As someone in the tech industry, learning about the oil industry is fascinating
The book overall was fascinating as a deep dive into industries I was completely unfamiliar with. I never understood how refineries worked, how oil was bought, sold, and moved across the country, and how other essential industries like farming and manufacturing operated.
The industries Koch Industries operated in had interesting parallels to tech. Tech is full of high fixed cost, low to zero marginal cost businesses, which makes it great for venture capital. Koch Industries with its scale and knowledge of challenging industries, could make bets in the same ways. They could buy pipelines, store oil in mass quantities, or build out and invest in refineries at a scale that other companies could not. They then leveraged this data and capital for their commodities trading divisions and a private equity branch (that rescued Georgia-Pacific). However controversial the company is, there are a lot of things to learn from what Koch Industries has done as a business.
Being the son of a billionaire CEO isn't easy
The book had a whole chapter focused on the upbringing of Chase Koch, Charles Koch's son. It was a fascinating look at the challenges of being the son of a billionaire CEO, especially one whose company is a family-run organization.
Chase had a tumultuous childhood. To teach him the value of hard work, his father sent him to work on one of the company's farms as his first job, shoveling manure and picking weeds. Chase's childhood was also defined by a reckless driving accident where he stuck and killed a 12-year-old boy. He was charged with vehicular homicide.
Chase initially wanted to forge his own path, going to school at Texas A&M and working there after graduation. He was eventually convinced to move back to Wichita to work for Koch Industries after an executive said something quite insightful: you have to earn the right to turn down the CEO job. He eventually did return to work for Koch. While he succeeded in the roles that Charles put him in, he took himself out of the running for the CEO position.
There really needs to be some campaign finance reform
The amount of influence Koch industries has had on policy is crazy. From buying local politicians to swaying national policies and running think tanks, Koch is deeply involved in the political sphere. The most recent example of this is the Trump tax cuts. To prevent increasing the deficit, the initial proposal had a border adjustment tax (BAT). Basically this was a tax on imports, which hurt one of Koch's most profitable refineries in Pine Bend because they imported cheap oil from Canada.
Koch lobbied policymakers to not include the BAT and eventually succeeded. The policy instead makes tax cuts for middle classes temporary, some cuts starting to expire in 2022 and expiring fully in 2027, in order to not increase the federal deficit.
A common theme among the books I've read recently is planning on a timeline of years and decades, not months. Koch Industries has that luxury since they've stayed private:
He avoided the snares that entangled many publicly traded companies that report their financial results to investors every three months. Koch Industries didn’t have to think quarter to quarter. The company thinks year to year. An internal think tank and deal-making committee, called the development group, will sometimes think through a business deal on a timeline measured in decades. This long-term view made Koch nimble where other companies stumbled
I thought this excerpt was particularly fascinating in light of some short-term oil futures going negative (meaning you would have to pay someone to take your oil):
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.
I thought reading this book around the time COVID-19 fears escalated was particularly interesting. One of the thoughts I had in early March was the fragility of society as we know today. Many of the things I took for granted like being able to walk the trails along the lake or eating out at a restaurant, are all consequences of people following the rules and society operating normally.
Some of the stories in Kochland illustrate how fragile this order is. The book opens with a controversial FBI investigation into Koch Oil underreporting oil they took from Indian reservations, a practice that was known as going long. For example, a Koch employee would report taking 100 barrels of oil from a producer, but deliver 101 barrels of oil to the pipeline. While Koch executives never directly told employees to go long, they made it clear never to be short, and workers who were constantly short would get fired. Measuring oil is an inexact science, which allowed Koch to get away with constantly going long and running on a surplus year over year. Koch ended up getting away with the practice after the FBI investigation as well.
Another story comes from one of their most profitable refineries in Pine Bend (Minnesota). Heather Faragher was one of the employees in charge of making sure the refinery obeyed EPA guidelines around waste water treatment. At the refinery, wastewater moved from pipes to a polishing pond where sediment sunk to the bottom and then was deposited to the Mississippi River. About 3.5 million gallons a day were deposited. Faragher advised that the refinery should renovate infrastructure that treated the wastewater, yet none of the refinery management listened as Koch was focused more on generating revenue for the refinery. This lead to the polishing ponds overflowing and illegal dumping of the wastewater to the surrounding wetlands. Eventually, Koch paid over $10 million in fines.
These are just a few instances of Koch bending and ignoring rules throughout their history. Some they got away with, some they didn't, but the rules of society are hard to enforce and monitor.
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