I have therefore had the enclosed brief study prepared to show the extent to
which the Soviets have progressed in their efforts to disrupt and capture an
increasing share of the international petroleum market. It appears that the
progress made by the Soviets in this field is sufficient to justify my
initial concern. I suggest that we are faced with a problem of sufficient
magnitude to warrant a thorough study by the interested agencies of our
government working in conjunction with leaders in the petroleum industry to
see if we cannot find a means of combatting this form of economic
warfare.
I am addressing similar letters and sending copies of the study to the
Secretaries of State, Defense, Commerce and Treasury; the Joint Chiefs;
Allen Dulles and Jack Irwin.
Enclosure1
GROWING CRISIS IN THE DISTRIBUTION AND MARKETING OF
PETROLEUM BY WESTERN NATIONS
The past year has seen the first clear cut signs of a deterioration of
Western control of world oil supplies. As a result of the Cold War,
growing nationalism, the discovery of new oil fields and mounting Soviet
competition—competition which cost considerations and Arab politics make
very difficult to meet—Western oil companies are faced with increasing
problems in maintaining the flow of their products around the world.
During the last two years the USSR has
more than doubled its oil exports, increasing them from 207,000 barrels
per day in 1958 to about 450,000 barrels per day in 1960. Current trends
in Soviet production and consumption indicate that this figure will
again be doubled by 1965 when exports to non-Communist countries may
reach 1 million barrels per day—if markets can be found. On this basis
it is probable that Soviet Bloc oil will comprise about 5% of the oil
moving in international commerce. This will be done on the solid
foundation of an approximate doubling of Soviet production between 1960
and 1965, rising from its present level of about 2.7 million barrels per
day to between 5 and 5.5 million barrels per day in 1965. As significant
as these figures are, however, they cloud the most dangerous aspect of
the picture—the concentration of these exports in a few countries.
[Page 656]
Iceland, one of our NATO Allies, imports
all of its POL requirements from the
USSR. Finland imports two-thirds of
its requirements from the Soviet Union; West Germany, 13 percent; Italy,
20 percent. Japan is moving toward increasing its reliance on Bloc oil
and trend in this direction may be developing in Brazil. India has
recently signed agreements which will make it a large consumer of Bloc
petroleum products. Last but not least is Cuba’s complete dependence on
Soviet sources of supply.
Virtually all of these inroads have been made by the use of inducements
and agreements which Western oil companies cannot match. Barter is the
most important of these. Soviet state trading monopolies and government
planning make it possible for Moscow to agree to accept fish from
Iceland in exchange for oil, thus guaranteeing that country a market for
its fish and a stable price for the purchase of its oil requirements. No
hard currency is required and many of the uncertainties of world markets
and prices are eliminated. The UAR and
Cuba have made the same type of arrangements with cotton and sugar
respectively as their means of payment. Italy, West Germany, and France
obtain markets for some of their machinery and steel exports. A new
element has been added in India where the USSR has agreed to accept non-convertible Indian currency
in payment. All of these agreements are calculated on a price basis
lower than that offered by Western companies. The recent $200 million
Italian contract with Moscow provides for the exchange of 240,000 tons
of 40 inch steel pipe and 50,000 tons of synthetic rubber for
approximately 84 million barrels of Soviet crude oil—indicating a price
of about $1.00 per barrel which is below the actual cost of production
of Middle East operators. Cost considerations are clearly a secondary
factor to political motivations when the USSR is trying to penetrate Western oil markets.
The problem, from the point of view of US national security interests, is
not simply that the Western companies lose markets or that the US balance of payments suffers. The impact
of Soviet activity in the next five years will still not be severe
enough to provide an insurmountable threat to the operations of these
companies, particularly in the areas of producing and refining. However,
Soviet activity will present at least two grave problems. One stems from
the leverage which the Soviets can exert to influence the price of oil
in international markets by their “dumping” or price-cutting operations.
Their offerings of up to 450,000 barrels per day of oil at ridiculously
low prices can seriously depress the world price of 20,000,000 barrels
per day of free world oil. A second problem is created by the picture of
the leading Communist state bettering Western private enterprise in
competitive markets. Nations which find their energy supplies closely
tied to Soviet oilfields are almost certain to turn a more attentive ear
[Page 657] toward Communist overtures
lest their vital oil supply line be tampered with by the Kremlin. At the
same time, the “unfair” practices used by the USSR to gain its foothold in Western markets will be
quickly forgotten while the fact that Western private enterprise has
suffered a setback at the hands of Soviet communism will stand in the
eyes of much of the world as an example of the Soviet system winning out
over the American system. Halting the development of such situations is
clearly a matter of great importance to US national security.
In addition to the “unfair” competition which Western oil interests face
from Moscow, there is growing momentum among various Arab leaders to
implement plans which will give them a more active role in the marketing
operations of the oil companies. With the aim of guaranteeing their
countries a stable level of high income, proposals of nationalist
leaders of Arab countries would, in effect, reduce the competitiveness
of Western oil even further compared with Soviet products and take away
much of the initiative in marketing now exercised by the companies by
putting it into the hands of the government of the producing country. We
are, therefore, likely to see a situation developing which will act as a
restraint on the normal private-competitive structure of American and
European petroleum enterprises at precisely the time when these concerns
are about to face their greatest challenge from the Communist
system.
The problem, although not unique in the oil industry is, however, here
most acute. We may expect to see similar challenges made to the security
of the Western alliances and the free world in other economic fields.
Our experience gained in meeting the broad economic threat of
Sino-Soviet aid to underdeveloped countries in the form of investment
credits, may be helpful. The danger has been clearly seen here. In this
case, it was apparent that private business could not operate on its own
against the odds of the entire Soviet political and economic system. The
attack on this Soviet offensive has already been shaped and,
essentially, involves direct government assistance in overseas
development projects combined with government encouragement of
increasing private economic activity. At present, efforts are underway
to make this a more concerted offensive by all the developed countries
of the West. Greater concern and more positive action by the United
States will be required to meet the growing threat in the petroleum
field.
