Memorandum of Conversation, by Mr. Stephen C. Brown of the Office of Chinese Affairs

Participants: Standard-Vacuum Oil Company—H. F. Seitz
Caltex Co—Mr. Keany
CA—Mr. Sprouse1
CA—Mr. Barnett2
CA—Mr. S. C. Brown

Messrs. Seitz and Keany came in at the Department’s request to discuss the proposed joint three-company shipments of petroleum products to Communist China. Mr. Seitz had telephoned the day before to request an answer.

After some desultory conversation which took place while awaiting Mr. Sprouse’s arrival, Mr. Barnett explained to them that our decision had been made in the light of an estimate of 3.5 million barrels of motor gasoline, kerosene, diesel fuel and lubricating oils required for civilian use in Communist China in 1950. This estimate had been made on the basis of information received from the companies.

Further, our decision had been made in the light of our knowledge and understanding of the difficulties under which they were operating in China. We did not wish to embarrass them in their efforts to project company properties, continue operations on a minimum basis, rand secure exit permits for key personnel.

With these considerations in mind we had decided that we would raise no objection to the three companies jointly shipping to Communist China the minimum quantities of products specified in the [Page 623]proposal; that is, 15,000 tons of motor gasoline, 5,000 tons of diesel and 800 tons of lubricating oils. This was on the understanding (1) that no further shipments by the companies are presently planned, (2) that the Department will be consulted by them prior to planning any additional shipments, and (3) that these shipments will be included in any program of permissible shipments to China for 1950 that may be agreed on with other Governments.

Mr. Keany of Caltex inquired whether these conditions meant that his company’s proposed shipment of 35,000 barrels of diesel was “out”. Mr. Barnett said that the Department did not intend to reverse its position on that shipment, and since we had raised no objection to it, it would stand so far as we were concerned but amounts under that shipment would be taken in account as representing a part of Caltex’s share in future quarterly allowable imports. The conditions did mean, however, that the other two shipments mentioned by Mr. Keany on the same occasion were, as such, “out”. Mr. Keany volunteered the information that Caltex did not yet possess a copy of the crude oil contract and that it appeared that operation of the contract might remain in indefinite suspense.

Mr. Barnett explained that we expected very shortly to reach understandings with the British on the question of petroleum supplies to China,3 and that the Department’s decision on the immediate proposal had been made with that in mind. We felt the quantities approved were well within our estimates of permissible quarterly shipments. He asked Mr. Brown to explain what our estimates were and how they were arrived at.

Mr. Brown indicated that on the basis of the minimum estimates of civilian requirements in 1950 received from the companies, we had arrived at the following suggested quarterly quota of permissible shipments for the named products:

Motor gasoline (42 gallon barrels) 125,000
Kerosene (42 gallon barrels) 250,000
Diesel (42 gallon barrels) 300,000
Lubricating oils (50 gallon drums) 4,200
Lubricating greases nil

With reference to the figure for lubricating oils, he explained that it was low because we had taken into account company stocks in China, which according to our information were substantial, and in Hong Kong as well. In terms of 42 gallon barrels the figure would be 5,000 barrels, which gave an equivalent of 4,200 50 gallon drums. With reference to greases, our information was that the companies hold 17 months stocks in China, and the zero quota was obvious.

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In comparing the proposed transaction with these suggested quarterly quotas it had appeared to us that generally it was well within the suggested limits. We objected, however, to the higher figure on motor gasoline because it appeared to represent 6 months’ supply at estimated rates of consumption, and preferred to approve only the minimum quantities in the proposal.

Mr. Seitz said that the companies did not propose to ship all at once, and that deliveries would be strung over a period of time. Mr. Brown replied that we were aware of this and had taken it into consideration, and that we had also taken into consideration the fact that two months of the first quarter were now past.

With reference to the question of our estimates generally, Mr. Brown said that we were well aware that Chinese requirements of petroleum products for civilian purposes might change substantially even over a period of one year, and that we realized that they might have to be revised. We would of course appreciate any information the companies might have indicating a need for revision.

Mr. Sprouse agreed that Mr. Barnett and Mr. Brown should prepare an informal memorandum for Messrs. Seitz and Keany summarizing our information regarding stocks in China, our estimates of civilian requirements for 1950, and all other pertinent information. We might at some future date want to discuss it with them. Mr. Seitz said that they would be glad to discuss the subject together with us, but that they could not very well discuss it privately together because of certain possible legal embarrassment it might cause their companies.

Several questions were raised aside from the main topic. Messrs Barnett and Brown inquired whether the Communists had indicated any desire to take over company stocks of aviation gasoline, by purhase or otherwise, to which the reply was that they had not, and had shown no interest whatever in the subject. Mr. Barnett said we would like to know if any approach were made to the companies regarding aviation gas in the future. Mr. Brown inquired whether it would be correct to assume that stocks in China in other than company hands are very small, to which Mr. Seitz replied that he thought this was correct; he did not feel stocks in Commie hands could amount to as much as one month’s supply, on the average. He felt the Commie willingness to allow foreign exchange on a cif basis in this transaction, plus an allowance for local currency margin, was an indication that they were feeling the pinch.

Mr. Barnett asked whether Hong Kong was normally a transshipment point for petroleum serving any areas other than China. The answer was that it was not normally used for serving other areas. Mr. Barnett then asked whether the companies could give any estimate of Hong Kong’s own petroleum requirements, and whether they had any information concerning the source of Hong Kong Government [Page 625]and British military Hong Kong requirements. Neither Seitz nor Keany could provide information regarding Hong King requirements, but said they thought in practice most of British Government requirements for Hong Kong were supplied by Shell, although the American firms were permitted to bid. In reply to a question, both agreed that from their point of view it was preferable, if possible, to have a single quota set up for administrative handling of shipments to China and Hong Kong (exclusive of British Government requirements). Seitz pointed out it was almost impossible to control transshipments from Hong Kong to China otherwise.

  1. Philip D. Sprouse, Director of the Office of Chinese Affairs.
  2. Robert W. Barnett, Officer in Charge of Economic Affairs, Office of Chinese Affairs.
  3. For previous documentation on this subject, see Foreign Relations, 1949, vol. ix, pp. 1002 ff.