832.6363/2–1448
The Secretary of State to
the Chargé in Brazil (Key)
No. 53
Washington, February 14,
1948.
Sir: There is enclosed, for the Embassy’s
information and use, a memorandum1 prepared in the Department
which summarizes certain thoughts in regard to Brazilian petroleum
development. The Ambassador and other members of the Embassy staff who
have been dealing directly with the petroleum problem are, of course,
fully aware of the points discussed in the memorandum and have brought
them out
[Page 357]
in their
conversations on the subject with Brazilian officials but it is believed
that the memorandum will be useful in serving as a guide to other
members of the staff who are not so fully informed concerning the
problem.
The Department is of the opinion that large-scale petroleum development
in Brazil is to that country’s own manifest interest in many particulars
and that there is little chance of its being achieved except by the
participation, under satisfactory conditions, of foreign capital. It
feels that some of the opposition which has been shown in various
Brazilian circles, notably among high officers of the Brazilian armed
services, to the enactment of legislation which would enable foreign
participation in Brazilian petroleum development may well be due to
inadequate knowledge of the factors involved.
The Department suggests the possibility that members of the Embassy staff
and representatives of other United States Government agencies in
Brazil, including American members of the Joint Brazil–United States
Military Commission, could discreetly help to overcome some of the
misapprehensions as to the petroleum situation which may exist among
Brazilians, both official and unofficial, with whom they have friendly
relations. You are consequently authorized, in your discretion, to bring
the contents of the enclosed memorandum to the attention of such persons
as background for such conversations as they may have on this subject.
It should, of course, be understood that access to the memorandum should
be restricted to United States Government officials.
Very truly yours,
For the Secretary of State:
Paul C. Daniels
Director, Office of American Republic Affairs
[Enclosure]
Memorandum on Brazilian Petroleum Development
Brazil today produces only a small fraction of its needs in petroleum
and petroleum products and is almost entirely dependent upon foreign
sources of supply. The present shortage of oil and transportation
facilities in the western hemisphere has already created
difficulties in meeting Brazil’s peacetime requirements which
emphasize the need for developing adequate sources of supply within
its own territory. Should another major war occur, Brazil’s oil
supply situation would probably become much more critical than even
in the last war.
Past experience has shown that the best way to develop an oil
industry
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is by free
enterprise without nationalistic restrictions. That is the way in
which the oil industry of the United States, the most successful and
largest in the world, was formed, with participation by companies
controlled abroad.
The oil industry has become such a complex one that only experienced
companies have the technical skill, personnel and resources to
engage in major oil development with maximum efficiency. The essence
of the industry is competition and best results have usually been
obtained by the participation of several entities in any area. The
discovery and development of petroleum is an industry involving high
risks. Experienced companies, operating in different areas, can
spread their risks and use the large profits made in a few cases to
counterbalance the losses elsewhere. The large sums of investment
capital which would be required for oil development in Brazil are
not available from private Brazilian sources.
As regards the possibility of financing oil development by other than
private sources, it is the policy of the United States Government
not to make public funds available for economic development projects
when private funds are available for them on reasonable terms. In
view of the fact that foreign companies are understood to be ready
to invest in Brazilian oil development if satisfactory legislation
is passed, United States public funds would thus not be available
for loans to aid oil development in Brazil under present
circumstances.
Government intervention in actual operation has generally proved
unsuccessful. In Mexico, production under Government control and
administration has stood still and has made no progress toward
meeting Mexico’s own oil needs and her great need for foreign
exchange. Development by a Government corporation in Argentina has
not met expectations. On the other hand, in Venezuela, where private
foreign capital has had a relatively free hand, subject only to
general regulation, there has been marked success in oil
development. There, the Government and country have benefited
greatly from royalties and taxation in contrast to the situation in
Mexico where maintaining oil production has been a net drain on
Government resources.
The major companies engage in all phases of the oil industry, from
exploration through production to refining, transportation,
distribution and marketing. It is improbable that they would be
prepared to enter into operations in Brazil on a restricted basis
enabling them to engage in only some of these activities. The
minimum conditions attractive to foreign capital would include
complete management control subject only to general Government
regulation and opportunity for reasonable profit commensurate with
the risks involved.
The initiation of large-scale petroleum development in Brazil could
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be expected to bring
the following important advantages to that country:
- 1.
- Probable self-sufficiency in its petroleum requirements,
including adequate supplies of fuel for the expansion of
transportation facilities.
- 2.
- Lower prices to local consumers than are possible for
similar imported products.
- 3.
- Reduction or elimination of the drain on foreign exchange
now being used to pay for imports.
- 4.
- Possible creation of a petroleum export trade that would
furnish a constant and substantial source of foreign
exchange for the country’s requirements.
- 5.
- Increased government revenues from petroleum royalties and
licenses and additional taxation revenue arising from the
increase of commercial and industrial activity that would
follow large-scale petroleum development.
- 6.
- Expansion of Brazilian industry both in lines directly
related to petroleum development and in those able to expand
as a result of their ability to obtain adequate and cheaper
supplies of petroleum products.
- 7.
- Increased employment and an opportunity for qualified
Brazilian technicians to obtain practical knowledge and
experience in the fields of petroleum production, refining
and marketing.
- 8.
- Development of inland waterways and increased highway
construction necessary in large-scale oil
development.
- 9.
- Additional health, sanitation and housing activities in
rural areas where oil development is carried on.
- 10.
- Encouragement to private foreign capital to participate in
other phases of Brazil’s economic development.
- 11.
- Greater military security since Brazil’s armed forces
would have a domestic source of supply for fuel.
