Memorandum of Conversation, by Mr. John D. Jernegan of the Division of Near Eastern Affairs

Mr. Fred Davies } Standard Oil Company of California
Mr. Lloyd Hamilton
Mr. Murray
Mr. Jernegan

Mr. Davies and Mr. Hamilton said they had heard nothing further on the subject of the proposed loan to King Ibn Saud since their conversation with Mr. Alling on July 24. They felt quite sure that Mr. Jesse Jones had not yet given any answer to Mr. James A. Moffett.

Mr. Hamilton said it was his understanding, following the last conversation between Mr. Moffett, (with Mr. Rodgers of the Texas Co.) and Mr. Jesse Jones, that Mr. Jones considered a direct loan under Lease-Lend or through the Reconstruction Finance Corporation as impracticable but that he was thinking of the possibility of making the money available to Great Britain under Lease-Lend, leaving it to the British to deliver the funds to King Ibn Saud. Mr. Hamilton and Mr. Davies feel, however, that if we put up the money we should get the credit. Mr. Murray agreed with this point of view.

The entire subject was gone over at some length, and Mr. Hamilton repeated the conviction of his company that a loan by the United States to Saudi Arabia at this time is very important from a political standpoint. He emphasized that King Ibn Saud is anxious to have American assistance because he does not fear our intervention in his affairs. The British, in Mr. Hamilton’s opinion, are also anxious to have the United States join in aiding the King because they do not want him to feel himself too much in their debt, a feeling which might some day influence him to throw in his lot with Britain’s opponents. [Page 644] They also want to avoid compromising his standing as an independent leader of the Arabs.

Mr. Murray said that he could understand the attitude both of the King and the British, but he pointed out that Saudi Arabia lies in an area in which British interests are much greater than ours and that the British are therefore more directly concerned. He further said that the British have a long background in the field of political loans, are used to advancing money without any great expectation of getting it back, whereas the United States does not have any tradition of that sort.

Mr. Murray explained that he fully appreciates the advantages of extending assistance to King Ibn Saud but that we must take into consideration the natural reluctance of Mr. Jesse Jones to embark on a purely political loan in an area where we are not directly concerned to any great extent. Mr. Murray said he is inclined to feel that it might be best to present the proposition first and foremost as a sound commercial operation, based on collateral, with the political advantages put forward only as a “plus value.” He asked whether Mr. Hamilton and Mr. Davies would be willing to see Mr. Jones and discuss the matter with him on that basis. Mr. Hamilton replied that he understood Mr. Moffett did not wish to take the initiative in calling on Mr. Jones again and that he would probably not approve of any such action by Mr. Davies and himself. Mr. C. E. Olmsted, vice president of the Texas Company and vice chairman of the California-Arabian Oil Co., is expected to arrive in Washington tonight, and Mr. Hamilton and Mr. Davies expect to talk with him about the situation. They think he may want to consult Mr. Rodgers regarding the advisability of again approaching Mr. Jones at this time. They asked, however, if the Near Eastern Division could not call to the attention of Mr. Jones the political factors involved and explain that the Department “would not be unhappy” if a loan were granted.

Mr. Hamilton said that in his initial conversation with the President Mr. Moffett had suggested that his company could supply oil for the United States Navy as security for the loan, and that the President had seemed to fall in with the idea, suggesting that certain Danish tankers might be used to transport the oil. Mr. Davies said that although the Navy Department does not feel that the Arabian oil is up to its standards, the British Navy is using it with satisfaction and that its high sulphur content is not so much of a drawback as might appear.

In order that we might have a better understanding of the proposal, Mr. Hamilton explained that the Standard Oil Company’s thought is that the American Government could make the loan direct to King Ibn Saud, against security in the form of petroleum products, which [Page 645] the King would deliver to the United States as needed. The California-Arabian would provide the oil for the King and would be repaid over a period of years by being permitted to export free of royalty a quantity of petroleum sufficient to make up for the value of the products supplied the United States. Essentially, but indirectly, the company would make an advance of royalties to the King, in the form of oil rather than in the form of cash.

Mr. Davies suggested that if the United States Government wanted to have the oil delivered immediately, the company could produce it up to the value of $500,000 per month (the suggested rate of the loan) but that additional tankers would be needed to transport it. He suggested that it might be used to fuel the American merchant ships now sailing to the Red Sea and Indian Ocean.

The California Standard’s New York attorney, Mr. Klein, has drawn up a legal opinion showing that a loan by the Reconstruction Finance Corporation on the basis outlined above would be practicable. A copy of this opinion was given to Mr. Jones about a month ago, and Mr. Davies promised to supply the Department with a copy as well. (This opinion is attached herewith.)32

In the course of the conversation, Mr. Murray mentioned, in confidence, King Ibn Saud’s direct appeal for a loan. Both Mr. Hamilton and Mr. Davies said they had not known of this before and were quite sure that this appeal had not been inspired by anyone connected with their company. They said the suggestion had been made to the King some time ago but that he had said he would not make any such move unless he were sure it would be favorably received. They had then dropped the matter.

Explaining why the King complains of the shortage of his oil royalties, Mr. Hamilton and Mr. Davies said that the export of oil has not decreased substantially but has not increased as the King had expected. This is due primarily to disruption of world markets by the war and secondarily to shortage of transportation facilities.

  1. See Hearings Before a Special Committee Investigating the National Defense Program, Part 41, Petroleum Arrangements With Saudi Arabia, pp. 25436–25438.