Rich had an idea that would later prove to be a stroke of genius. This idea would soon transform Philipp Brothers into a powerhouse of the international oil trade, and it speaks volumes about Rich and his successes. He suggested a deal between two parties who—at least officially—would have nothing to do with one another. It was a highly secretive and politically explosive deal, which remains shrouded in secrecy to this day.
I first heard of the deal when I interviewed Rich’s former high-ranking employees in Madrid. I had wanted to know how Rich had managed to break into the oil-trading business so quickly. I got along quite well with one of these traders due to a shared passion for Africa. We were discussing whether Africa would one day be able to pull itself out of its poverty and misery, and we came to the conclusion that the continent could only do so on its own and not with the help of foreign aid. Suddenly he made a tapping gesture with his index finger and asked me to turn off my tape recorder.
Under the pledge of secrecy he proceeded to tell me an almost unbelievable tale. It was the story of an Iranian-Israeli oil pipeline that ran from Eilat—Israel’s gateway to the Red Sea—to Ashkelon on the Mediterranean coast. It was thanks to this pipeline—and thanks to his cooperation with Iran and Israel—that Rich was able to get his foot in the door of the global oil trade.
Top-Secret Pipeline in Israel
To this day the Iranian connection to the oil pipeline is one of Israel’s best-kept state secrets.1 The pipeline was an attempt to solve one of the Jewish state’s greatest strategic challenges, one that threatened the nation’s very survival: access to a steady supply of oil. There’s an old Israeli joke: Moses wandered the Middle East for forty years—and finally settled in the only place without any oil. Israel’s oil-rich enemy neighbors were keen to keep the country from gaining access to this important raw material. Up to 90 percent of Israel’s oil imports came from Iran. The Persian country, which is not Arab, had secretly supplied Israel with the black gold since the middle 1950s.2
In the summer of 1965, Golda Meir, then Israel’s foreign minister, visited the shah in Tehran. She suggested the two nations cooperate in the construction and management of a pipeline. The meeting was top secret, as Iran did not officially recognize Israel. The shah had his own regional interests, and he had no desire to damage his relationship with the Arab world. The Arab nations considered Israel a pariah, and together they had organized a boycott of Israel. Nevertheless, the shah, whom the Israelis referred to by his cover name “Landlord,” signaled that he was prepared to enter into secret negotiations. The Iranians were represented by the National Iranian Oil Company (NIOC), and the Israelis sent high-ranking government representatives as well as members of the Mossad to the talks—a fact that underscored the project’s immense strategic importance.
Two years later the negotiations finally reached a turning point. President Nasser’s closure of the Suez Canal in the wake of the Six-Day War convinced the shah that the pipeline was in Iran’s strategic interest. Mohammad Reza Shah Pahlavi realized that the closure threatened Iran’s main transport route, since Iran shipped three out of four barrels of its oil through the Suez Canal.3 The closure threatened his plans to transform Iran into the region’s dominant oil-producing nation. The shah, as the leader of the only non-Arab OPEC member nation in the region, also saw the presence of Egypt’s Arab allies on Iran’s doorstep as a hindrance to his desire to serve as a counterbalance to President Nasser. Thanks to the pipeline, Mohammad Reza Pahlavi could lessen his dependence on Egypt and the Suez Canal.
Israel and Iran agreed to set up a fifty-fifty joint venture, and together the two countries founded Trans-Asiatic Oil Ltd. in Switzerland. The shah demanded that Iran’s participation in the company remain a secret. When asked, the official answer from Iran would always be the same: “We do not sell oil to Israel.” Trans-Asiatic operated the pipeline, the oil terminals, and oil containers in Eilat and Ashkelon, and it even maintained a fleet of tankers to transport the oil.
The pipeline, 254 kilometers long and 106 centimeters in diameter, was completed in 1969, and in December of the same year the first Iranian oil began to flow. Ten million metric tons of oil were transported through the Israeli pipeline in the first year. Israel bought 3 million metric tons for its own supply. The Iranian navy accompanied the tankers from the ports of lading to the Strait of Hormuz, and the Israeli navy guarded the ships’ entry into the Gulf of Aqaba at the Straits of Tiran.
The pipeline was what game theorists would call a “win-win situation”—a solution of equal benefit to both parties. “Thanks to the pipeline, the shah was able to gradually outrival the multinational oil companies and become a powerful force in the oil trade,” a participant in the deal told me. NIOC was able to freely sell its oil on the open market for the first time ever. The shah made a lot of money and could continue to feed his extravagant lifestyle. Furthermore, the pipeline was a useful tool in his struggle to gain greater control over the oil companies. Israel, on the other side, earned good money on the transit fees for the pipeline and was at the same time able to secure a constant supply of oil.
Trading with the Shah of Persia
Rich wanted to go into business with the shah of Persia and find buyers for the Iranian oil that passed through Israel. It was the bold idea that would later become his great success. Rich’s cometlike ascent could never have happened were it not for this deal, and, according to a well-informed insider, it was the true foundation of Rich’s enterprise. Insiders also know that Rich could never have become the biggest independent oil trader in the world without the help of Pincus Green. “Marc is the visionary, Pinky makes things happen. It’s impossible to think of one without the other,” said a friend who has known both of them well for many years. This is primarily—but not solely—connected to Green’s skills as a traffic manager. It was Pinky, as all his acquaintances call him, who was able to make the crucial contacts in Iran. These contacts formed the basis for the company that would become Marc Rich + Co. AG. Iran played such an important role in Green’s career that he named the family office, i.e., a private company managing the family wealth, that he constructed after his retirement, Yeshil Management AG. Yeshil is the Farsi word for green.
Pinky Green was indicted in 1983 on exactly the same charges as Marc Rich, and he was pardoned in 2001 by President Bill Clinton at exactly the same time. Nevertheless, he has to a large extent managed to keep out of the headlines. Googling his name turns up a mere 6,710 hits, compared with a whopping 230,000 hits for Marc Rich.4 Even his opponents can only find nice things to say about him. “If I wanted a neighbor, Pincus Green would be the perfect neighbor,” U.S. Marshal Ken Hill told me.
In the 1960s Green traded mainly in chrome ore—which is used to make stainless steel—and copper for Philipp Brothers. Both metals were found in Persia, as Iran was more commonly called at the time. For this reason Green frequently traveled between New York and Iran, where he became friendly with Ali Rezai. The Rezai family were powerful and influential owner-operators of chrome and copper mines. Ali, who was known as “Mr. Steel” on account of his family’s links to the industry, later became a member of the Majlis, the Iranian senate. More important, he was a friend of the shah, Mohammad Reza Pahlavi. “Pinky was very, very close to Ali Rezai,” one Iran expert told me.
The connection to Rezai opened the doors to Iran’s economic and political elite, and this access would prove to be of exceptional importance. It led Green right to the center of power in Persia, namely, the shah himself. “This relationship allowed Pinky to develop a relationship with the National Iranian Oil Company,” Rich told me. Rich himself met the shah years later as a neighbor in St. Moritz.
The most important player in Rich’s oil dealings was Parviz Mina. When Rich first met him, he was responsible for international relations on the administrative board of NIOC. Mina was reputedly exceptionally intelligent and highly competent in technical issues. Tony Benn, the British secretary of state for energy at the time, cal
led him “brilliant.”5 Mina had earned a PhD in petroleum engineering at the University of Birmingham in Great Britain. He had been working in the Iranian oil industry since the fall of Mohammad Mossadegh, Iran’s nationalist prime minister, in 1953. He had excellent contacts to the other oil-producing nations and was a member of the OPEC Long Term Strategy Committee for two years.
Crude Middleman
When I asked him about the pipeline business, Rich only stared at me for a wordless moment. It seemed he was considering whether or not he should admit to this secret. He then confessed to me that the pipeline was indeed a milestone of his career—“a very, very important business,” as Rich put it. Thanks to the relationship with oil director Parviz Mina and “Mr. Steel” Ali Rezai, he started it in 1973. Rich can no longer say exactly how much oil he traded in the beginning. He still knows that he was able to expand the business with Iran over the years up to 8 to 10 million tons per year (approximately 60 to 75 million barrels). “People were reluctant to use the pipeline because the oil had passed through Israel,” Rich told me. Whoever did official business with Israel ran the risk of being blacklisted by Arab nations. “Still, the pipeline was there. I decided that it was attractive and gradually introduced it.” Rich secretly transported the politically controversial oil—some of it in Israeli tankers—across the Mediterranean to Spain, Rich’s adopted country. In order to disguise the oil’s origin, the tankers sometimes stopped in Romania. The Communist country, since 1965 ruled by the dictator Nicolae Ceauescu, was the only Eastern Bloc nation that had not broken diplomatic relations with Israel in the wake of the Six-Day War.
There was a reason for such discretion. As mentioned earlier, Spain’s fascist head of state, Generalissimo Francisco Franco, had consistently refused to officially recognize Israel, but he was very interested in obtaining oil. Spain had an incredible thirst for oil as a result of the nation’s industrialization coupled with the economic boom of the “Spanish miracle” in the 1960s. As is often the case, pragmatism usually wins out over ideology in such situations. “Spain bought the oil—even though it had no diplomatic relations with Israel,” an insider explained. “Politics,” he said laughingly and shook his head.
As the oil was relatively cheap, Rich could offer it at prices that were lower than those of the competition. For customers who might have been concerned about the oil’s Israeli connection, this was a decisive financial incentive. “There was a big price advantage,” Rich explained. “The oil was cheaper because of the much cheaper freight. The transport of Iranian crude through the pipeline was much cheaper than going all the way around Africa.” A metric ton of Iranian oil cost 21 in Eilat. The same oil cost 28 once it had been transported to Europe via the Cape of Good Hope.6 At that time the usual route through the Suez Canal was not possible due to Egypt’s closure of the canal from 1967 to 1975.
Rich gained access to Franco’s government by means of his economist friend Alfredo Santos Blanco. “He was very helpful to me,” Rich said. “He knew everybody and everybody knew him. Thanks to him we came into contact with the Spanish government and the Spanish refineries who eventually became our customers.” Santos Blanco, who in 1974 would become Spain’s minister of industry, even went on to join Rich’s company as a public relations man after leaving office. Rich had won the privilege to supply Spain because he had been able to solve a problem between Spain and Egypt. Egypt owed Spain a substantial sum of money that it was unable to pay back. Rich arranged to buy Egyptian oil for Spain and used part of that credit for the purchase. “As compensation from Spain for this business, they gave me a part of the government quota to supply them,” Rich explains. As is true of many countries, the Spanish government controlled a set percentage of all oil imports. Rich sold the “pipeline oil” for countless years to the Spanish government as part of this government quota of 30 percent.
“Yes, the pipeline was very important to me,” Rich repeated and closed the door on the topic. The story is evidence of Rich’s close cooperation with Iran, Israel, and Spain. It was a cooperation of great value to all involved, whose importance will be explained in the following chapters. It underscores Rich’s contacts in Israel’s intelligence service Mossad. There were very few deals that had as great an effect on Rich as the pipeline business. It proved to Rich that he could trust his instincts. Once again, Rich was at the right place at the right time and had made the right decision. It was no small risk given the political controversy surrounding Israel, but the risk proved to be manageable. Most important, however, the deal had paid off. In the early 1970s, Philipp Brothers became one of the world’s largest oil-trading companies almost overnight, and Rich created the beginnings of a spot market for oil that he would later perfect in his own company. He sold most of the oil to Spain, but also to Italy and mid-sized oil companies in the United States. It was a novel development. Oil could now be bought “on the spot” on short notice with no need for long-term contracts or other obligations to the major companies or oil sheiks.
Rich’s ability to bring together improbable business partners would soon become his trademark. He would repeatedly serve his clients as a discreet go-between—a kind of “crude oil middleman.” It would prove again and again to be the most lucrative kind of deal. In times of crisis, governments were prepared to pay a premium for strategically important commodities such as oil. Rich carved out a niche for himself that would allow him to make contacts and gather experience in the oil trade on a grand scale. The contacts he made would soon allow him to leave Philipp Brothers and found his own company. Thanks to Israel and Spain—and Iran, of course—Rich would soon ascend the throne to become the undisputed King of Oil.
Yom Kippur War
Knowledge is power. This is probably more true of the commodities trade than of any other field—with the exception of the military. The difference between wealth and wreckage usually depends on access to superior information. The contacts that Rich and Green had made in Iran were worth their weight in (black) gold. Thanks to these excellent relations, Rich learned early in the 1970s that the oil-producing countries were incensed. The high inflation rates coupled with the massive devaluation of the dollar made their income from oil sales plummet. In spring 1973 Rich and Green heard of the “new structures” looming in the oil industry as well as of OPEC’s desire to raise prices before the competition had gotten wind of it. “I wouldn’t call it inside information, but direct information,” one oil trader who was involved in the Iranian deals told me. “Contrary to the other companies, we were on the spot, we were there. Contrary to them, we got all the information available in the market.”
Rich saw the opportunity that others had failed to see. “We felt the market was changing, the whole world was changing,” he recalls. “We knew more than our competitors. Of course, I always develop relations with my customers.” Green was once more in Iran in spring 1973 when he heard that NIOC wanted to sell oil on the free market. “We thought it would be a good idea to take a long position in crude.” They bet on higher prices and signed a long-term contract with Iran without consulting their bosses at Philipp Brothers in New York. According to Rich, they committed themselves to purchasing a total of one million metric tons (approximately 7.5 million barrels) over a long period of time at a fixed price, namely 5 per barrel. The total value of the deal was 37.5 million.
Philipp Brothers president Ludwig Jesselson was shocked when he was informed of the deal. “How could you do that?” he yelled at Rich. Five dollars per barrel was at least 2 more than the oil’s market price at the time. Worse still, it was not a back-to-back deal, for Rich and Green did not have a buyer for the huge quantity of oil. In other words, Philipp Brothers carried the entire risk at a price that was 15 million higher than the market price. This risk was intolerable for Jesselson, who still lived according to the company motto, “It is better to sleep well than eat well.”
There followed a marathon series of telephone conferences, sometimes heated, at other times downright nasty, but th
e upshot was that Jesselson forced Rich and Green to get rid of the oil as quickly as possible. “It was very annoying,” says Rich. They had no choice, but they obeyed their orders reluctantly. “Pinky sold the oil to Ashland Oil in Kentucky for a small profit. They took over the contract. Too bad,” says Rich. He perceived Jesselson’s behavior as a breach of trust and a rejection. It was a foreshadowing of the final split with Philipp Brothers that was soon to come.
It must have been one of the best deals in the history of Ashland Oil, for Rich and Green were proved right only months after the sale. On October 6, 1973, Yom Kippur, Egypt and Syria attacked Israel. The Arab nations brought Israel to the verge of military defeat for the first time in its history. The Soviet Union supported Egypt and Syria, whereas the United States weighed in on the side of the Israelis. The Jewish state only managed to drive its opponents back after conceding large areas of land. There was no victor in this three-week-long conflict, which was the fourth in a series of Israeli-Arab wars (after the Israeli war of independence in 1948, the Suez War of 1956–57, and the Six-Day War in 1967).
The oil-producing nations made a further attempt to use their oil as a weapon. This tactic may have failed miserably during the Six-Day War, but the political and economic situation was different this time. Libya and Saudi Arabia were the first to cease delivery to the United States and Western Europe. Six more important oil producers had joined the boycott by the end of 1973—the United Arab Emirates, Iran, Iraq, Kuwait, Algeria, and Qatar. At the same time, OPEC decided to cut oil production and raise prices. The “oil weapon,” which had proved so lack-luster only six years previously, now hit home with the force of a bomb. It was also around this time that President Nixon signed the Emergency Petroleum Allocation Act, which introduced controls on oil prices in the United States and would cause such enormous problems for Rich ten years later (see chapter 9).
The King of Oil: The Secret Lives of Marc Rich Page 8