No. 13.
Mr. Lee to Mr. Bayard.

No. 217.]

Sir: The petroleum question, which has been the source of trouble in the adjustment of the new treaty between Austria and Hungary, is one that has great interest for us.

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The position of matters is as follows:

The treaty which went into force in 1877 established for petroleum a specific-gravity test based upon the relative specific gravity of American and Russian petroleum, the two rates of duty being 1.10 florins and 2 florins per 100 kilograms.

The basis of this standard was the relative amount of illuminating oil contained in each, to be ascertained by specific-gravity test.

The law worked well enough for us for a few years, when the Russian exporters, finding that they could not compete with the crude American product, began distilling their crude and shipping the result, colored with refuse and mixed in such a manner as to maintain the legal specific-gravity standard for the low rate of duty, while introducing an unfinished manufactured article containing nearly three times the quantity of illuminating oil as is contained in their natural petroleum.

Our trade in petroleum has naturally steadily declined.

* * * * * * *

The opposition to the renewal of the old treaty comes from two sources; on the one side the Galicians, who are, in a moderate way, petroleum producers, find their industry unprofitable under the competition of the Russian article; and on the other hand, the finance minister of Austria (that is, the Austrian division of Austria-Hungary).

Under the internal-revenue laws, the internal-revenue tax on refined petroleum is collected at the refinery, and nearly all the refineries are at Fiume, in the Hungarian division, so that the so-called consumption tax is collected there and goes into the Hungarian treasury, while the Austrian treasury loses what was formerly collected at Trieste on imported refined, as Fiume oil, on account of its disproportionate cheapness, has driven most other oil out of the Austrian market. The language of the law does not discriminate against American crude, but the interpretation of it by the customs officials, whereby the Russian semi-manufactured article, containing 85 per cent, of oil, pays a duty of 1.10 florins per 100 kilos and American crude, containing about 75 per cent, of oil, is made to pay 2 florins on the same quantity, discriminates.

There has been a disagreement between the Parliaments of Austria and Hungary on the subject of renewing the treaty of 1877 in that item referring to petroleum.

The Austrian ministry had decided to make the concession to Hungary, but the Austrian Parliament refused to ratify it, creating such a crisis as threatened either a resignation of the ministry or a dissolution.

The settlement will probably be made before March next, and may be compromised within a few weeks so as to place the result before the two Parliaments when they meet in December.

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Within the next few days I shall have an interview with Count Kalnoky or Mr. Szögyènya, and shall represent verbally the injustice done to American interests, which I believe to be in contravention of the “most favored nation” clause of our treaty.

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I have requested a statement of facts embodying the discriminative policy from our consular agent at Fiume, to be used as a basis of diplomatic action.

I have, etc.,

James Fenner Lee.