The company’s survival, of course, did not ensure the survival of any given job at Koch Industries. The employees in Wichita felt this fact in their bones. Dread permeated the hallways at Koch Industries, and in offices across the country, fed by the knowledge that every job was now considered expendable. It was not a happy occasion, then, when employees were told that there would be a companywide meeting held in a large auditorium in Koch headquarters just before Christmas.
Such annual meetings were usually a time to celebrate the upcoming holidays and reflect on the good fortune of the year that had passed. They were a time for Charles Koch to wear a goofy Christmas sweater or perform a skit involving Georgia-Pacific products. This year, as Jeremy Jones and his coworkers filed into the auditorium, they knew that they might be hearing the worst.
Charles Koch took the stage, and his mood was somber. As he stood in front of the crowd, he described the severity of the economic downturn. He didn’t try to varnish the ugly truth or avoid stating directly what many of them knew was coming. Charles Koch walked through each division of the company and explained the damage that was being done. There was less demand for construction materials at Georgia-Pacific. There was less demand for carpeting and clothing at Invista. There was less demand for fertilizer, less demand for gasoline from the refineries. Not everyone at the company would come back from the holidays to a job.
“He was standing up there in front of probably two thousand people, saying, ‘Look, we’re obviously going to get through this. But I’m going to be very honest with you folks. We’re going to have to make some very serious adjustments to get through it,” Jones recalled.
One of the adjustments hit Jones. His venture fund, Koch Genesis, was shut down. Other adjustments had already begun to ripple quickly through Koch’s operations across the country. In early October, Koch closed a Georgia-Pacific plywood mill in Whiteville, North Carolina, eliminating 400 jobs. Two weeks later, Koch cut 400 jobs at an Invista plant in Seaford, Delaware. Then 395 jobs were cut with the closure of a petrochemical plant in Odessa, Texas. Three hundred more jobs were cut at a Georgia-Pacific plant in Alabama. In early December, 575 jobs were cut at Invista in Virginia. Another 70 Georgia-Pacific jobs were cut in New York. In January of 2009, 150 jobs were cut at Koch Industries headquarters in Wichita. Within a few months of Lehman Brothers’ bankruptcy, Koch cut at least 2,000 jobs.
The bloodletting at Koch, while rapid and unprecedented in size, was mild compared with what happened in the rest of the economy. In September of 2008, US employers cut 159,000 jobs, the worst monthly purge in five years. But even those cuts were shallow and didn’t reflect the depth of the downturn. In October, 240,000 jobs were cut. Then 524,000 in December. Then 598,000 the next month. Then 651,000. Then 663,000.
Many of the jobs lost in 2008 never came back. Between 1948 and 2007, only about 13 percent of people who lost their jobs could not find a new job within six months. By 2010, that number would soar to 45 percent. Unemployment became a way of life rather than a temporary setback. The desperation that these workers felt would transform the next decade of American political life.
But the desperation was not felt evenly. Things looked very different from Charles Koch’s office. The downturn was painful—David Koch estimated publicly that Koch Industries’ profit in 2009 was half of what it was the previous year. But even in light of these diminished profits, the downturn presented opportunity for Koch Industries. After forty years of living and working in the volatile world of commodities markets, Charles Koch had finally built a machine that was poised to thrive, even profit, in the midst of violent market corrections. This capability derived, in part, from something that Charles Koch called “the trading mentality.” This mentality held that it didn’t matter so much if markets were going up or down; what mattered was that the traders could see ways to exploit large shifts in the markets. During volatile times, companies and governments and competing traders were thrown off balance. Prices diverged. Supplies were interrupted. Gaps emerged between market prices and underlying values. Koch became nimble, even expert, at exploiting those gaps for its gain.
“When the market is constant, traders don’t make money,” explained Melissa Beckett, the star trader who’d once traded electricity futures. “Traders make money on change.”
Because of its trading mentality and capabilities, Koch Industries could seize opportunities during the crash that were unattainable to most companies, and certainly to most households. This opportunity was most evident in the oil markets, where Koch’s traders spotted a trading opportunity that would be worth millions of dollars in pure profit.
They seized it.
* * *
For the first time since World War II, the economies of Japan, Europe, and the United States entered into a recession simultaneously. The impact on global oil markets was immediate and catastrophic. Oil fell from nearly $145 a barrel to roughly $35 a barrel in a matter of months. The reason was oversupply. When prices were high, oil companies ran at full throttle to produce as much crude as possible. When demand collapsed, all that oil was stranded, with no one to buy it. This oversupply created an obscure follow-on effect that was only visible to people like Koch’s oil traders in Houston. The markets entered a rare period that the traders called “contango.” Koch looked for gaps in the market, and this was one of the biggest in years.
It’s difficult for outsiders to even understand the nature of a contango market. In essence, the price of oil in spot markets, which reflect the price of oil today, tends to be lower than the price of oil to be delivered in the future. This is attributable to a host of complex reasons.I In the relatively rare scenario when oil today is cheaper than oil in the future, the markets are said to be in contango, and it doesn’t tend to last very long. Usually the market reverts to its normal state of cheaper oil in the future.
When the market goes into contango, it presents a whole host of ways for Koch’s traders to profit. In late 2008, the potential profits were extraordinary. The size of the contango became enormous—the gap between oil sold today and oil sold for delivery a few months out became roughly $8 a barrel. A more common level of contango would be in the range of $2 or $4 a barrel. And the gap wasn’t just wide, it was long-lasting. The markets remained in contango for several months.
Koch Industries, and a handful of other giant oil producers, were able to exploit this gap in a special way. Because Koch Industries traded in both the futures markets and the physical markets, it could execute something called the “contango storage play.” One former senior trader within Koch Supply & Trading called the contango storage play a “bread-and-butter” strategy for Koch’s crude oil department.
The mechanics of the contango storage play seem deceptively simple. A trader at Koch Industries buys oil in the spot markets, where it is cheap. Then, the trader sells oil for delivery in the futures markets, where oil is more expensive. When the contango gap is $8, it is easy to picture how quickly the profits pile up. The trader can buy oil for $35 and sell it for $43, almost instantly.
There is a catch, however. To execute the contango storage play, the trader must be able to do something that most traders can’t do—they must be able to deliver the actual, physical oil in that future month. If a typical oil speculator—who did not own an oil refinery, storage tanks, or an oil tanker ship—tried to execute the contango storage trade, they could find themselves shut out. Executing the contango storage trade didn’t just require deep knowledge of arcane shipping markets and transportation law; it also required deep relationships in the private world of oil production. “You have to have a lot of support systems to take advantage of it,” Beckett said. Koch had that support system. Koch could deliver the oil.