The King of Oil: The Secret Lives of Marc Rich

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 freelyaccording 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 40to produce a barrel (forty-two gallons) of oil and deliver it to the United States, but the Seven Sisters could demand prices of2.50 a barrel or more of their buyers. 4
    The price for a barrel of oil remained more or less constant—2.50 to3 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 expenditureon 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