades to the next step. He had no experience dealing with the particular problems inherent in the oil trade. The notion of taking risks was as foreign to him as it was for the entire company, and this idea was clearly reflected in the Philipp Brothers’ German motto: Besser gut schlafen, als gut essen. It is better to sleep well than eat well. The principle was drummed into employees that it was better to avoid a lucrative deal if the risks involved were high enough that they might endanger the entire company.

  In this respect, Marc Rich was more aggressive than his bosses, and it was this fear of risk, among other things, that would later lead Rich to leave Philipp Brothers in order to found his own company. “I was the right person in the right place at the right time,” he told me, as if that were all there was to it. “I was working in a commodity trading house, and the oligopoly of the Seven Sisters was coming to a halt. Suddenly the world needed a new system of bringing the oil from the producing countries to the consuming countries, so that’s exactly what I did.”

  Rich realized that if the oil-producing countries wished to break the dominance of the corporations, they would need independent traders like him. They simply did not have the means—the marketing know-how, the established distribution channels, contacts to the refineries—to market the oil themselves. Rich knew that he could offer all of these by utilizing Philipp Brothers’ worldwide organization. He wanted to repeat the successes he had enjoyed trading mercury. He wanted to create a market.

  Yet Rich had to deal with three important problems. First he had to get the oil. Then he had to find a buyer. The most difficult problem of them all was the delivery: How could he get the oil to the buyers? The handling and transportation of oil was much more complicated and expensive than transporting metals. Oil is a liquid with varying degrees of viscosity, and it can easily be lost as a result of evaporation or leakage. The physical characteristics of oil can change during transportation and according to temperature. Oil was also traded in huge quantities, and that meant one needed a lot of credit. Oil required special ships, and oil trades were conducted more quickly than other commodity trades. Whereas the time of delivery was not as crucial when it came to trading in bauxite, manganese, or copper, time was of the essence when it came to the oil trade.

  Every trader knows that the most important element of a deal is the execution of the trade. One of the world’s most experienced traffic managers introduced me to the art of trade execution. Like many of my interviewees, he wished to remain anonymous. He even insisted that I leave the name of our meeting place out of this book. I wanted to know why he felt such an intense need for secrecy. “It’s better for me and my business if no one knows who I am,” he told me straight out.

  “As a trader it is possible to close a fantastic deal,” he said, “but it isn’t worth anything if the execution goes wrong. Even worse: Every mistake can spell disaster. I’ve seen it all. For example, you might have a bad letter of credit that results in the cargo being delivered much later than planned or not at all. Or you might charter a ship and suddenly the ship is not allowed to enter the destination port. The deal would fall through, and you might lose millions or have to pay enormous demurrage or storage fees, all because you didn’t do your homework.”

  Pincus Green

  If Rich wanted to get into the oil business with the goal of creating a free market, he would need an expert in trade execution. He knew he needed his own logistics system, and he knew immediately who was most qualified to set up such a system: Pincus “Pinky” Green. Green would soon become one of the most important people in Rich’s life—his alter ego, so to speak. He had been working in the European headquarters of Philipp Brothers in Zug, Switzerland, since 1965. He was considered by many to be a logistical genius with a photographic memory. At any given moment, Green always knew who was offering the best shipping rates or where a shipment was currently located during transport.

  Green is only a few months older than Rich, and the two have amazingly similar family backgrounds. Green was born in the middle of the Great Depression on March 11, 1934, in Brooklyn as the seventh of eight children. His parents, Sadie and Israel Green, fled from the Ukrainian part of the Soviet Union to the United States in the early twenties. The 1917 October Revolution had marked the beginning of a bloody civil war that would last until the winter of 1920–21. Several armies took part in the fighting—the Ukrainian army, peasant irregulars, the Red Army, and the counterrevolutionary White Guards. Terrible massacres were carried out against Ukraine’s Jews. There were twelve hundred pogroms, 530 Jewish communities were attacked, and sixty thousand Jews were murdered.7 Those Jews who were able to escape fled the country.

  Israel Green ran a successful grocery store in Brooklyn that provided the family with a comfortable standard of living. Their success would not last long, however. Their bank collapsed on Black Tuesday, and the family lost everything in the 1929 economic crash. It was difficult enough to find a new job in those days of mass unemployment and mass poverty, but for Green, an Orthodox Jew who didn’t work on Saturdays, it was virtually impossible. His four sons had to help the family make ends meet. On Sundays and after school, Pincus went from door to door selling candy from his little wagon. He attended a Jewish school in Brooklyn. At the age of sixteen he left high school and went to work as a stockboy stocking shelves in Manhattan’s Garment District. He then
got a job in the mailroom at Philipp Brothers and followed the same career path as all traders before him and Marc Rich after him. After serving in the army from 1955 to 1957, he married his lifelong love, Libby, in 1957. The two still live together and are the parents of four adult children.

  The moment he heard of Rich’s plans, Green was hooked on the idea of trading oil as if it were any other commodity. The two formed a disparate pair, for their characters could not have been more different. The cosmopolitan Rich did not believe in God, as he confided to me, favored a nice glass of wine, and wore tailor-made suits. Green, on the other hand, was deeply religious and would still live in a modest stucco house in Flatbush, a Brooklyn neighborhood inhabited mainly by Jewish immigrants, when he was a millionaire.

  They were the perfect embodiment of the old saying about opposites attracting. Together they would revolutionize the global commodities trade.

  ISRAEL and the SHAH

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  he traders who would soon shake the global oil market had a rather humble start. “We did one or two transactions with Tunis,” Rich remembers. They made a profit of 60,000, which, although not exactly overwhelming, showed their bosses that there was money to be made in crude oil. Jesselson and Rothschild were open to the idea in principle, but they tended to be rather conservative and warned Rich of the potential dangers. They were aware of the inherent risks in the capital-intensive oil trade, as a failed deal could spell ruin for a company.