890F.51/4–745

Memorandum by the Assistant Secretary of State (Clayton) to the Assistant Secretary of State (Dunn)

As you know, considerable thought has been given recently to ways and means of assisting the Government of Saudi Arabia to meet its budgetary deficit when lend-lease aid is no longer available. Officers of NEA65 have expressed the belief that the American oil concession in Arabia is in danger of being lost if King Ibn Saud does not obtain sufficient financial assistance pending the time when royalty payments become adequate to cover his deficit. NEA has recommended that assistance be supplied either by purchase of an underground reserve by the Navy Department, or by a direct U.S. Government loan to the Government of Saudi Arabia secured by future oil royalties. The State, War and Navy Coordinating Committee has taken an interest in these proposals, and, at the suggestion of that Committee, Mr. Acheson has had preliminary discussions with certain members of Congress.

There appears to be general agreement that Arabian oil is of great importance to the future military security of the United States. Although the military officials recognize that Arabian oil might not be subject to the direct strategic control of U.S. forces in the event of another world war, it is suggested that if Arabian oil can be developed, it can replace in European and Mediterranean markets substantial quantities of Western Hemisphere oil which might otherwise be disposed [Page 870] of there. In this way, Western Hemisphere oil subject to U.S. military control could be conserved.

I agree that this is a highly desirable objective from the standpoint of national defense. But I am not at all sure that the measures so far suggested are the best for accomplishment of the objective sought. You will appreciate that the objective will not be popular with the American petroleum industry other than the two companies (Texas and Socal66) participating in the Arabian concession. The industry reaction to U.S. Government assistance in the speedy development of Arabian oil was made abundantly clear at the time of the Petroleum Reserve Corporation pipe-line proposal two years ago.67 At that time, the industry was successful in marshaling strong Congressional and public opposition to the scheme, making good use of the popular antipathy against the “government’s getting into the oil business.”

I am quite certain that similar opposition will develop against any proposal for either the purchase of a foreign oil reserve by the Navy, or the use of U.S. Government funds to keep King Ibn Saud favorably disposed towards the private American company now holding the oil concession. On the other hand, if the American company, or its parent companies (Texas and Socal) were to advance Ibn Saud the funds he needs pending development of adequate production and markets, while the U. S. Government limited its assistance to the usual diplomatic support accorded all American business interests abroad, plus sustained efforts to work out a satisfactory international petroleum agreement within the framework of an international security organization, the American petroleum industry would have much less opportunity to stir up effective opposition.

I feel that the Department must consider this matter very carefully, and should particularly avoid being drawn unnecessarily into a controversy which has been going on for over two years between certain Washington officials desiring to obtain a foreign oil reserve at any cost (the group headed by Navy Assistant Secretary Bard and the Chairman of the House Naval Appropriations Committee, Mr. Vinson), and a perhaps even larger and more influential group opposing government entry into business (for which Senator Connally will be a particularly vigorous spokesman). I am afraid that the Department, properly desirous of cooperating in the accomplishment [Page 871] of a desired objective, has accepted somewhat too uncritically certain proposals which are not necessarily the best which could be devised.

In my opinion both the national interest and the interests of the oil companies concerned, as well as certain broader interests of the Department, might be better served if the oil companies themselves were to provide the funds needed by King Ibn Saud. Neither the national interest nor the interest of the companies will be advanced if a controversy develops similar to the “pipe-line” controversy of two years ago. I am surprised to learn that the oil companies have not even been advised of the plans under foot. I feel strongly that they should be consulted before their interests are again made a “political football”. I suspect that if the riskiness of an approach to Congress for U.S. Government funds were pointed out to them, they would consider it advisable in their own interest to advance the funds themselves against future oil royalties. I am advised that the amount required will probably not exceed $30,000,000 over the five year period following the expiration of lend-lease aid. This would represent a relatively small addition to a total recoverable investment which, by present indications, will be smaller relative to potential reserves and profits than the investment in any similar reserve anywhere in the world.

In mentioning certain broader interests of the Department in the foregoing paragraph, I had in mind the charges of American imperialism which may be advanced if the Navy should acquire a reserve in Arabia, and the effect upon the Government’s investment and development policy if a precedent is established for the use of U.S. Government funds to finance the budgetary deficits of foreign countries in which Americans are doing business. These possibilities deserve serious consideration, although they should not be permitted to stand in the way of accomplishment of an objective essential to the national defense if said objective can be accomplished in no other way.

Perhaps there are compelling reasons of which I am not aware for believing that the oil concession cannot be adequately protected by the private interests entitled to the profits from its exploitation. But if so, doubt is cast upon the adequacy of the American private enterprise system in the international field. It is true that the British Government has put its capital directly into the Middle East oil business, but it has also retained a direct equity interest in the profits of that business. It is not difficult to anticipate the questions which may be raised by the American taxpayer, and the Department should avoid putting the Arabian American Oil Company in an embarrassing position without giving it every opportunity to stand on its own feet.

I should like to discuss these matters with you at your convenience.

  1. Office of Near Eastern and African Affairs.
  2. The Texas Company and the Standard Oil Company of California, joint owners of the Arabian American Oil Company.
  3. For documentation on the concern of the United States in 1943 to assure the safeguarding and increased development of adequate petroleum reserves in Saudi Arabia, see Foreign Relations, 1943, vol. iv, pp. 921 ff.