McGhee Files: Lot 53 D 468: Petroleum

Memorandum by the Acting Deputy Director of the Office of African and Near Eastern Affairs (Wilkins) and Mr. Richard Funkhouser of the Same Office 1

secret

The basic British and American interest in the Near East is indivisible. Both the United States and the United Kingdom desire the economic improvement of the area and further political development on which stability is based. It is in the interest of the United States and the United Kingdom that such stability should continue. The British have hitherto made it clear that they wish the United States to lend a helping hand in achieving these objectives and have stated that Saudi Arabia presents a fertile field for coordinated United States–United Kingdom action in the Near East.

The economic stability of Saudi Arabia is directly determined by the rate of development of Saudi Arabian oil resources. Oil is the economy of Saudi Arabia. During recent years royalty payments arising from oil production have increased Saudi Arabian income from approximately $20,000,000 to $80,000,000 a year. Major economic improvements such as harbor facilities, roads, railroads, and agricultural developments have taken place. It would be impossible to expect that Saudi Arabia could without extremely severe dislocations find its former standards acceptable.

American oil companies have invested approximately $390,000,000 in Saudi Arabian concessions and they employ approximately 5000 Americans in the field. This expenditure and this personnel, aside from fulfilling valuable commercial functions which warrant the support of the United States Government, Resent an effective weapon against the advance of Communism in backward areas by providing; even the lowest levels of local society with a livelihood, with programs [Page 35]for health, education and sanitation and with a picture of the democratic way of life. Reduction of such United States investments would jeopardize the success of that part of the proposed United States Government’s Point Four Program which is directed towards inducing private capital to move into economically undeveloped areas.

The economic health of Saudi Arabia makes possible continued political stability in that country. The political stability of Saudi Arabia is not only important in itself but is indivisible with the stability of the Near East as a whole. Saudi Arabia has consistently exerted stabilizing and pro-Western influence in the area. During the Palestine War Saudi Arabia provided an important moderating influence on the other Arab States.

The United States Government considers Saudi Arabia a strategically located state and desires to maintain the close ties of friendship which characterize relations between the two countries. During World War II Saudi Arabia was a valuable ally to the Western Powers. Strategically located at the land, sea and air crossroads of Eurasia, south of the heart of Russia, it houses at Dhahran the most important United States military air base in the area.

If this strategically located country is to fulfill its role as an outstanding stabilizing influence in the Near East in time of peace and as a sympathetic ally in time of war, it must have not only the ability but also the willingness to fulfill that role. This ability is adversely affected if the political and economic stability within Saudia Arabia is impaired, while its willingness to fulfill this role is jeopardized if actions of the Western Powers are damaging to Saudi Arabia, particularly if these same actions concurrently give profit to Saudi Arabia’s neighbors.

The United Kingdom decision to substitute British-owned oil for United States company oil in the sterling area as well as other United Kingdom currency and trade restrictions affecting United States company oil have forced a serious cutback of Saudi Arabian oil production while oil development in Kuwait, Iraq, and Iran has advanced. More serious cutbacks are threatened. Saudi Arabian oil production is approximately 200,000 barrels per day below production schedules formulated last year, and 100,000 barrels per day below production one year ago. Another cutback of 100,000 barrels per day is anticipated. There has thus been set in motion reactions which not only place in jeopardy the stability of Saudi Arabia but will also, if unchecked, work to the detriment of general economic, political and strategic interests in the Near East area which are of mutual importance to both the United States and the United Kingdom.

  1. The source text was a revised draft of a memorandum prepared for presentation to the British. It was attached to a memorandum from Hare to Labouisse dated March 15 which suggested that if it were handed to the British, it should be given the most informal treatment. Earlier drafts of the source text, dated March 6, 8, 9, and 11, are in Department of State file 780.022.