The King of Oil: The Secret Lives of Marc Rich

office in January 1981.
    Although the regulations were complicated, the reality in the market was even more so. The system of price controls only applied to the first sale of regulated oil in the United States. Upon subsequent sales of the same oil, further regulations limited an increase in price by restricting the amount of profit that a reseller was allowed to make by trading in or speculating on crude oil. This “permissible average markup” (PAM) was calculated by the Department of Energy based on a given company’s past profit margins. Newer companies with little or no trading history, such as Marc Rich International, were not allocated a PAM until September 1980. Beginning on September 1, 1980—only months before Reagan abolished the act and paved the way for deregulation—these resellers were permitted a fixed maximum profit of twenty cents per barrel.
    It was against this backdrop of regulation and price controls that Rich sought to run his business and turn a profit. Where others saw only obstacles and difficulties, Rich saw business opportunities. He attempted to use the regulations to his advantage and earn the maximumpossible return. The oil markets adapted to the regulations very quickly, while dealers tried to avoid the price caps wherever possible. One way of doing this was by combining a deal involving price-controlled domestic oil with a deal involving nonregulated foreign oil. Companies began to swap oil from different categories in order to allow one party to obtain unregulated oil that could be sold at the full market price. Discounts and additional advantages were made available for this purpose. For these types of deals, U.S. companies needed an experienced international reseller with good contacts in the global market. Marc Rich was the perfect candidate. In 1979 and 1980 he was
the
international oil trader. No one else had better business relations with partners in the Middle East, Africa, and Europe. His two companies—Marc Rich International (MRI), with a branch office in New York, and Marc Rich + Co. AG in Switzerland—were perfectly positioned to profit from this trade.
    John Troland, co-owner of West Texas Marketing, was aware of this fact, and in the fall of 1979 he suggested a deal to Rich. According to Troland, WTM could legally “tier trade” regulated oil obtained at the lower regulated prices for uncontrolled domestic oil that could then be sold at the unregulated free market price. However, WTM had difficulty obtaining regulated oil. Many producers were willing to sell their regulated oil at the controlled price only in combination with an additional transaction that they themselves would benefit from. These transactions involved unregulated foreign oil sold at a discounted price. WTM, Troland explained, did not have the necessary access to the foreign oil market to engage in this additional transaction. Troland knew that Rich had the knowledge, the connections, and the capacity to trade in the global oil market.
    In a typical example of this process, Marc Rich + Co. made discounted offshore sales of unregulated foreign oil to Charter Crude Oil Company, an American oil producer from Texas. Charter then agreed to sell cheap price-controlled domestic oil to MRI that MRI would then resell to WTM. WTM swapped this cheap oil for higher-value unregulated oil and sold it back to MRI at a discount. MRI subsequently soldthe oil at market prices on the global market. After the transaction was completed, MRI compensated Marc Rich + Co. for the discount it had given to Charter in order to obtain the regulated oil. Without this discount, Charter would never have been able to sell cheap domestic oil.
    This form of transaction continued after the twenty-cent permissible average markup was imposed on MRI in September 1980, but the transactions were restructured to greatly reduce MRI’s role. MRI no longer acquired the tier-traded domestic oil at a discount and no longer reimbursed Marc Rich + Co. for its losses on the offshore trades at the beginning of the transactions. Instead, WTM and another reseller, Listo Petroleum, sold the tier-traded domestic oil at the higher unregulated price and paid Marc Rich + Co. for its contribution to the entire transaction. The U.S. oil producers involved in these restructured transactions were Charter and Atlantic Richfield—the longtime trading partner of Marc Rich International.
    The purpose of these complicated transactions was always the same.