ROLLING STONE MAGAZINE:
Inside the Koch Brothers' Toxic Empire:
Illustration by Victor Juhasz
Together, Charles and David Koch control one of the world's
largest fortunes, which they are using to buy up our political
system. But what they don't want you to know is how they made
all that money
The enormity of the Koch fortune is no mystery. Brothers Charles
and David are each worth more than $40 billion. The electoral
influence of the Koch brothers is similarly well-chronicled.
The Kochs are our homegrown oligarchs; they've
cornered the market on Republican politics and
are nakedly attempting to buy Congress and the
White House. Their political network helped
finance the Tea Party and powers today's GOP. Koch-affiliated
organizations raised some $400 million during the 2012 election,
and aim to spend another $290 million to elect Republicans in
this year's midterms. So far in this cycle, Koch-backed entities
have bought 44,000 political ads to boost Republican efforts to
take back the Senate.
What is less clear is where
all that money comes from.
Koch Industries is headquartered
in a squat, smoked-glass building
that rises above the prairie on the outskirts of Wichita, Kansas.
The building, like the brothers' fiercely private firm, is literally
and figuratively a black box. Koch touts only one top-line financial
figure: $115 billion in annual revenue, as estimated by Forbes.
By that metric, it is larger than IBM, Honda or Hewlett-Packard
and is America's second-largest private company after agribusiness
colossus Cargill. The company's stock response to inquiries from
reporters: "We are privately held and don't disclose this information."
But Koch Industries is not entirely opaque. The company's troubled
legal history – including a trail of congressional investigations,
Department of Justice consent decrees, civil lawsuits and felony
convictions – augmented by internal company documents,
leaked State Department cables, Freedom of Information
disclosures and company whistle-blowers, combine to cast an
unwelcome spotlight on the toxic empire whose profits finance
the modern GOP.
Under the nearly five-decade reign of CEO Charles Koch, the
company has paid out record civil and criminal environmental
penalties. And in 1999, a jury handed down to Koch's pipeline
company what was then the largest wrongful-death judgment of its
type in U.S. history, resulting from the explosion of a defective pipeline
that incinerated a pair of Texas teenagers.
The volume of Koch Industries' toxic output is staggering. According
to the University of Massachusetts Amherst's Political Economy
Research Institute, only three companies rank among the top 30
polluters of America's air, water and climate: ExxonMobil,
American Electric Power and Koch Industries. Thanks in part
to its 2005 purchase of paper-mill giant Georgia-Pacific,
Koch Industries dumps more pollutants into the nation's
waterways than General Electric and International Paper
combined. The company ranks 13th in the nation for toxic
Koch's climate pollution, meanwhile, outpaces oil giants including
Valero, Chevron and Shell. Across its businesses, Koch generates
24 million metric tons of greenhouse gases a year.
For Koch, this license to
pollute amounts to a perverse,
hidden subsidy. The cost is
borne by communities in
cities like Port Arthur, Texas, where a Koch-owned facility
produces as much as 2 billion pounds of petrochemicals every year. In March, Koch signed a consent decree with the Department of Justice requiring it to spend more than $40 million to bring this plant into compliance with the Clean Air Act.
The toxic history of Koch Industries is not limited to physical pollution.
It also extends to the company's business practices, which have
been the target of numerous federal investigations, resulting in
several indictments and convictions, as well as a whole host of
fines and penalties.
And in one of the great ironies of the Obama years, the president's
financial-regulatory reform seems to benefit Koch Industries.
The company is expanding its high-flying trading empire
precisely as Wall Street banks – facing tough new restrictions,
which Koch has largely escaped – are backing away from
It is often said that the Koch brothers are in the oil business.
That's true as far as it goes – but Koch Industries is not a
major oil producer. Instead, the company has woven itself
into every nook of the vast industrial web that transforms
raw fossil fuels into usable goods. Koch-owned businesses trade,
transport, refine and process fossil fuels, moving them across
the world and up the value chain until they become things
we forgot began with hydrocarbons: fertilizers, Lycra, the
innards of our smartphones.
The company controls at least four oil refineries, six ethanol
plants, a natural-gas-fired power plant and 4,000 miles of pipeline.
Until recently, Koch refined roughly five percent of the oil
burned in America (that percentage is down after it shuttered
its 85,000-barrel-per-day refinery in North Pole, Alaska, owing,
in part, to the discovery that a toxic solvent had leaked from the
facility, fouling the town's groundwater). From the fossil fuels it
refines, Koch also produces billions of pounds of petrochemicals,
which, in turn, become the feedstock for other Koch businesses.
In a journey across Koch Industries, what enters as a barrel of
West Texas Intermediate can exit as a Stainmaster carpet.
Koch's hunger for growth is insatiable: Since 1960, the company
brags, the value of Koch Industries has grown 4,200-fold, outpacing
the Standard & Poor's index by nearly 30 times. On average, Koch
projects to double its revenue every six years. Koch is now a key
player in the fracking boom that's vaulting the United States past
Saudi Arabia as the world's top oil producer, even as it's
endangering America's groundwater. In 2012, a Koch subsidiary
opened a pipeline capable of carrying 250,000 barrels a day of
fracked crude from South Texas to Corpus Christi, where the
company owns a refinery complex, and it has announced plans
to further expand its Texas pipeline operations. In a recent
acquisition, Koch bought Frac-Chem, a top provider of hydraulic
fracturing chemicals to drillers. Thanks to the Bush
administration's anti-regulatory agenda – which Koch Industries
helped craft – Frac-Chem's chemical cocktails, injected deep under
the nation's aquifers, are almost entirely exempt from the Safe
Drinking Water Act.
Koch is also long on the richest –
but also the dirtiest and most
carbon-polluting – oil deposits
in North America: the tar sands
of Alberta. The company's Pine
Bend refinery, near St. Paul,
Minnesota, processes nearly a
quarter of the Canadian bitumen
exported to the United States –
which, in turn, has created for Koch Industries a lucrative sideline in
petcoke exports. Denser, dirtier and cheaper than coal, petcoke is the
dregs of tar-sands refining. U.S. coal plants are largely forbidden
from burning petcoke, but it can be profitably shipped to countries
with lax pollution laws like Mexico and China. One of the firm's
subsidiaries, Koch Carbon, is expanding its Chicago terminal
operations to receive up to 11 million tons of petcoke for global export.
In June, the EPA noted the facility had violated the Clean Air Act
with petcoke particulates that endanger the health of South Side
residents. "We dispute that the two elevated readings" behind the
EPA notice of violation "are violations of anything," Koch's top
lawyer, Mark Holden, told Rolling Stone, insisting that Koch
Carbon is a good neighbor.
Over the past dozen years, the company has quietly acquired
leases for 1.1 million acres of Alberta oil fields, an area larger
than Rhode Island. By some estimates, Koch's direct holdings
nearly double ExxonMobil's and nearly triple Shell's. In May,
Koch Oil Sands Operating LLC of Calgary, Alberta, sought
permits to embark on a multi-billiondollar tar-sands-extraction
operation. This one site is projected to produce 22 million barrels
a year – more than a full day's supply of U.S. oil.
Charles Koch, the 78-year-old CEO and chairman of
board of Koch Industries, is inarguably a
He presents himself as a man of moral clarity and
high integrity. "The role of business is to produce
products and services in a way that makes people's
lives better," he said recently. "It cannot do so if it is
injuring people and harming
the environment in the process."
The Koch family's lucrative blend of pollution, speculation,
law-bending and self-righteousness stretches back to the early
20th century, when Charles' father first entered the oil business.
Fred C. Koch was born in 1900 in Quanah, Texas – a sunbaked
patch of prairie across the Red River from Oklahoma. Fred was
the second son of Hotze "Harry" Koch, a Dutch immigrant who –
as recalled in Koch literature – ran "a modest newspaper business"
amid the dusty poverty of Quanah. In the family legend, Fred Koch
emerged from the nothing of the Texas range to found an empire.
But like many stories the company likes to tell about itself, this
piece of Kochlore takes liberties with the truth. Fred was not a
simple country boy, and his father was not just a small-town
publisher. Harry Koch was also a local railroad baron who used
his newspaper to promote the Quanah, Acme & Pacific railways.
A director and founding shareholder of the company, Harry sought
to build a rail line across Texas to El Paso. He hoped to turn
Quanah into "the most important railroad center in northwest
Texas and a metropolitan city of first rank." He may not have
fulfilled those ambitions, but Harry did build up what one friend
called "a handsome pile of dinero."
Harry was not just the financial springboard for the Koch dynasty,
he was also its wellspring of far-right politics. Harry editorialized
against fiat money, demanded hangings for "habitual criminals"
and blasted Social Security as inviting sloth. At the depths of the
Depression, he demanded that elected officials in Washington
should stop trying to fix the economy: "Business," he wrote,
"has always found a way to overcome various recessions."
In the company's telling, young Fred was an innovator whose
inventions helped revolutionize the oil industry. But there is much
more to this story. In its early days, refining oil was a dirty and
wasteful practice. But around 1920, Universal Oil Products introduced
a clean and hugely profitable way to "crack" heavy crude, breaking it
down under heat and heavy pressure to boost gasoline yields. In 1925,
Fred, who earned a degree in chemical engineering from MIT,
partnered with a former Universal engineer named Lewis Winkler
and designed a near carbon copy of the Universal cracking apparatus
– making only tiny, unpatentable tweaks. Relying on family
connections, Fred soon landed his first client – an Oklahoma
refinery owned by his maternal uncle L.B. Simmons. In a flash,
Winkler-Koch Engineering Co. had contracts to install its
knockoff cracking equipment all over the heartland, undercutting
Universal by charging a one-time fee rather than ongoing royalties.
It was a boom business. That is, until Universal sued in 1929,
accusing WinklerKoch of stealing its intellectual property. With
his domestic business tied up in court, Fred started looking for
partners abroad and was soon doing business in the Soviet Union,
where leader Joseph Stalin had just launched his first Five Year Plan.
Stalin sought to fund his country's industrialization by selling oil
into the lucrative European export market. But the Soviet Union's
reserves were notoriously hard to refine. The USSR needed
cracking technology, and the Oil Directorate of the Supreme
Council of the National Economy took a shining to Winkler-Koch –
primarily because Koch's oil-industry competitors were reluctant
to do business with totalitarian Communists.
From The Archives Issue 1219: October 9, 2014
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