810.50 Rio de Janeiro/10–2248

The Acting Secretary of State to Diplomatic Representatives in Certain American Republics 1

confidential

Discussion of Petroleum at Meeting of U.S. Economic Officers in Río de Janeiro November 1 to November 6

The Acting Secretary of State refers to the circular airgram of September 20, 19482 concerning the meeting of U.S. Economic Officers in Río de Janeiro November 1 to November 6, and encloses a paper on petroleum for the Embassy’s consideration in connection with that meeting.

Petroleum was not included on the agenda of the meeting for a general discussion on the assumption that the interest in this subject was limited to those Embassies in countries with an important existing or prospective oil industry. Petroleum is of great importance, however, to certain Latin American countries. In addition, the oil of Latin America is vital to the security of the United States. For these reasons it is considered desirable that petroleum be the subject of discussion in at least one meeting of the interested economic officers, and that in view of the possible limited interest in this subject that such meeting be an informal evening session. The enclosed paper is submitted as basis for that discussion. It is being transmitted to those Embassies considered to have a significant interest in the problem of petroleum.

It is suggested that the Embassy representative at the petroleum meeting be prepared to give a brief report on the petroleum industry and petroleum problems of the country to which he is accredited. …

Following the Río meeting, the Department desires from the Embassy a report giving its considered analysis of the petroleum industry and petroleum problems of the country to which it is accredited. …

. . . . . . . . . . . . . .

The Department will use this report, along with those from other Embassies, in its re-evaluation of Latin American petroleum problems and United States policy toward oil development in the Western Hemisphere.

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[Enclosure]

Petroleum *

world supply and demand situation

During the thirties the United States was very fortunate in that oil was discovered at a much greater rate than it was consumed. In order to promote conservation and restrict production to market demand for this natural resource, most of the oil producing states controlled the rate of flow of the wells at a level below their maximum efficient rate. On a country-wide basis the difference between the actual rate of flow and the maximum efficient rate was more than a million barrels a day at the beginning of World War II. This reserve productive capacity was a valuable asset at the time of our entry in the war, since it enabled production to be expanded to meet all military and minimum essential requirements for petroleum.

In 1938 the daily average production in the United States was approximately 3½ million barrels a day. Despite the fact that much of the consumption of petroleum not essential to the war effort was eliminated, requirements grew so rapidly that by September 1945 production had reached 4,850,000 barrels a day. This was estimated to be about 300,000 barrels a day in excess of the maximum efficient rate of production. In other words, the United States had used up its cushion of reserve productive capacity and gone beyond by 300,000 barrels a day. The United States was overproducing its oil fields.

United States production has continued to climb rapidly since the war and has now reached close to 5,550,000 barrels daily. This high production rate has been achieved by maintaining a continuous high drilling rate and by producing wells at or near their maximum allowable. Whether or not many oil fields are being overproduced is not known. The industry indicates that the fields are being produced at the maximum efficient rate. All this has happened while the United States changed from a net exporter to a net importer of oil. The daily average net exports in 1938 were 382,000, whereas now the net imports are probably exceeding 100,000 barrels a day.

The United States industry while drawing upon United States petroleum resources as fast as technical and scientific knowledge and sound productive practices will permit, is still short of satisfying domestic requirements. It appears as if the United States will become increasingly dependent on foreign sources of supply to supplement domestic requirements. At the same time the United States is rapidly depleting its petroleum resources. The present known reserve is about [Page 252] 11 or 12 times as large as the current annual production, and the estimated possible new discoveries may not add more than another 20 or 30 years of supply at best, assuming of course that it could be found and extracted at the desired rate which apparently will not be possible.

Finding and producing costs are rising as it is becoming more difficult to locate new and deeper deposits. United States oil is finding it increasingly difficult to compete with oil from certain large foreign sources where great quantities of low-cost oil already have been found.

Although our domestic peacetime requirements are large and growing rapidly, the Military estimate that United States wartime requirements would be at least 2 million barrels a day higher than present consumption. This estimate also supposes the elimination of nonessential uses—that is non-essential to the conduct of a war. Current domestic requirements alone are now close to 6 million barrels a day. Some appreciation of the magnitude of a sudden increase to 8 million barrels a day may be had when it is realized that the world production today is approximately 9¼ million barrels a day.

Any sudden increase in United States supplies could not be accomplished today unless one or more other countries were deprived of their supplies. The world’s petroleum facilities are producing at capacity—including pipe lines, tankers, refineries, and marketing facilities, and the oil fields of the world cannot be operated beyond the capacity of the facilities to handle the oil. At present the only excess productive capacity appears to be in the Middle East. In this area there are probably several hundred thousand barrels a day additional oil available but transportation and refining facilities are not adequate to move and process the oil. In all other areas, the oil fields as well as the facilities for handling the oil are being operated at capacity.

Most of the petroleum reserves of the world are concentrated in four areas, viz., the United States, Venezuela, USSR, and the Middle East. It is estimated that the United States contains about 22 billion barrels of reserve, Venezuela about 8 billions, the USSR 6 to 8 billions, and the Persian Gulf area in the Middle East something over 20 billions. The known reserves of the Middle East are variously estimated at from 20 to 32 billion barrels and the possible undiscovered reserves are estimated to be of the order of 200 to 300 billion barrels. Unquestionably the possibilities of the area are immense.

Very little is known about the reserves or production of the USSR. Only an insignificant proportion of the oil produced there finds its way into international trade.

The Middle East reserves can be expanded rapidly if sufficient material and manpower are available. In fact, it is the only area where the productivity of the known reserves can be greatly increased. The production of the area is now over a million barrels a day and the [Page 253] known reserves are large enough to support a daily production of possibly 8 million barrels a day. The plans for the area call for a daily production of about 1,800,000 barrels per day by 1952. Such expansion requires the building of new pipe lines, new tankers, and more refineries. The proposed pipe lines from the Persian Gulf to the Mediterranean, if and when completed, would be capable of transporting more than a million barrels a day.

Persian Gulf oil now supplies less than 40 per cent of the petroleum for the European Cooperation Administration countries, but by the end of the four-year program this area is expected to be provided by over 80 per cent of its requirements from the Persian Gulf area.

In the Western Hemisphere both the United States and Venezuela are increasing their output at a relatively rapid rate in order to keep up with increasing demand, but in order to do this a very active exploration campaign must be maintained to find new reserves for development. This is a different story from the Middle East where the reserves already discovered are far more than sufficient to support the planned expansion to two million barrels a day.

The United States is the greatest market in the world for petroleum. The United States requirements are almost twice as much as the rest of the world combined. Although historically the United States has been a large exporter of petroleum, it cannot in the future continue so as it is unable any longer to produce its own requirements. Other countries can look to the United States only for lubricating oils, high test gasolines, and other similar specialty products.

Until recently the United States has been receiving its supplementary supplies from Venezuela, but now small amounts of Middle East oil are being shipped to the United States. To what extent this may increase cannot presently be determined. However, the major portion of European requirements have been shipped from Venezuela, and as that market is gradually taken over by Middle East sources, more and more oil from Venezuela will be diverted into the United States.

It should be noted that Venezuela is the only Latin American country that is producing considerably more than its requirements and thus is a large exporter of petroleum.

Several other Latin American countries produce oil in relatively small amounts and of these only Mexico, Colombia and Peru have small surpluses for export. The requirements of the Latin American countries are growing rapidly and since most of them are importing nations they are steadily increasing the drain on foreign sources of supply. Even Mexico, which is now an exporter to a small extent, may soon become an importer unless new large reserves of petroleum can be developed in the near future.

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hemisphere defense

Under ordinary peace time conditions the United States would have no concern about adequate petroleum supplies for domestic requirements, as it is recognized that there are sufficient reserves in the Middle East to supplement the world’s requirements for the foreseeable future. However, it is because of the vulnerability of the Middle East under emergency conditions that the United States must look to less vulnerable areas for its peace time and emergency supplies, for in an industry as highly specialized as petroleum in all its phases the flow lines must be developed in peace time to be available and ready for expansion in war time. Therefore, a prudent regard for our security requires that the United States must look to increased development of the petroleum resources in the Western Hemisphere.

The United States, Venezuela, and Canada are the only countries in the Western Hemisphere where large-scale exploration and development of new petroleum resources is taking place. But the production of these three countries is inadequate to meet the war time requirements of the Western Hemisphere. The United States and Canada cannot meet their own peace time requirements, and Venezuela’s surplus is inadequate to make up the deficit in Western Hemisphere requirements in an emergency.

The Military have been very much concerned about the lack of greater productive capacity in the Western Hemisphere and have repeatedly urged that everything should be done to make the Western Hemisphere self-sufficient in the field of petroleum within the next five years. The time factor makes this a difficult goal to achieve as it takes years to make the preliminary surveys, geological and geophysical studies, discover and develop an oil field.

Our Missions in the Latin American countries have been kept fully informed of the gravity of the problem and of the urgent need to find some way of attaining a substantial expansion of petroleum reserves and production in the Western Hemisphere,

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The Military attach such importance to the petroleum situation that members of the Armed Services Petroleum Board have advised their superiors that defense of the Western Hemisphere in the event of an emergency will be dependent upon a substantial expansion of Western Hemisphere petroleum resources within the next few years.

[Here follows a series of studies on oil problems in Mexico, Venezuela, Colombia, Peru, Brazil, Bolivia, Chile, Argentina, and Ecuador.]

area of discussion

A general resume of the petroleum situation in the Latin American countries appears to indicate the following:

1.
A number of the Latin American countries appear to have good possibilities for the discovery of large petroleum reserves.
2.
The security of the Western Hemisphere requires that steps be taken immediately to bring about an expansion of reserves in the Western Hemisphere with the view toward increasing its productive capacity by at least 2 million barrels per day within the next five years.
3.
The most efficient method for achieving rapid expansion of petroleum resources is by private industry, and, conversely, probably the least effective method is by outright unfettered loans to the Latin American Governments for this purpose.
4.
There appears to be a strong trend toward nationalization of the petroleum industry in the Latin American countries. …
5.
It begins to appear that traditional private enterprise operations; in the petroleum industry may not be possible in a number of Latin American countries, and that, if so, such operations cannot be relied upon in those countries for the needed expansion in petroleum reserves and production in the Western Hemisphere. If traditional private enterprise operations are not possible in this important area, what measures, if any, must be taken to facilitate oil exploration and production on some other basis?

[Here follows a list of topics for discussion.]

  1. Forwarded under Form DS–4 to the Embassies in Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, and Venezuela.
  2. Not printed.
  3. Special Background Paper for Use in Discussion of Petroleum at the Río de Janeiro Conference of Economic Officers. [Footnote in the source text.]
  4. The Missions have been supplied with full information on petroleum developments within the Department, other agencies of the Government, the Congressional hearings, the documents and minutes of the inter-departmental Technical Petroleum Committee and its successor, the International Petroleum Policy Committee. The Missions have been informed also of the study made by the State, War, and Navy Departments in a special inter-departmental subcommittee of State–Army–Navy–Air Force Coordinating Committee on the subject of developing Western Hemisphere oil for Western Hemisphere defense. In connection with petroleum supply for hemispheric defense, the interested Missions have been supplied also with “Excerpts from Minutes of Plenary Session 131, February 24, 1948 of Inter-American Defense Board”, a paper prepared by Army-Navy Petroleum Board presented to Inter-American Defense Board February 24, 1948, and to the Joint Brazilian-United States Defense Commission March 10, 1948, entitled “Necessity for Developing Additional Supplies of Oil in the Western Hemisphere for Hemispheric Defense”, and Minutes of Plenary Session 133, March 16, 1948 of Inter-American Defense Board. [Footnote in the source text.]