The King of Oil: The Secret Lives of Marc Rich

to full capacity on their own. Buyers for any possible surpluses could be found much more quickly, and supply gaps were easier to fill. In short, supply and demand could be balanced much more efficiently. The spot market brought with it an increase in productivity that helped to turn the entire industry inside out. Oil was now precisely what Rich had predicted only a few years before: just another commodity. “Marc Rich invented the concept of the independent oil trade. That’s why he is such an important person in the history of trade,” an expert who helped me understand the technical details of the oil trade told me.
    Rich and his partners put the very same theory into practice that economists have expounded for years. Skillful traders do well when the risk is high and the supply is threatened by crisis. Only then can they use their competitive advantage to the best effect. “Trading companies reduce search, negotiation, and transaction costs and seem likely to be employed at least initially when the risks of international trade are high,” says Geoffrey Jones, a professor of business history at Harvard Business School, who is a specialist in trading companies. 6 Traders can help their customers by compensating for a lack of information and trust.
    Anyone who has ever haggled over the price of spices or carpets in an Arabian bazaar knows what it means to try to purchase goods without a reference price. To put it simply, experienced commodities traders know where and with whom they have to trade—particularly in areas where it is difficult to establish a contract. “We feel that the trader has a physical role to play: that of managing the flow of commodities both in time and in space in a universe characterized by instability. It is this very instability which in the final analysis provides the
raison d’être
of trade,” says the French economics professor Philippe Chalmin, an expert in commodities markets with practical experience in the field. 7
    This ability to deal with instability and in turn secure a stable flow of oil was, ironically, also of use to the U.S. Department of Defense, which hired Marc Rich + Co. as a defense contractor. In July 1978 the DoD bought45.6 million worth of oil from Marc Rich + Co. for the Strategic Petroleum Reserve, established after the oil shock of 1973, in order to guarantee the nation’s energy security. That was followed by a further46.7 million worth of oil in August. Altogether these purchases amounted to approximately 7.1 million barrels of oil (1 million metric tons).
The Secret of Trust
     
    The employees at Marc Rich + Co. soon enjoyed a reputation as young, aggressive traders. Rich cultivated a distinct meritocracy. In this respect he stuck to the tried-and-true tradition he had learned at Philipp Brothers. Rich did not put much stock in university education but instead entrusted employees with as much freedom and responsibility as they could bear. “We throw young people into the swimming pool. Either they sink or they learn to swim,” Rich once said. “Marc Rich bought me my freedom,” a trader told me rather dramatically. “He allowed me to be what I am.”
    “When he trusts someone, he really trusts,” says Avner Azulay, who has worked for Rich for over twenty-five years. “He lets you do it the way you see best. It allows you to put your whole heart into it without any limitations. He leaves you to decide using your best judgment.” Trust is one of Rich’s secrets of success, and trust also presents an economic advantage. In his acclaimed book
Trust,
the political economist Francis Fukuyama illustrates how the degree of trust in a society—and indeed in a company—can be decisive for both its prosperity and its ability to compete. 8 In “low-trust” societies such as China, France, or Italy, you cannot assume that everyone is following the rules. Members of these societies must always renegotiate these rules and often evenhave to go to court to do so. In “high-trust” societies such as Germany or Japan, however, businesspeople are more willing to trust that everyone holds to the same values, whereby deception is not accepted. A high degree of reciprocal trust substantially lowers the cost of business. It is much easier for large and successful private enterprises to blossom in societies with a high degree of social trust.
    The distinguished economist and Nobel Prize winner Kenneth J. Arrow characterizes trust as “an important lubricant