The Secretary of State to the Ambassador in Brazil (Berle)
2631. Urtels 3403 and 3411, Nov 13, and urtel 3420, Nov 14.66 Facts in possession of Dept regarding petroleum refining situation in Brazil appear at variance with Embs understanding of situation. Following are principal points of difference:
- You stated that “refining and marketing of oil in Brazil is at present air-tight monopoly of Standard Oil probably acting in conjunction with British Shell interests.” Dept understanding is that [Page 530]neither Standard nor any other American company has any refining operations whatever in Brazil, only operating refineries being three small Brazilian-owned plants at Matarazzo, São Paulo, and Rio Grande do Sul. Thus no Standard monopoly of refining. As regards marketing, Dept understands Standard does about 40 percent of gasoline business and 50 percent of residual fuel oil (these percentages including sales by Caloric company which owned by Standard); balance of business divided among Shell, Atlantic, and Texas, with Gulf perhaps having small participation resultant from recent purchase of Brazilian marketing organization.
- You speak of “Standard Oil and its partner Atlantic.” Dept has no evidence of any joint operations by Standard and Atlantic (except certain occasional cooperative transactions requested to be performed by PAW67 under Directive 70); both companies deny any inter-corporate connection.
- You state that a stand by this Government against measures restricting importation would not satisfy Standard and Atlantic because “result would probably be to bring down price of oil.” Dept informed that prices in Brazil are determined by National Petroleum Council with view to protecting the three small Brazilian refineries, and that large profits of importers of finished products result from such mandatory minimum prices.
If understanding of Dept on any or all of above points is known by you to be incorrect please inform by urgent cable. Otherwise Dept feels that position taken in Deptel 2599, Nov 10, is only sound position that can be taken and regrets it apparently did not make sufficiently clear ideas meant to be conveyed therein. Dept opposes monopoly arrangement as strongly as Emb, whether Brazilian or American. Dept believes in fullest application of open-door principle to which you referred and feels that objective is unattainable so long as decree-laws 395 and 4071 remain on books. Consequently, Dept reiterates that fundamental objective of Emb should be to seek elimination of restrictive provisions in those decrees. Belief here is that any other approach, such as minority interest in refineries for U.S. companies, would be only compromise solution of doubtful duration. Moreover, because of monopolistic aspects, we oppose exclusive concessions for establishment of refineries, whether wholly or partially Brazilian-owned, and likewise, any sort of exclusive marketing arrangements between refineries and American distributors. In precisely what respects is Emb not in accord with foregoing?
Dept proposed that Emb attempt to forestall final action on recommendations of Petroleum Council merely as initial stop-gap measure [Page 531]so as to keep situation fluid and permit attack on root of difficulties, decree-laws 395 and 4071.
Dept’s position is re-stated as follows:
Decree-laws 395 and 4071 prevent American nationals from owning or even having minority participation in refineries in Brazil and have retarded development of refining industry Brazil. This situation, while considered by Dept to be essentially unsound, was not cause for serious concern so long as existent Brazilian refining capacity was adequate to supply only small fraction of Brazilian petroleum product requirements. With announcement, however, that Ypiranga and Sampaio groups had each obtained on a duopoly basis refining concessions authorizing construction of a 10,000–barrel refinery, (subject to determination of financial responsibility and guarantee of crude supply), these two refineries in addition to the three small existent refineries would be adequate to supply all of Brazil’s requirements of oil products except residual fuel oil and specialty products. Thus one of three results would necessarily ensue: (a) either present United States suppliers would be excluded altogether from Brazilian markets and crude supplies obtained by the Brazilian refineries from other sources, or (b) a rigid market and quota arrangement would be initiated designed to protect the relative market positions of present suppliers and thus to freeze the competitive statics quo, or (c) some such monopolistic supply arrangement would develop as apparently has been anticipated by Gulf in that one or at most two companies would have exclusive supply contracts with the Brazilian refineries. The Dept felt that all three of these alternative results were undesirable and that it was therefore important to proceed promptly to do what could be done to obtain a modification or repeal of the basic decree-laws which gave rise to this situation. Pending adequate discussion of the issues of commercial policy and international investment policy that are involved, Dept is anxious to obtain a temporary suspension of the arrangements where-under all refining operations in Brazil would be concentrated in the hands of the Ypiranga and Sampaio groups.
It is accordingly requested that you hold such conversations as you deem appropriate with the Brazilian authorities along the lines indicated in Deptel 2599.
For your information, local representatives of Standard and Atlantic are apparently still under impression that their parent companies would be satisfied with a minority participation in Brazilian-owned refineries (which incidentally will almost inevitably be accompanied by a tacit or overt understanding freezing crude supply positions). Actually, as indicated in third paragraph of Deptel 2599, officials of Standard and Atlantic here have reconsidered and will await outcome of Dept’s efforts to obtain a general loosening up of the [Page 532]situation in Brazil that will permit free competitive entry to both the refining and marketing business in Brazil. Further, the initial acceptance by American companies of minority interests in the development of Brazil’s petroleum resources, would have serious effect on this Government’s over-all policy with respect to protection of American interests in other Latin American countries; i.e., Mexico.