The King of Oil: The Secret Lives of Marc Rich

by Daniel Ammann

  The troubles began the moment Green went through customs at Mehrabad airport. The Iranian immigration official immediately confiscated his American passport. Green politely yet firmly asked the official to return his passport, as he could not travel around the country without it. The official shook his head, and Green realized he would not return it. He was an experienced trader who was used to finding creative solutions to new problems. He needed a means of getting back his passport that would at the same time allow the immigration official to save face. Green asked him in Farsi for a receipt for his passport. His chutzpah was rewarded. The official wrote Green’s name, date of birth, and passport number on the back of a piece of paper packaging and signed the unusual receipt.

  Khomeini’s Return

  On that day, February 1, 1979, hundreds of thousands of people kept vigil at Mehrabad Airport. They were waiting for an aged man who finally arrived on an Air France Boeing 747: the seventy-six-year-old Ayatollah Ruhollah Khomeini, returning to Iran after fifteen years in exile in France. Four days later Khomeini appointed an “Islamic revolutionary government,” and soon afterward Bakhtiar had to make way for Khomeini’s appointed prime minister, Mehdi Bazargan.

  All the while Green was stranded in Tehran without a passport. He was prohibited from working, and he was not allowed to travel. He was isolated. Employees back at company headquarters in Zug were beginning to worry about his safety. Green then proved what a savvy trader was capable of achieving. One week after he had arrived, he went to the customs office with the piece of paper upon which the customs official had written his name, date of birth, and passport number. Sure enough, Green managed to get back his passport and immediately leave the country at a time when Americans and Jews in Iran had to fear for their lives.

  Two weeks after the Ayatollah Khomeini’s return, Iran found itself in the iron grip of Islamic fundamentalists. In the wake of the takeover, dozens of ministers who had remained true to the shah were tried by “Islamic people’s courts” in summary proceedings and sentenced to death. Thousands of army and police officers were arrested and shot. Prime Minister Bazargan broke off all relations with Israel, and the Israeli embassy was stormed and plundered by a rampaging mob. A few days later the Ayatollah Khomeini turned over the Israeli mission to the PLO; chairman Yasser Arafat flew to Iran to personally raise the Palestinian flag above the mission. The ayatollah set the tone for Iran’s future stance on the Jewish state: Israel was a “cancer” that would destroy the Islamic religion and Muslims if it were not removed from the region.2 Khomeini believed that according to the Koran Israel had no right to exist.

  The United States and Israel evacuated all of their citizens then living in Iran. Nearly all international companies that were represented in the country withdrew their employees and closed their offices. However, one company kept its office open throughout the headiest days of the takeover: Marc Rich + Co. Rich had already gained experience in political instability and abrupt regime changes in the course of his dealings with Cuba and Bolivia. On no account did he want to give up the Iranian oil market that was so important to him, and he held out for as long as possible. His representative in Tehran was a French national who had worked in Iran for many years. During the takeover this representative was cut off from the outside world for days on end. At times he even had to barricade the office and take cover from ricocheting bullets. In the end, however, he managed to hold the fort, and, indeed, his perseverance would eventually pay off.

  The Islamic revolution in Iran, one of the world’s greatest oil producers, brought an unprecedented level of instability to the oil markets. Iranian oil production declined dramatically, and at times it was almost completely disrupted. In 1977 Iran had produced 7 million barrels of oil per day. In the early months of 1979, however, daily production levels dropped to just under half a million barrels. The laws of supply and demand dictated that a sharp drop in oil supplies would have an effect on oil prices, and soon enough the price for oil began to skyrocket. Following the end of the Arab oil embargo, prices had fluctuated little between 1974 and 1978 and remained relatively stable at 10.73 to 13.39 per barrel.3 Shortly after the 1979 revolution, desperate American oil companies were suddenly willing to pay spot-market prices of up to 28 per barrel—more than twice the official OPEC price of 13.34.4 The year 1979 was to be the craziest in the craziest decade in the oil industry’s history. In two consecutive price hikes—each amounting to 15 percent—OPEC raised its official price to 16.75 per barrel.

  Iran Hostage Crisis

  Then came November 4, 1979—a day that would change the world, the United States, and the public’s view of Marc Rich forever. On that Sunday five hundred Iranians calling themselves the Muslim Students of the Imam Khomeini Line stormed the American embassy in Tehran in the late morning and took ninety people hostage, including sixty-three U.S. citizens. The American chargé d’affaires, Bruce Laingen, and two other diplomats were seized at the Iranian foreign ministry. The Ayatollah Khomeini immediately lent his support to the hostage taking as the “natural reaction of the people” and characterized the embassy as an “American den of spies.” Khomeini branded the United States “the Great Satan.” (He would later call Israel “the Little Satan.”)

  In return for freeing the hostages, the alleged students demanded the United States return the ousted shah, Mohammad Reza Pahlavi, who had been undergoing treatment for lymphatic cancer at the Cornell Medical Center in New York for the previous two weeks. The mob chanted, “Khomeini struggles, Carter trembles. Give us the shah. America, America, death to your plots.” By “plots” the hostage takers were referring to the coup against the former Iranian prime minister Mohammad Mossadegh. Mossadegh had nationalized the Iranian oil industry in 1951 and limited the shah’s powers to such an extent that the ruler was ultimately forced to leave the country. In 1953 Mossadegh was deposed by Iranian army officers, supported by the CIA and the British Secret Intelligence Service.

  The attack on the U.S. embassy and the taking of hostages was a violation of diplomatic immunity as laid out at the Vienna Congress of 1814–15, an agreement that even the Nazis had respected during World War II. Embassy grounds are considered extraterritorial areas that are beyond the legal reach of the host nation. President Jimmy Carter called the attack on the U.S. embassy what it was: a breach of international law and an act of terrorism. The hostages were humiliated and presented bound and blindfolded in front of international television cameras. The superpower could only watch powerlessly while the American flag was burned and Carter was hanged in effigy. Every evening the ABC television network broadcast a news program entitled America Held Hostage that kept viewers posted on the hostages’ suffering. The Iranian hostage crisis was one of the worst humiliations ever suffered by the United States in its entire history, yet it was also an event that helped bring the nation closer together. Yellow ribbons were seen around trees and on house doors across the country as a symbol of solidarity with the hostages.

  The Carter administration imposed an array of political and economic sanctions against Iran in mid-November 1979. The import of Iranian crude was prohibited, and approximately 8 billion of Iranian assets in the United States were frozen. Carter’s order forbade the transfer of “all property and interests in property of the Government of Iran, its instrumentalities and controlled entities and the Central Bank of Iran which are or become subject to the jurisdiction of the United States.”5 The Iranians in turn canceled all contracts with American oil companies operating in Iran and forbade them from exporting crude oil out of the country.6

  The United States broke off diplomatic relations with Iran on April 7, 1980. (Since then, U.S. interests in the country have been represented by the government of Switzerland as a protecting power.) President Carter forbade by executive order all financial transactions with Iran and banned “any person subject to the jurisdiction of the United States in connection with any transaction involving Iran, an Iranian governmental entity, an enterprise controlled by I
ran or an Iranian governmental entity, or any person in Iran” from making “any payment, transfer of credit, or other transfer of funds or other property of interests therein, except for purposes of family remittances.”7 Only after 444 days were the hostages finally released on January 20, 1981.

  The Iranian hostage crisis was a painful tragedy for the United States that seemed to offer proof of an even more painful truth: a miserable failure of U.S. foreign policy. In the wake of this failure, the center of power in the global oil market began to shift inexorably from the United States and other Western industrialized nations toward the oil-producing nations.8

  The Second Oil Shock of 1979

  The political escalation in Iran had three main effects on the oil market. The official OPEC price soared to 38 per barrel in 1980, and prices of up to 50 per barrel were paid for individual shipments—three to four times the price that had existed before the fall of the shah and the highest prices ever paid in the history of the oil business. The price of gasoline doubled within the same time period from 63 to 1.30 per gallon. Second, the supply of oil to the United States was endangered—at least temporarily. Finally, the mullahs had broken off contact with American and European companies. If they wanted to continue selling oil, they were in desperate need of a new intermediary.

  The decision to locate the headquarters of Marc Rich + Co. in Switzerland, a neutral nation, finally paid off. Rich bought and sold most of the oil he traded through his company in Zug. He did so primarily for tax reasons, but in the case of Iran (and later South Africa) Rich was aware of the political advantages of using a Swiss company to complete his trades. President Carter’s executive order excluded “any person subject to the jurisdiction of the United States which is a non-banking association, corporation, or other organization organized and doing business under the laws of any foreign country [emphasis added].”9 Rich believed that his Swiss company was exempt from the order according to this definition.

  The spring of 1979 saw the beginning of one of the twentieth century’s most astounding business partnerships. Shortly after the revolution, the anti-Semitic, anticapitalist, and anti-American regime of the Ayatollah Khomeini decided to do business with none other than the Jewish American businessman Marc Rich. In the end, the new government, which had canceled most of the contracts signed during the shah’s reign, decided to trade with one of his most important partners.

  “They respected the contracts,” Rich tells me over lunch. NIOC continued to sell Marc Rich + Co. 8 million to 10 million metric tons of oil per year (approximately 60 million to 75 million barrels) as stipulated by the contract Rich had signed with the shah’s government. “They didn’t have any objections,” he says, as if there were nothing at all unusual about the situation. I had asked him how he had managed to gain the trust of the new Khomeini regime, even though he had worked closely with the shah’s government. His laconic answer helps to explain why traders such as Rich exist in the first place and why they are in such great demand. “We performed a service for them,” Rich explains. “We bought the oil, we handled the transport, and we sold it. They couldn’t do it themselves, so we were able to do it.”

  The more experienced and successful managers at NIOC during the reign of the shah fled the country when he did, and all other foreign experts had already left. The new executives had no experience whatsoever in running an oil company. They were appointed to head the company for ideological and theological reasons, not for their expertise. They were completely illiterate in even the most basic fundamentals of the commodities trade such as financing, insurance, lading, transport, and unlading. “They were certainly not trained,” Rich remembers. I ask Rich if the new directors at NIOC had depended on his company’s know-how. Would the Iranians have been helpless without him? Rich laughs. “They didn’t behave that way, but in a way it’s true.”

  Rich maintained a much more intensive and much longer business relationship with Iran than was previously known. It is a relationship that extended far beyond the five transactions later listed in prosecutor Rudolph W. Giuliani’s indictment. The contract with Iran, which was renewed yearly, remained valid throughout the hostage crisis. “It was a political development which did not affect the business,” Rich says. “It was very unpleasant and tragic for the hostages and humiliating for America, but it didn’t affect the business. We sold oil because a) it was available and b) the price was right. That’s why we did business. We didn’t force anyone to either buy from us or sell it to us. In both cases the seller sold it to us because it suited him and the buyer bought it because it suited him. It was a service.” I ask him how long he did business with Iran. “Forever,” he explains, “until I sold my company to the management” in 1994.10

  “We Had Oil Available, and Our Competitors Did Not”

  The second global oil crisis of 1979 would prove to be—like the first crisis sparked by the Arab oil embargo in 1973—a boon to Marc Rich. Using the information provided by his contacts in the oil-producing nations, Rich had gambled that the political situation in the Middle East would remain unstable. He was convinced that the oil price would continue to rise over the medium term. He therefore continued to seek out new suppliers and was ready to pay good prices for long-term supply guarantees. Iran was by far the most important country—but not the only one—from which Rich purchased his oil.

  Jacques Hachuel had, as explained in the previous chapter, already signed a contract of this kind with Ecuador for Marc Rich + Co. before the crisis. The company’s partnerships with two African nations were also of great importance. Nigeria, the most populous nation on the continent, had risen to become Africa’s largest oil exporter by the 1970s. The West African nation provides a stunning example of the sad phenomenon known as the “resource curse.” The nation’s immense oil riches never trickled down to benefit the wider population. The country has a history of coups after which the new ruling elite would pillage the treasury and fill their coffers with the nation’s wealth. Rich, who has had years of experience with Nigeria, describes the country as “the global capital of corruption.” “It is a very unpleasant situation for the people,” he says and shakes his head. “Such a rich country, and the people see nothing of it.” None of this prevented Rich from signing long-term contracts with the state-owned Nigerian National Petroleum Corporation in November 1976 and September 1978 for the delivery of over fifty thousand barrels per day. In 1976 he also concluded long-term contracts with the Marxist regime in southwestern Angola for large amounts of oil (see chapter 14).

  Rich himself describes his long-term way of thinking as one of the most important secrets of his success. “It was always clear to me. We need to have a long-term relationship with our customers. This was our big advantage, the fact that we had a long-term supply. We had oil available, and our competitors did not.” He could thus supply the American (and European) oil companies with the oil they so dearly needed. “He was one of the most reliable traders in the sense that if he [said he] had some crude, he really had it,” one of his former American buyers said.11 According to Richard Perkins, then director of global oil trading at Chevron, “Marc Rich has always performed on his contracts and has good standing with the majors.”12

  The sudden ebb in the flow of Iranian oil posed a serious problem to the United States, which had imported approximately 1 million barrels of oil per day from Iran—around 6 percent of total U.S. consumption. However, this seemingly small percentage caused dramatic supply gaps, and long lines of cars again began to form at the filling stations. In his “Crisis of Confidence” speech, President Carter described the energy crisis as “the moral equivalent of war.”13 Particularly hard hit were the smaller American companies in the “Iranian consortium.” This consortium, made up of the state-owned National Iranian Oil Company and American, British, Dutch, and French firms, was founded in the early 1950s after the nationalization of the Iranian oil industry and later dissolved in the wake of the Iranian revolution.14 While the larger American compan
ies such as Exxon, Gulf Oil, or Mobil could meet demand to some extent with oil from other countries, smaller companies such as Atlantic Richfield were faced with collapse.

  ARCO, then the seventh-largest oil company in the United States, exemplified the problems of smaller oil companies in those turbulent times. The company was suddenly short the 125,000 barrels of oil per day that Khomeini’s government was no longer willing to deliver. It soon looked as if ARCO would no longer be able to fulfill its contracts, a fact that would have surely spelled ruin for the company. As we have seen (chapter 7), it was thanks to his contract with ARCO that Rich had received his first line of credit in 1974. William F. Ariano, a senior trader at ARCO, had remained Rich’s close friend—and steady customer—ever since. When Ariano found he could no longer purchase Iranian oil after the Islamic revolution, he turned in desperation to Rich in August 1979. Marc Rich + Co. became ARCO’s largest supplier throughout the crisis. In 1979 and 1980, Rich’s company delivered tens of thousands of barrels of mainly Nigerian oil per day. In total, ARCO purchased nearly 27 million barrels from Marc Rich + Co. According to the contract, it had to pay between 2.50 and 8 more per barrel than Rich paid his suppliers. “Try to buy the crude at the lowest price you can, but get the crude. Those were the orders to the crude people,” an ARCO representative summed up the sentiment of those years.15 In his dealings with ARCO alone, Rich made a profit of approximately 120 million within eighteen months. ARCO was pleased to pay the prices Rich asked for, as it was still getting a very good deal. The spot price for crude was much higher than the price Rich asked of his steady clients.