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Charles Koch won the labor battle at Pine Bend. In doing so, he took greater control over an asset that would become the fountainhead of profits for his company.
Decades later, former Koch Industries executives would refer to the Pine Bend refinery with a sense of admiration, and almost awe. Virtually all of them would use the term “cash cow” when describing the facility. The years would prove that Charles Koch was remarkably insightful—or remarkably lucky—when he purchased Pine Bend in 1969. In the 1960s, the refinery had profited in part by exploiting a loophole in US oil programs, but even after those loopholes were closed, the refinery was in a prime position.IV It was one of the few refineries in the United States that had access to a special form of Canadian oil that was very cheap, and it sold the gasoline it made into a retail market that was particularly expensive. Charles Koch was able to exploit this opportunity to the fullest.
But in 1973, after beating the OCAW, Charles Koch didn’t have any time to celebrate.
On September 24, the St. Paul Pioneer Press carried a story on the front page with the headline “Employees End Koch Strike.” But just a few weeks later, on November 26, that same newspaper carried a headline that was much larger. That headline read: “Nixon Asks [for] Wide Energy Power.”
For Charles Koch, the true age of volatility had just arrived.
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I. At least one news report put the tally at 144 to 100.
II. This rule cut both ways for the union. While it reduced the freedom of workers to set their own schedule, the majority of them seemed to approve of the mandatory overtime provision. There is a culture of working long shifts at the refinery, and employees enjoyed the pay bumps that overtime brought them. Most of the labor disputes about overtime at the refinery revolved around who got it and did not, rather than how much overtime work was required.
III. The OCAW eventually merged with the larger United Steelworkers union, which currently represents the employees.
IV. The refinery had once benefited from a special importing arrangement with Canada, outlined in the previous chapter.
CHAPTER 4
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The Age of Volatility Intensifies
(1973–1975)
Within a matter of months after the OCAW strike ended, Charles Koch found himself sitting on the edge of a large hole on his family’s estate in Wichita, a pit that was meant to be the foundation of a new home he was building for himself and his new wife, Liz, a local woman whose family owned a chain of department stores. But construction might have to be suspended because he feared he was running out of money. Koch Industries was suffering huge losses because of decisions he had made, and he worried the company might go out of business. “I was worried that if the company went under, this house would take me under as well,” Charles Koch later wrote. He had won control over the Pine Bend refinery, only to be blindsided by market forces outside his command.
The trouble started on October 6, 1973, when Egypt and Syria launched a surprise military attack against Israel. The United States assisted Israel in its defense, causing Arab nations to retaliate in a novel way. The oil-rich nations banned oil exports to the United States entirely, while also cutting overall production by 5 percent. In every ensuing month, the Arab nations would cut an additional 5 percent of production.
It was not obvious at first just how catastrophic this retaliation would be. Up until that point, Americans had felt secure in their abundance of oil. The 1960s were the era of the all-American gusher, but the age of abundance was about to end. American demand for fossil fuels had been slowly outstripping domestic supplies. In 1968, the oil economy pivoted from surplus into scarcity as oil drilling outpaced oil supplies for the first time, by 0.07 percent. American oil drillers were essentially operating with the pedal to the metal and still were not able to entirely meet growing demand. Oil imports nearly tripled between 1967 and 1973. With US demand for imports so strong, there was virtually no cushion of extra oil supplies on global markets to help absorb a shock to supplies. The Arab embargo kept about 4.4 million barrels of oil a day off the market: 9 percent of the total supply. For the first time in its history, the United States could not make up for the loss.
The shock was unprecedented. Gasoline prices, which had hovered along at the same level year after year for decades, spiked. In some markets, crude oil prices jumped from $5.40 a barrel to $17 a barrel—a 600 percent increase in a matter of weeks. There were shortages and long lines at gas stations that were open for limited hours if they were open at all. Fist fights broke out, black market auctioneers sold gasoline at exorbitant prices, and people hoarded gas when they could find it.
The price shock caused a calamity inside Koch Industries. Charles Koch had been quietly expanding a profitable segment of the company, a shipping division that carried crude oil on oceangoing tankers. Strong demand for US oil imports created a small boom for oil tankers, and Koch Industries signed leases to carry crude around the world. The money was so good that Charles Koch decided to make a giant bet on the business by building a “supertanker” of his own. He named it after his mother, Mary R. Koch, then in her midsixties. What Charles Koch didn’t realize was that he was making a giant, one-directional bet on the future of oil imports. When production plummeted, the bet left him exposed. The shipping market was plagued by crippling excess capacity, almost overnight. The value of the Mary R. Koch plunged, and Koch was obligated to money-losing shipping leases.
The mid-1970s were a period of economic crisis for both Koch Industries and the United States. The years of inflation, recession, and energy shocks transformed America’s political and economic landscapes. This period also shaped Koch Industries. In response to the crisis, Charles Koch began to transform the company into an institution that was built for the new era of volatility. The changes made during this time laid foundations for Koch Industries that remained in place for decades. Charles Koch aimed to build a corporation that would not only survive the brutal swings of the marketplace, but profit from them. He built a company that learned constantly from the world around it and prized information discovery above almost everything. It was a company that embraced change and hated permanence, one where every division would be up for sale all the time. He built a structure with centralized control—which emanated from his boardroom—but that also gave managers and employees a remarkable level of freedom. He fused the sophisticated management techniques he learned as a consultant in Boston with the folk wisdom of his mentor Sterling Varner and the free-market religion of thinkers like Hayek and von Mises. Also during this time, Charles Koch built a political action network that he operated in tandem with Koch Industries’ business, creating a public influence operation that was arguably unique in the history of corporate America.
Even in the face of a downturn, Charles Koch invested heavily in Pine Bend to ensure its long-term profitability. But investing money alone wasn’t at the heart of Koch’s efforts to transform Pine Bend. The effort would not be built on cash—it would be built on information. In the face of unprecedented market volatility, Charles Koch and his team adopted a strategy that would inform Koch Industries for decades. It relied on deep analysis and information gathering. Charles Koch couldn’t control the market’s violent ups and downs, but by understanding them better, he could beat his competitors.