The Secretary of State to the Chargé in Brazil (Key)

No. 53

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

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 [Page 358] 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 [Page 359] be expected to bring the following important advantages to that country:

Probable self-sufficiency in its petroleum requirements, including adequate supplies of fuel for the expansion of transportation facilities.
Lower prices to local consumers than are possible for similar imported products.
Reduction or elimination of the drain on foreign exchange now being used to pay for imports.
Possible creation of a petroleum export trade that would furnish a constant and substantial source of foreign exchange for the country’s requirements.
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.
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.
Increased employment and an opportunity for qualified Brazilian technicians to obtain practical knowledge and experience in the fields of petroleum production, refining and marketing.
Development of inland waterways and increased highway construction necessary in large-scale oil development.
Additional health, sanitation and housing activities in rural areas where oil development is carried on.
Encouragement to private foreign capital to participate in other phases of Brazil’s economic development.
Greater military security since Brazil’s armed forces would have a domestic source of supply for fuel.

  1. Infra.