890F.51/6–2345: Telegram
The Acting Secretary of State to the Minister in Saudi Arabia (Eddy)
178. ReDepts 169, June 18, Legs 243, June 23,44 and Legs 245, June 24. Department will try to push development loan without waiting for working out of long-range budgetary assistance program. You may inform King that Export-Import Bank has approved in principle the loan of funds for development of such projects as water supply, electric powder and roads, provided adequate security for repayment can be arranged. You may say that you hope to be able to present a definite proposal before the end of this year. You should emphasize that these funds will be repayable loans, not gifts.
For your strictly confidential information, major difficulty causing delay is fact that Aramco has option of paying royalties in either sterling or dollars, while oil is likely to be sold mostly for sterling for some time to come with no certainty that sterling will be freely [Page 918] convertible into dollars. Company would ordinarily not pay royalties in dollars until it had met other dollar expenditures such as dollar salaries of employees, U.S. income taxes, purchases of equipment in the United States, and perhaps dividends to stockholders. Question is whether a sufficient proportion of annual production will be sold for dollars or a sufficient amount of sterling proceeds be convertible into dollars, to cover all foregoing dollar expenditures and also payment of dollar royalties in an amount sufficient to permit SAG to meet interest and amortization on dollar loans in addition to current dollar needs. Export-Import Bank and others who have studied this problem have grave doubts that oil royalties can be considered adequate security for dollar loans unless firm dollar market can be found for oil. This problem is the core of difficulties Department is facing in seeking dollar loans for Saudi Arabia or any other country whose exportable resources, however attractive for the long pull, are not likely to be importable into the United States as long as U.S. production is adequate for U.S. need.
Congressional leaders have indicated that outright grants specifically to Saudi Arabia are out of the question. Purchase of an oil reserve by the Navy or advance payment of royalties on such a reserve, has been considered in connection with budgetary assistance program, and would eliminate repayment problem, but Navy Department is worried about reaction of domestic petroleum industry, and is not ready to commit itself to spend any money for present or future Arabian oil.
This explanation may help you to understand delays. Department is seeking solution earnestly, and progress is being made daily.