Kochland Page 58
The trades that could be built around Corpus Christi and Eagle Ford Shale seemed impervious to loss, and they returned enormous profits even as oil prices fell and the economy moved sideways from 2011 through 2015.
There was, however, one growing threat to Koch’s oil refining operations. Oil industry analysts started to worry about something that seemed incomprehensible in 2008 when oil was scarce. The fracking boom raised the prospect that the era of “peak oil” might be replaced by an era of “peak demand.” Even though it was cheap, demand might fall. Consumers, for the first time in memory, had an alternative choice in energy markets: fuels like wind power and solar energy.
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The Obama administration failed to pass a carbon regulation bill. But it had been far more successful in stoking the rise of alternative energy sources. The primary vehicle for this effort was the stimulus bill, which provided an unprecedented $90 billion in subsidies for renewable-energy sources. The bill also incentivized an additional $100 billion in private-sector funding. Just as the government nurtured fracking technology for many years, its renewable-energy subsidies helped make wind and solar power more affordable. And the subsidies were once again transforming the energy industry.
In 2007, renewable-energy sources provided only 6.5 percent of all the BTUs consumed in America, while fossil fuels provided 85 percent. By 2013, renewables provided 9.5 percent of the total energy, while fossil fuels provided 81.8 percent. (The biggest loser in the energy sector shift was coal, which was displaced by natural gas as a fuel for power plants.) This might seem like a small shift, but in commodities markets, even small changes can have broad ripple effects.
The Obama administration further compounded this effect by pushing for new fuel efficiency standards for vehicles, pressuring automakers to make a fleet that consumed less gasoline even as electric-powered cars became more affordable.
Even as Koch refined the Eagle Ford crude oil, signs of peak demand for gasoline were emerging across America. The energy industry consulting firm Turner, Mason & Co., which counted Koch Industries as a client, estimated that the rise of renewables would cause demand for finished petroleum products in the United States to fall by 0.1 percent on an average annual basis between 2016 and 2025. This low-growth environment posed a threat to Koch’s Eagle Ford play. If demand for gasoline weakened, prices would fall and profit margins would shrink, perhaps permanently.
Koch Industries employees saw this threat plainly. It was evident in Koch’s own backyard. Giant windmill farms were erected across the flat and windy state of Kansas, their development spurred along by state lawmakers. In Kansas, the political support for wind energy was bipartisan. Even the Republican governor, Sam Brownback, was enthusiastic about helping the wind industry expand in the state. Building wind farms and a new utility grid created jobs. The wind industry was a rare beacon of future growth in the state. Fracking hadn’t taken hold in Kansas, cattle feedlots were struggling, and farming could only support so many families.
Like twenty-nine states across the country, Kansas legislators passed a law requiring state utility companies to buy 10 percent of their power from renewable sources in 2011, increasing that level to 20 percent by 2020. As a result, wind farms were becoming more plentiful, and the cost of building them was steadily falling as the young wind industry improved its techniques. Renewable energy was on track to steadily displace fossil fuels in Charles Koch’s home state and elsewhere.
Charles Koch knew that such developments were not inevitable. If government policy was responsible for supporting renewable energy, then government policy could be changed.
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One of Charles Koch’s primary skills was identifying undervalued commodities. By 2013, it became evident that political power in the state of Kansas was an undervalued commodity.
The state was deeply Republican and still largely rural. This meant that most Kansas state officials—the occupants of the state house and the state senate—were elected during primary contests in their home districts. A state politician in Kansas might be elected by no more than a thousand voters during a primary race. Such elections drew a turnout level near zero and generated almost no media attention. It was common for a campaign to cost $10,000, on the upside.
Many Kansas state lawmakers were like Tom Moxley, a rancher from the tiny town of Council Grove, about a hundred miles northeast of Wichita. Moxley was in his midsixties when he ran for a seat in the statehouse in Kansas’s Sixty-Eighth District. He figured it was his time to do some public service after decades of running a small business.
Serving in the Kansas statehouse was a little more serious than joining the local volunteer fire department, but not by much. The 125 members of the Kansas House convened every January for a legislative session that usually ended in May. When they were in session, they met in the state capitol building in Topeka, a sleepy city about an hour west of Kansas City.
Moxley joined the legislature in 2007. Over the next few years, he learned how things worked. Then, starting around 2011, he watched Koch Industries transform everything. A central focus of Koch’s efforts was beating back the mandates to support renewable energy. Because Moxley sat on the House Energy and Environment Committee, he had the chance to see Koch’s strategy play out firsthand. In 2013, a string of experts descended on the capitol in Topeka to testify about renewable energy. Moxley called these scholars “heavy hitters”—the kind of high-profile people who rarely showed up for a statehouse hearing. The scholars came from think tanks like the Cato Institute in Washington, and they testified about the deeply damaging economic effects of wind power and government mandates.
Renewable-energy mandates were passed in Kansas in 2009 as a bipartisan compromise. The state was about to approve construction of a new coal-fired plant, and the mandates to buy renewable energy were included in the approval. The concerns were economic as much as environmental—Kansas generated the vast majority of its power from coal and was being hurt by high coal prices, even as neighboring states were getting cheaper energy from natural gas. Wind power was getting cheaper by the year, thanks to state mandates across the country and stimulus money from Washington. Kansas wanted an alternative to coal.
In 2013, a Kansas statehouse member from Wichita pushed a bill to remove the renewable-energy mandates. He was Republican Dennis Hedke, the chairman of Moxley’s Energy Committee. Hedke was a geophysicist who did consulting work for regional oil and gas companies, and his fixation on repealing the renewable-energy mandates seemed odd to Moxley, who supported the new coal plant in 2009 but also saw the benefits of wind and solar power. “Wind power has turned out to be less expensive than about any other source for Kansas,” Moxley said. “I think the renewable [energy mandates]—that part has been generally good for everybody.”
The Kansas statehouse held a number of hearings on global warming. The heavy hitters lined up to testify. Moxley broke these experts into two groups: the “true believers,” who thought man-made climate change was an impending environmental crisis, and the “naysayers,” who said that the science was in doubt and the problem of climate change was being promoted by hysterical liberals. The true believers were brought in by the wind industry lobbyists, who were just starting to get a foothold in Topeka. The naysayers were brought in by Koch-funded groups, including Americans for Prosperity, the Heartland Institute, the Beacon Hill Institute, the Kansas Policy Institute, and the Kansas Chamber of Commerce.
The hearings transfixed Moxley because he didn’t know if he was a naysayer or a true believer. He was a staunch Republican, and therefore inclined to distrust Al Gore and the EPA. But just like Bob Inglis, Moxley got a scientific schooling in carbon emissions, and it changed his thinking. He gradually came to believe that the naysayers did not have a serious case. “I’m open to good science, but those guys were just throwing dust in the air and not making a case,” Moxley recalled. He turned against them completely when it was proved that one of the climate skeptics had shown legis
lators a chart on the Earth’s climate that conveniently omitted the last hundred years, when temperatures began to escalate.
While the arguments over global warming were unconvincing to Moxley, Koch Industries was using other tools to help legislators come around to its point of view. Moxley started to hear stories from his colleagues about a changing political landscape.
During primary elections in rural districts, Koch Industries and its various political arms were dropping $50,000 into local primary races. This was a pittance by national political standards, but it amounted to a shock-and-awe campaign in towns like Larned, Kanapolis, and Great Bend. Koch Industries was expert at coordinating with other conservative groups, Moxley said, such as the National Rifle Association, the pro-life group Kansans for Life, the state Chamber of Commerce, and, of course, Americans for Prosperity.
Moxley observed a recurrent strategy. He said that Koch handpicked a candidate in a primary election, told that candidate to stay home, and then scorched the earth beneath their opponent with negative messages in the form of postcard mailings, advertisements, and door-knocking campaigns. Such efforts intensified in 2012 and wiped out incumbents who seemed resistant to Charles Koch’s political vision.
“The bottom line is, they flipped the [Kansas] senate from pretty traditional Republican kind of thinking to ‘Koch’ kind of thinking. And it’s pretty dramatic. We’re still living with it,” Moxley said. He grew disdainful of a new breed of state legislators who showed up in Topeka and seemed more concerned with toeing a line set out by Koch Industries than they did with thinking for themselves.
“They’re like numbskulls. All they’re going to do is take orders from the Chamber and Koch and so on,” Moxley said. “They’re not thoughtful. They’re not people that read the newspaper or have a history background. They just do what Koch wants done.”
Koch’s efforts in Kansas were part of a multistate campaign to push back renewable-energy subsidies. Koch’s primary targets were so-called renewable energy standards that required states to buy wind and solar power. Koch characterized these mandates as a form of crony capitalism. The Heartland Institute, which Koch funded, helped write a bill to repeal such standards. The bill was then taken up by ALEC, the Koch-funded conference of state legislators, and then introduced in more than a dozen states between 2013 and 2014.
ALEC’s efforts bore fruit. Ohio repealed its renewable standard, as did West Virginia. In Kansas, the fight lasted for years. Moxley repeatedly voted against the bill to repeal the renewable-energy mandates, as did a handful of other Republicans and many Democrats. But the financial power behind the bill was too strong to resist. In 2015, a version of the bill finally passed, removing the mandates and making the renewable-energy standards voluntary. This was only a partial victory for Koch. Wind power continued to gain ground in Kansas in part because it was so cheap. The utility companies were already meeting their renewable standards whether they were mandatory or not. Still, Koch had managed to achieve an effect in Kansas and other states that was similar to what it had done in Washington. It politicized the issue of renewable energy. It had stained the efforts to stoke competition in the energy industry as a form of government corruption, and it drew a red line that Republican politicians could not cross.
Moxley ended up leaving the Kansas legislature in 2016, when he decided not to seek reelection. “I kind of aged out,” he said. But his time in the conservative Kansas statehouse changed his thinking about human-induced climate change. He was more worried about it than before. He went back to his ranch in Council Grove, installed a large set of solar panels, and now only pays for electricity off the grid for about five months in the winter. About a year after he left politics, Moxley began to recover from the experience.
“I was just walking across the yard, and broke out in a whistle,” he said.
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By 2014, a sense of mastery infused the corporate culture at Koch Industries. The company was thriving, even during an era of almost unprecedented volatility in the global energy business and weak economic growth in the United States. A geyser of cash flowed from Koch’s oil refineries, thanks to the Eagle Ford Shale play and the continued profitability at Pine Bend. Profits were soaring in Koch’s massive network of nitrogen fertilizer plants, thanks to the collapse of natural gas prices. Business was strong and profits were rising at Georgia-Pacific, thanks to a recovery in the housing market. The company’s success seemed like the proof of concept for Market-Based Management. Koch Industries seemed to have its hand in everything—paper towels, gasoline, clothing, corn, derivatives trading—and somehow it succeeded even as different markets rose and fell.
Charles Koch and his team had also proven that they could master the art of politics. The Obama revolution was crippled. The days of a permanent liberal majority and a new New Deal were in the past. It was true that Obama had been reelected in 2012, but his governing power was hemmed in by a Congress that slid further into Republican control with each election. Koch’s chosen congressional candidates gained more seats in the midterms of 2014. Across the states, Koch’s political network was more powerful than ever. The greatest legislative threat to Koch’s business—greenhouse gas regulation—was relegated to the fringes of American political life. Charles Koch had faced a political movement that he considered to be dangerous to America’s future, and he had largely prevailed.
As always, Charles Koch had his eye on the far future. The vast majority of profits that flowed from Koch’s operations were recycled right back into the company. Koch Industries initiated an acquisition spree that was only paralleled by the wild growth strategies of the 1990s. During 2013 and 2014, Koch Industries spent billions of dollars to amass new assets and enter new lines of business. It acquired companies in an impossibly diverse array of industries: from steel, to glass, to greeting cards.
In late 2012, Koch bought a stake in the privately held glassmaker Guardian Industries, making Koch the largest shareholder. Koch placed an executive on Guardian’s board and monitored the company’s performance, eventually purchasing the rest of Guardian’s shares. In 2013, Koch paid $7.2 billion to buy the technology company Molex, which made electronic sensors and chips. This acquisition gave Koch its first major presence in the technology sector and it also played to Koch’s strength as a commodity company; Molex made its products by using huge quantities of rare earth materials and metals.
Also in 2013, Koch invested $1 billion to help build a high-tech steel mill in Arkansas, anticipating that the specialty steel it produced would be in high demand as America’s economy improved and replaced its aging electricity grid. Somewhat strangely, in April of 2013, Koch financed a deal to buy the greeting card company American Greetings and take it private in a deal worth $878 million. Outsiders wondered if that wasn’t some sort of add-on to Koch’s paper business, but it seems that Charles Koch just thought the card company was a good buy. In August, Koch paid $1.45 billion to purchase Buckeye Technologies, a company that made specialty fabrics and materials out of wood and cotton, which was then tucked into the Georgia-Pacific division.
The sense of mastery within Koch Industries only intensified in 2014 when Charles Koch and his team expanded and renovated company headquarters. The corporate campus had not grown significantly since the Tower was built in the 1990s, and now Koch needed more room to accommodate its growing workforce. The only hindrance to this expansion was Thirty-Seventh Street, the busy two-lane road that ran through the north side of the headquarters campus. Many employees had to park on the north side of Thirty-Seventh Street and use an underground pedestrian tunnel to get safely into the Tower. To alleviate this problem, Koch Industries paid to have Thirty-Seventh Street torn out and rerouted in a large semicircle that arced around the headquarters. The newly laid Thirty-Seventh Street created a giant horseshoe shape. Inside the horseshoe, Koch built a new office building with 210,000 square feet of space and enough room for 745 employees.
The most noticeable renovation, howeve
r, was the wall.
Koch Industries erected an earthen wall that encircled the north end of the complex, running in a curve along the newly rerouted Thirty-Seventh Street. The wall was tall and sloped, with trees planted along its length. Before the wall was erected, visitors could turn from Thirty-Seventh and steer directly into Koch’s visitors’ lot. Uninvited guests could walk directly from the lot into the Tower’s lobby. Now the only means of entrance were a series of checkpoints. Two of the checkpoints were located on the north side, where metal gates had been installed into the side of the wall. To gain access, a visitor had to first receive an e-mail from the address DoNotReply-SAFE@kochind.com that included a bar code in the message. A security guard inside a squat building next to the gate scanned the bar code with a red light. If accepted, a yellow guardrail rose up and allowed the visitor to pass inside.
The wall around Koch Industries reflected the cost that came with Charles Koch’s political victories. For decades, Charles Koch had fiercely guarded his privacy. In just a few short years, he had become a public figure and a walking political cartoon. The “Koch brothers,” meaning Charles and David, had become fodder for countless political ads and exposés. Their image became a shorthand illustration for the influence of big money on politics. Charles Koch began receiving death threats in steady volume. The earthen wall helped keep such threats at bay. Now packages delivered to Koch Industries were received first in a bomb-proof room at the Tower where packages ran through X-ray machines to scan for bombs. When Charles parked in a special lot with indoor access to the building, Koch Industries became more fortresslike and more culturally insular, even as it extended its reach further each day into industries that underpinned modern life.