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.
Paulson had used some of these machines back in Texas, when he worked for the Coastal refinery. He had been experimenting then with the idea of using the computers to produce marketing models and forecasts to help operate the plant. But those models had only been done on a month-by-month basis. Paulson wanted the models to be much larger. He wanted to feed information in and come up with models for each quarter of the year: data sets that would let Paulson know exactly what fuels he should be producing and exactly where he should be selling them.
Varner, an oil-field man more familiar with the world of roughnecks and drilling rigs than with NASA scientists, wasn’t impressed with Paulson’s plan. “Sterling says, ‘Oh, we don’t need that,’ ” Paulson recalled. “I didn’t listen. I kept doing it.”
Charles Koch quickly grasped the potential that computers held. The company installed several IBM computers in Wichita. Paulson perfected his models and before long he was using them to manage operations at Pine Bend at a granular level of detail. As the computer models improved operations, Charles Koch invested more money in the plant, expanding its capacity, and Koch’s share of the market increased steadily.
The management of Pine Bend was smart, even innovative beyond its time, but the biggest source of profits at the refinery did not have to do with computer models or marketing teams. Pine Bend became a gold mine mostly because of geography, and because of a bottleneck in oil markets. Because of its location in northern Minnesota, virtually all of the oil processed at Pine Bend was imported from Canada. Canadian oil was very different from most of the oil refined in the United States. Canadian crude was “sour,” meaning it contained very high amounts of sulfur. Sulfur is a contaminant that has to be processed out of the oil to make gasoline—a process that is both difficult and expensive. The sulfur is stripped out in a giant tower called a coker, and the process leaves behind a thick residue that cakes up on the walls and must be scraped out. The residue is used to make asphalt and other products.
Oil that was drilled in Texas or Saudi Arabia, by contrast, was known as “sweet” crude because it had very low sulfur content. This made it a lot cheaper and easier to process—you didn’t need coker towers to take the sulfur out. So many of America’s oil refineries sprang up around the Gulf Coast because that’s where sweet crude was imported and processed.
Very few firms wanted to install the kind of expensive equipment that ran at Pine Bend, but Great Northern had done so. When Paulson took over, Pine Bend was one of very fewer buyers in the upper Midwest that offered to buy Canadian crude. Because there were so few buyers, the Canadian crude piled up—there was an excess of supply. This meant that prices dropped. Koch could buy the sour oil at a price that was significantly lower than oil prices elsewhere in the United States.
But the cheap Canadian crude was only half of the equation. When Koch turned around to sell the gasoline it made at Pine Bend, it sold that gasoline into a midwestern region where there were very few other refineries, causing supplies to be relatively tight and prices high. This made the economics of Pine Bend almost too good to be true. The refinery bought cheap oil that few people wanted, refined it, and then sold the gasoline into scarce markets where demand and prices were high.
Paulson surveyed the market and saw one large competitor. There was a pipeline company called Williams Brothers, which shipped about a hundred thousand barrels of gasoline into the Minnesota area each day. Paulson knew that it cost about 6 cents per gallon to ship the gas from the Gulf Coast, where most American refineries were located. This meant that Koch had a 6-cent advantage over Williams Brothers that it could exploit. “I said, ‘We can expand. And we can dry up Williams Brothers,’ ” Paulson recalled.
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