* * *
John Kujawa, the OCAW president, did not talk about work when he got home. His wife, Martha Ann, knew very little about the negotiations he was leading with Koch Refining. John often spent the weekends and evenings drinking with his friends. When he was home, he was silent.
But Martha Ann could see the tension building in him. He was in turmoil inside. His drinking was intense.
Kujawa was in an impossible position. If he pushed for an agreement to end the strike, he would be labeled a traitor or a sellout. If he failed to meet Koch’s demands, or at least some of them, the employees he represented might never get their jobs back.
Then Bernard Paulson dropped a bombshell on Kujawa during their negotiations. Paulson said that he was prepared to break an unwritten agreement that refinery owners had long honored: he was prepared to hire in nonunion replacement workers. It was exceedingly rare for any company to make such a move, which violated all principles of collective bargaining. Doing so would alienate Koch Refining from any unionized worker it dealt with in Minnesota. And it would effectively destroy the OCAW local 6-662.
As August turned to September, Kujawa began pressing his union to end the strike. But working with his own union members was almost as difficult as working with Paulson. Martha Ann Kujawa said internal tensions were so heated that she believed her husband might be in danger. John never confided in her what was going on, but she saw things that concerned her.
“I was looking out the window of the duplex that we lived in and he was being followed home by somebody. And they were threatening him. He was walking on the sidewalk and he started speeding up and came to the house quickly. And I thought that was strange,” she recalled. “I wouldn’t even be a bit surprised if his life was in danger.”
By September 15, Kujawa had helped the union come to a tentative agreement with Koch. The agreement caved to many of Koch’s demands, but the union leaders argued that it was the best deal the members could get after nine months of being on strike.
On the evening of September 17, the OCAW workers gathered in a junior high school near the oil refinery. They were presented with the contract that Kujawa had negotiated. It was time for them to vote on it, time to decide whether they were willing to end the strike and move on. Kujawa pointed out that pay and benefits were not even the primary issues in the negotiations. The main dispute was over how much control Koch’s management would have over the employees. The members voted to reject the contract, 149 to 103.
* * *
After the vote, Paulson gave the Teamsters an ultimatum: “Either you guys start coming across [the picket line], or we are going to go nonunion with all of our deliveries. Even after this strike is over,” he remembers telling them. The Teamsters came around to Paulson’s rationale. In mid-September they drove across the picket line. In doing so, they broke the back of the OCAW. Even decades later, feelings were raw about that betrayal. Lowell Payton, an OCAW man who stood for months out on the picket line, was still bitter decades later when he recalled watching the Teamster-driven trucks roll past the picket line. “Teamsters are no better than an egg-sucking dog,” Payton said.
On the evening of September 23, the OCAW gathered again at the junior high school to vote on the contract. They voted this time to accept the contract, by at least 140 to 100.I The contract would last sixteen months, only seven months longer than the strike itself.
Paulson felt that the OCAW had no choice but to agree to it. “They could see they were, you know, losing everything,” he said.
* * *
OCAW workers like Ernie Tromberg and Joe Quinn were shocked when they returned to the refinery. The place was in terrible shape. Most of the OCAW men who went back to work remember the massive overtime payments they received as they worked long days to get the refining equipment back into good working order.
But many of the employees did not come back. The bitterness ran too deep. Tromberg said that Koch lost many of its best engineers and operators after the strike; the people who knew the Pine Bend facility most intimately. Kujawa later lost his reelection bid to be president. Joe Quinn replaced him.
Paulson retained his job as head of the plant, and he said that each new union president was more “reasonable” than the last. The days of Joseph Hammerschmidt were over. The union members knew who was truly in charge, and they knew that Charles Koch would not back down to demands as his predecessors had done.
The OCAW agreed to significant changes in its relationship with Koch Refining. The work shuttle that ferried employees around was gone. A new rule imposed mandatory overtime, meaning that a manager could simply tell a shift worker that he must stay and work late, or come in on a Saturday, rather than request those extra hours from him.II The work rules of old, which required that workers of certain “trades” could only work on the tasks that fit their skills, were jettisoned.
The grievance process, by which employees could appeal their boss’s decision, was defanged. There would be no more cash payments if an employee won a grievance fight. There would be no more checks like the one that Joe Quinn received to compensate for lost wages or other penalties. Instead, if an employee won a grievance fight, he or she would be allotted enough overtime work to cover the amount they were owed—in other words, if an employee won a grievance, he earned the right only to work extra hours to earn back the money Koch owed him.
Employees at the Pine Bend refinery remain unionized to this day.III But the strike of 1973 broke the union’s power. This fit into a pattern that was being played out across the United States between 1973 and 1993. Unions disbanded and broke apart. Solidarity became an artifact. The remaining unions became something like a shadow human resources department. They offered employment services like health insurance and credit union membership, but they seldom went on strike for better wages or working conditions.
* * *
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.
* * *
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.
Once again, Charles Koch turned to Bernard Paulson to help carry out the new plan.
* * *
Bernard Paulson moved to Wichita shortly after he ended the OCAW strike at Pine Bend. He was promoted to vice president over all of Koch’s refinery operations, a role that let him work closely with Charles Koch and Sterling Varner.
Paulson, like other Koch executives, found himself studying information systems just as much as he studied the oil business itself. Accordingly, the first step that Paulson took to revolutionize the Pine Bend refinery was to learn more about the refinery itself.
Paulson began running tests on each unit at the refinery. Every unit served a particular purpose. One unit, for example, was a giant tower that processed crude oil into gasoline. By-products from that unit might get sent through a pipe to another unit that would process those by-products into different fuels. One unit turned some of the most unusable by-products into asphalt. Paulson tested each one by running them under different conditions—running them eight hours a day instead of sixteen, for example. Or he tested them by burning different types of feedstock in them. Then he closely measured the results.
By doing this, Paulson built a new database—a roadmap that let him know exactly how each unit operated while it processed different types of oil or when run for different lengths of time at various levels of intensity. This taught Paulson more about the inner workings of Pine Bend than anyone had known before. He knew when the machines would operate at their most efficient and when they would lag. He became familiar with the inevitable trade-offs that resulted from running one unit longer than another or choosing a different feedstock.
Then Paulson started learning more about the raw fuels that were flowing into Pine Bend to be refined. He began running tests, called assays, on the oil that Pine Bend was buying. Paulson wasn’t satisfied with the assays that the unionized workers were running on the oil, so he formed a team in Wichita and moved the testing there. Inside the Wichita laboratories, engineers ran Pine Bend’s feedstocks through a battery of assays that peeled away the component parts of each fuel for examination. With this information, Paulson developed a microscopic understanding of each fuel that flowed into Pine Bend’s units.
Paulson turned to Koch’s sales and marketing team. He told them to learn everything they could about the markets where Pine Bend sold its products. They learned the prices of different fuels at different depots during different times of the year. The marketing team learned the prices of asphalt, which Pine Bend produced, and the prices of Canadian crude oil, which Pine Bend purchased. All of these numbers were compiled into a new and massive data set that showed the complex financial environment that surrounded Pine Bend, the chaotic push and pull of supply and demand for the variety of products that the refin
ery could make.
This information allowed Paulson to abandon the hunches and guesswork that were often used to run an oil refinery. Now he had a team that could predict with remarkable reliability just how profitable the Pine Bend refinery would be when it processed any given combination of feedstocks and sold them to any given combination of customers.
There was one major obstacle to using this information: the tests and surveys produced far more data than could be processed by any person, or even a team of people. To solve that problem, Paulson used an unlikely tool: he used a computer. This was far more innovative than it might sound decades later. In 1974, computers were still the stuff of myth. NASA was known during the 1960s to have used a supercomputing machine to send astronauts into space. Photos of the high-tech equipment were awe inspiring. Computers were enormous installations that filled many rooms; the machines stood in rows like giant refrigerators with glass doors, holding reels of tape inside of them that processed information at unimaginable speeds. Some computers still used punch cards to make their tabulations.
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