Papers Relating to the Foreign Relations of the United States, Transmitted to Congress, With the Annual Message of the President, December 6, 1886
No. 446.
Mr. Cox to
Mr. Bayard.
Constantinople, April 5, 1886. (Received April 19.)
Sir: The magnitude of our interests invested in the petroleum trade generally, and especially in the Turkish Empire, led me to request of Mr. Libby a statement of his observations in the Caspian region.
Mr. Libby is the agent of certain oil companies or corporations in the United States.
He went to Baku this winter, and under the keen light of American enterprise he took a view of the situation.
In respect to the present and future competition of the Russian with the American trade, his narrative and deductions are of importance. I inclose his statement.
I have had many requests for information from our countrymen on this topic. I would suggest that you give his statements publicity.
* * * * * * *
When in Egypt I was informed by the prime minister, Nubar Pacha, that his son, who is an engineer, was then on a visit to the scene of the recent discoveries of petroleum on the Bed Sea coast.
The father of our consul at Alexandria, Sir Constantine Zerduvachi, also informed me that he was about to invest in the business, if it had a favorable prospect.
He is a rich and prudent man, and I asked him to have his son, the consul, write Consul-General Cardwell or to myself any mature or authentic information and views of the Egyptian “find.”
Some doubts are expressed as to the value of the Egyptian discoveries.
The first results are said to have been meager, further borings being required to confirm the speculations of the sanguine.
An article which I inclose appears in the Constantinople journal the Advertiser of April 2, on this topic.
It is suggestive of two things, (1) that oil exists in considerable abundance all over the neighborhood where a colony is already forming, and (2) that it is accessible to that part of the coast where there is good anchorage.
I have made no copy of Mr. Libby’s letter, as our copying facilities in the legation are not abundant.
I have, &c.,
Mr. Libby to Mr. Cox.
Dear Sir: To the extent consistent with the corporate and private interests I am representing, I respond with pleasure to your suggestion of submitting a few facts and impressions incident to my recent visit to Southern Russia and my present visit to Constantinople, more especially in reference to the petroleum industry.
The prehistoric sacred fires of Baku, which for many and many a century have sum moned the faithful from afar, appear at last to be losing their vitatity, and to-day are appealing to practical utilization in the locality and are no longer more than an occasional magnet to attract the pagan worshiper.
[Page 866]The petroleum fountains which some time ago awakened so much interest and wonder, the Balakhani oil field, so small yet so prolific, the cluster of adjacent refineries, constituting the black town of Baku, the tank steamers propelled by liquid fuel, the system of petroleum distribution in Russia, the illuminations of the oil on the surface of the untroubled waters of the Caspian, have all been described so often and so accurately by far more fluent pens than mine that I may well confine myself to a few features of the present situation directly pertinent to competitive commerce.
The future of the Russian petroleum industry is principally contingent upon a continued large and economic production of the Balakhani territory; increased transportation facilities, the extent of Government subsidy or support, and, finally, upon the hope of diminished production and higher prices in America. Among the elements of its weakness is the very natural probability that when this circumscribed territory shall in due time diminish in productiveness or maintain its productive power at a greatly added cost, that no new territory of corresponding value as to economic development and convenient location may be substituted.
To a far greater extent than in America does successful permanency depend upon an extremely low cost for the crude article. With a yield of only about 30 per cent, of refined petroleum as compared with a yield of 70 and 75 per cent, from the American crude, there is remaining an enormous residual product, very little of which even now can be profitably marketed, and very much of which cannot be marketed at all. Therefore, it becomes evident that each increase of cost in the Russian crude above its almost nominal valuation of to-day would be attended with a far greater added cost for the refined product than would result in America from a corresponding advance in the cost of the crude product there. While indications are not lacking that the cost of production in the Balakhani territory is surely and steadily, even if very gradually, increasing, it appears none the less evident that for a long time to come this territory must hang like an unwelcome cloud over the hopes and dreams of the American producer, longing for the prices and the profits of the good old days. The majority of the refiners of Baku appear to be acting upon the theory that they have a sort of “demand call” on this territory for unlimited future supplies, and comparatively little surplus has therefore been accumulated above the ground. The American industry, on the other hand, with the new developments constantly under way, with an enormous daily production and with a reserve stock of about 35,000,000 of barrels, may reasonably hope that the future will not place them under less advantageous conditions of competition than of late.
The Russian refining interest at Baku has found itself embarrassed by inadequate railway transportation to the Black Sea, traceable not alone to insufficiency of tank wagons but to restricted possibility of transport over the Suramme Pass, about 3,100 feet above the level of the sea.
The Russian Government has long had under consideration methods of relief halting between a decision in favor of a pipe line connecting Baku with Batoum, a distance of more than 650 miles, or of constructing a tunnel under the Suramme Pass. In declining up to the present time to give practical aid to what would at first be regarded as the simple solution of the two, the Russian Government has been doubtless influenced by the following considerations: That, being the guarantor of the railway shares and debentures, it would be unwise to promote any parallel enterprise which would materially increase the annual deficit of the railway by taking from it its principal source of revenue; again, the efficacy of a trunk pipe line would be far more in doubt, its mission far more uncertain, than in America.
The Russian government was doubtless aware that to convey both the crude and refined product through the same pipe line would be impracticable. The objections to thus transporting the crude (as done in America) would be that all economic considerations would be shattered by paying expensive pipage on a product of which about 70 per cent, may be classed as residual, and aside from the probable and continual clogging of the pipes, which the character of this crude product appears to suggest, the further obstacle is presented of necessitating the transfer of the refineries from Baku to Batoum or the construction of entirely new ones at the latter place, naturally entailing enormous expenditures. On the other hand if conveying the refined product is contemplated, the question of discoloration becomes most important, and aside from this it is evident that it would place the product of all the Baku refineries on the same footing.
There could be no discrimination as to brand or comparative excellence or deficiency of refining, and even if some quality stipulation were nominally exacted it would be almost impossible of enforcement, and the product of the larger and more reliable refineries would mingle at random with the product of the many smaller Tartar, Persian, and Armenian refiners with their primitive machinery and dubious business methods, creating a medley of products unlikely to inspire confidence in the critical markets of the world. The conveyance of distillate (the article freed by distillation from the residual product but not yet finished) is subject to almost the same objections, with the additional obstacle of compelling the refiners to have a portion of [Page 867] their factory at each terminal of the pipe line, say 650 miles or more apart. While the doubtful utility of this pipe line might therefore cause either a Government or private capitalist to hesitate before incurring the great cost of its construction, it is further evident that in a country where military considerations dwarf all others, and in a portion of that country growing daily in strategical and political importance, the Government would naturally reflect, that, while a tunnel might facilitate the meeting of some great military crisis, army maneuvering in a pipe line would be slightly complicated.
The advocates of the tunnel further argue that the pipe-line would be built only in the hope of benefiting a single industry, while (military considerations aside) the tunnel would promote general commerce and conduce to the convenience of the public. The Government have had this question long under advisement and a decision in ay be anticipated at an early day. It is a subject of great interest to the petroleum industry of Russia.
If imitation he indeed the sincerest form of flattery, our acknowledgments must be extended to our Russian friends. Not content with copying to the extent possible every detail of American package and packing, they have paid to the high reputation of one of the prominent American brands (Pratt’s Radiant) a most embarrassing compliment; as I do not wish to use the word “counterfeiting,” some more conservative synonym must he imagined.
From fair competition the American packer certainly does not shrink, but he certainly does object to see his signature at large when he has given no power of attorney.
In the efforts about to be made to cause a discontinuance of these imitations, which have damaged so unfairly some of the, American brands, it is greatly to be hoped that the decree of the proper tribunals may be of a character to vindicate the efficacy of trade-mark treaties, and I am sure the better element of the Russian industry should co-operate with us in these legitimate efforts. You are aware that we have not with Turkey as with, Russia a trade-mark treaty, and the “regulations” covering this subject and claimed by the Ottoman Government to be equivalent in value to a treaty, present, I fear, a very dubious incentive to efforts for redress. If, however, we are successful in procuring a discontinuance of the imitations in the principal locality of their manufacture, a valuable precedent will be established which may promote and simplify our efforts for protection elsewhere.
Referring to the storage petroleum monopoly at Constantinople, which from time to time has been the subject of official communication and protests from the representatives of the United States to the Turkish Government, it appears that no important concession has yet transpired, and the charges upon a case of petroleum stored for six months in Constantinople continue about six times as great as for an equal period in some of the neighboring ports. I am aware that the gentlemen controlling this monopoly have the right to exact these charges so exorbitant, but their firman is optional, not compulsory, and I have personally no doubt they would find that policy ultimately the more profitable to themselves which should invite and not repel large deliveries to their custody. The importer to-day has no alternative but to employ his ingenuity in avoiding the delivery of one unnecessary package to the monopoly stores.
A more conciliatory policy would in my judgement result quite as much to the pecuniary advantage of those enjoying this exclusive firman as to the convenience and economy of the importers. But in addition to extravagant storage and inadequate avenues for guarding our brands from imitation, I note the intention of the Ottoman Government to materially increase the import duty on petroleum. I am aware that the theory is advanced that doubling the duty will not diminish the consumption, and that as the added tax falls indirectly but surely on Turkish subjects American interests cannot suffer. It is an almost invariable law of trade that consumption decreases as cost increases, and the experience of the American petroleum industry, gathered from every country of the world, certainly confirms such a statement as applicable to petroleum. In increasing this duty Turkey is guarding or promoting no home industry, and the balance of her trade with the United States is already heavily against the latter.
The firman which permits storage changes so exceptionally excessive I regard in conflict with the spirit if not the letter of our existing treaty, as causing in substance an additional duty. Whatever the motive, this has been the result. Petroleum is the first article of importance of United States exports to Turkey in Europe and in Asia. It is already taxed beyond the average import duties exacted by other countries, and far above the average exacted in other Oriental countries where consumption is so dependent upon cheapness.
Its progress in Turkey is already harassed enough by the storage exactions and brand imitations before referred to, and should not, in my judgment, be singled out for a greatly increased import duty. I venture, therefore, on behalf of the American petroleum industry, to anticipate that no material increase will transpire without encountering your remonstrance.
Reverting again to the broad question of American and Russian competition, I have noted the opinions of some of my predecessors to Baku that the economic domestic [Page 868] practices of the Tartar, Persian, and Armenian refiners would make them formidable competitors to the more extravagant American refiners. I cannot accept this view of the case. They have other characteristics that far more than neutralize any advantages that mere personal economies can create. Devour each other in a retail sort of way they may, but if the Russian petroleum industry is to be permanently formidable and aggressive it will, in my judgement, be traceable to the brains, genius, and perseverance of a comparatively small number of men who can command the support of the Russian Government and the confidence of the banking centers of Europe.
In the comparatively few markets of the world where Russian petroleum has as yet made important headway it is generally conceded to be inferior and far more unreliable in quality and packing than the American product, and its introduction has been largely traceable to concessions in price or deceptions practiced upon the unwary consumer. Russian progress, however, is naturally facilitated by the fact that there is scarcely a market on earth where it is necessary to explain the nature and utility of refined petroleum. That work has been done by others. And so far as the varied machinery attending production, refining, and packing is concerned the petroleum industry of Russia has little to invent; it has merely to copy, but this has not been found an over-easy task. Years of pioneer toil, enterprise, and ingenuity on the part of the American industry have culminated in perfected methods, extensive manufactories, sound business organization, and an enormous trade at home and abroad, and this fruition has been accompanied by the accummulation of great financial resources which have been fairly won, and which no emergency has heretofore summoned into competitive action.
The Russian industry received a favoring stimulant from the action of its Government in placing a prohibitive tariff on the American product; but this nourishing influence has been greatly neutralized by the intense competition now in progress between the refiners of Baku for the supply of their home market, and if this industry is to be rapidly developed for an aggressive export campaign it can hardly hope to escape the penalty, which many a precedent suggests, of paying high rates for money and high prices for credit.
I have made no effort in the foregoing to cross the technical, the statistical, or the descriptive frontier; nor have I regarded it as pertinent to venture upon any personal prophecy as to whether a great commercial duel between these two industries is forthcoming, or whether a commercial treaty of peace may later on be ratified. To-day initial competition is in progress, and as the British Government is interested in guarding the manufactures of Manchester or bringing Indian cereals cheaply to the sea; as the Government of Russia is exhibiting an activity without a precedent (where its commerce is involved) in the developement of what it conjectures may become the most important of that country’s products; so the Government of the United States cannot be unmindful, and the petroleum industry gratefully recognizes and appreciates that it is not unmindful, of the welfare of the product standing first on the list of the manufactured exports of America; a product which has been so essentially and exclusively American, a product which has contributed so greatly to the favorable adjustment of Amercian trade balances with the world, a product which has forced its way into more nooks and corners of civilized and uncivilized countries than any other one-product in business history emanating from a single source. If unfair commercial practices assail it, if diplomatic intrigue is busy against it, I am sure I only re-echo your own sentiments when I invoke the co-operation of the foreign representatives of our Government in its defense whenever and wherever its well-earned supremacy is unfairly menaced.
I do not propose to inflict you with a recital of my journey from Constantinople to Baku.
The storms which attended my voyage on the Black Sea could not wholly neutralize the scenic beauty of its shores. I must dedicate to wanderers of greater leisure and more descriptive power the task of picturing the weary desert which the Caspian Sea alone can end, the glories of the Caucasus and the attractions of beautiful Tiflis. The railway linking these two historic seas seems like a boundary line where the dash of the Occident and the repose of the Orient have blended together in many a conglomerate exhibition of custom, race, and costume, while this powerful and growing Russian nation, with eyes turned lovingly to the south and to the east, are marching earnestly, silently, steadily onward to realize their dreams of conquest and territorial aggrandizement.
My visit to the enemy’s camp (commercially speaking) was full of interest and instruction. It was signalized by many an act of considerate attention and courtesy, which, if I may not reciprocate hereafter, I shall at least long remember as serving to evidence that, however personal interests may be clashing, “there’s something good in human nature yet.” I am aware, sir, that this communication has conveyed but meager information in response to the inquiries with which you have honored me. It has been written amid the pressure of business avocation; but I cannot regard it as submitted wholly in vain, as its conclusion affords me so natural an opportunity of [Page 869] according my appreciation of the interest you have manifested in my mission and of the series of personal courtesies contributing so acceptably to my sojourn on Ottoman soil.
I have, &c.,
petroleum in egypt.
The recent discovery of petroleum wells in Egypt comes at an opportune moment for the fortunes of the country, always supposing that the supply should turn out to be as plentiful as it is well situated. When the news first arrived that oil had been “struck” near Suez, observes the Standard, some incredulity was—not unnaturally—expressed regarding the substantiality of the discovery. For some reason, probably because the great petroleum wells of America are, for the most part, in a carboniferous district, there is a popular notion that petroleum is intimately connected with coal; in reality there is no necessary relationship between the mineral and the liquid fuels. In Persia, China, Japan, Burmah, Baku, Galicia, and in various parts of Canada and the United States, not to mention the indications reported from Morocco, rock-oil occurs in all geological formations, from Silurian up to Tertiary, and the two epochs of the earth history with which it is most intimately connected are the Silurian and the lower half of the Tertiary systems, in which coal is either absent or very sparely distributed.
The most productive region in the eastern hemisphere lies in the eocene and miocene of the Carpathians, Transylvania, and the Caucasus.
Two years ago M. Debay, a Belgian explorer, was sent to examine the neighborhood. For many months he has been more or less engaged in developing the wells at the cost of the Egyptian Government, and has now succeeded in establishing a little colony to workmen on the spot. After penetrating through beds of sulphur, shale, clay, limestone, and sandstone, he “struck oil,” and ascertained that it exists in considerable abundance all over the neighborhood. A single well yields about 2 tons a day of the high specific gravity of 880, water being 1,000; and as the district is easily accessible from a part of the coast where there is a good anchorage, there is a fair prospect of a productive industry which should not only make the navigation of the Red Sea more tolerable but also improve the chances of a paying railway from the Red Sea coast to Cairo and to Berber. Fuel is power; but a self-stoking fuel in the torrid zone should be power combined with luxury.