McGhee Files: Lot 53 D 468: Petroleum2

Memorandum by Mr. Richard Funkhouser of the Office of African and Near Eastern Affairs to the Assistant Secretary of State for Near Eastern, South Asian and African Affairs (McGhee)

secret

Subject: Progress Report on US–UK Oil Talks

After two months of painful interagency discussion, the US came up with an oil policy which stated in brief that we should discuss with British authorities the possibility of US oil companies selling part of their production against sterling payment, and we would urge the British to discuss the details of such arrangements with American oil companies. Briefly, the plan was for American oil companies to “sterlingize” (i.e. bring their dollar costs as close as possible to those of British companies), sell part of their oil for sterling and convert back into dollars no greater sums than the British would have to pay to finance the oil expansion required to replace US oil imports. UK–US Government discussions in Washington and UK Government–US company discussions in London proceeded without results. The British claimed that any plan allowing US companies to sell for sterling and convert profits would increase the dollar drain on the UK balance of payments.

The third week in December, the British suddenly announced that all US imports of fuel oil and one-third of dollar gasoline imports into the UK and dependent overseas territories would be prohibited. Other sterling countries followed this lead. The US Government strongly condemned this precipitate move and stated that such arbitrary action was unwarranted in view of the fact that it was this very problem which was being currently negotiated. Furthermore, American companies claimed they had been given the run-around by British officials in London and no serious attempt had been made by the British [Page 10]to show a willingness to negotiate. News hit the press. ECA was under heavy pressure for financing the replacement of US owned oil facilities abroad.

ECA, in view of British refusal to modify their position and in view of Hoffman’s being extremely annoyed with the British for their accumulating record of non-cooperation, concluded that the British would be told that not only would no further expansion of oil facilities at home or abroad be financed by ECA but if expansion of oil facilities which depended for continued operation upon practice of currency discrimination or other undesirable trade restrictions persisted through use of free dollars, ECA would reduce UK allocation of ECA aid by a corresponding amount. This staggering policy was read to the British by Labouisse (State) and Jeffers (ECA) Tuesday, January 3. Members of the British Embassy, including Franks, are reported to be bombarding ECA with statements to the effect that recovery of the UK will be blocked by such a decision. Hoffman and other ECA officials are reported even more adamant at this time.

Of course, the real purpose of the ECA move is not to penalize the UK but to force them to study and work out arrangements whereby normal suppliers can continue to operate in sterling areas without greater cost to the UK balance of payments.

I am at your disposal for further details and documentation.

  1. Lot 53 D 468 contains copies of memoranda and correspondence of Assistant Secretary of State for Near Eastern, South Asian and African Affairs George C. McGhee for the years 1949–1951.