The Secretary of State to the Legation in Syria 1
The Secretary of State refers to the Legation’s despatch No. 323 of January 25, 19512 in which the Legation discusses the likelihood that Syria will nationalize petroleum marketing and requests that the Department provide, for use in informal discussions with Syrian officials, background material tending to show the economic disadvantages of nationalization.
The Legation indicates that the Syrian inclination toward nationalization of petroleum marketing is prompted by the problem of high [Page 299] prices. The Syrian attitude toward this problem is but one reflection of the general dissatisfaction of Near East states not only with oil concession development and returns but also with prevailing prices and marketing practices. Ideally the solution would seem to lie in the adoption of a Near East price basis which would result in substantial reductions in retail price levels and would offset much of the prevailing criticism on which interest in nationalization is based.
The Department has expressed to American interest operating in the area its concern regarding current Near East attitudes to both existing concession contracts and prevailing marketing practices, and the dangers inherent in an indifferent attitude toward them. Whether they and British oil interests might be induced to adopt a more liberal price regimen by a Syrian threat to nationalize petroleum marketing is open to speculation. Although the Department recognizes the right of any nation to nationalize industries assuming adequate compensation for the interests affected, it does not favor nationalization. In the Syrian case it considers nationalization of petroleum marketing to be an undesirable solution to this problem. Nonetheless the Department questions the wisdom, even in informal talks, of putting a one-sided brief—rather than an objective discussion of the proposal to nationalize petroleum marketing—before the Syrians. Such approach to this problem as the Legation makes should not be construable as informal pressure to discourage a decision to nationalize, which would be liable to generate suspicion of United States motives in international economic affairs and increase hostility toward United States and British interests in the Near East.
Informal objective consultation may, however, suffice to discourage Syrian officials contemplating nationalization as a solution to the price problem, particularly if it appears that previously unforeseen consequences and difficulties must be faced. In its informal talks with Syrian officials, the Legation should, therefore, suggest that the following points receive careful study before a decision is made:
A. Effect of Nationalization on Domestic Economy
1. A decision to nationalize petroleum marketing implies that adequate supplies of petroleum products are available. In the case of Syria, given that relations with Lebanon are not further strained, a large share of the domestic requirements may be derived from the IPC refinery at Tripoli. There will, however, be a serious gap between total consumer demand and the availability of supplies from this source. Assuring the adequacy of supply involves, therefore, the availability of foreign exchange to cover import needs, and some thought should be given to the drain on Syria’s sterling and dollar reserves which this may occasion.[Page 300]
2. If, after nationalization, adequate supplies were not available, what effect would a severe curtailment of supplies have on (a) Syria’s industrial development, (b) essential transport, and (c) Syrian economy.
3. In the event that adequate supplies cannot be maintained, how would the Syrian public react to a new rationing of petroleum products and how would the reimposition of rationing affect the stability of the Government.
B. Syrian Responsibility in Nationalization Program
Should the Syrian Government decide to nationalize petroleum marketing, consideration must be given to compensating United States, United Kingdom, French and Lebanese interests owning storage and distribution facilities in Syria. Compensation implies either substantial foreign exchange outlay at one time or a prolonged additional drain upon Syrian foreign exchange reserves. Nationalization can, of course, be accomplished without making compensation in foreign currency; or without making any form of compensation. Either of these alternatives leads to strained relations with the nations involved and may have a direct influence on the availability of supplies.
C. Effect of Nationalization on Future Private Investments in Syria
The impact nationalization of petroleum marketing is likely to have on future private investments in Syria should not be overlooked. Due consideration should be given the extent to which private enterprise would be willing to make further capital investments in Syria in view of the nationalization of an important sector of the Syrian economy where private enterprise had substantial investment. An immediate consequence may be the suspension of oil exploration now underway and a reluctance of other possible investors to take up the concession area, if abandoned.
D. What Effect Will Nationalization Have upon the Efficiency of Distribution of Petroleum Products
The decision to nationalize petroleum marketing implies that an organization ready to assume the task of distributing and vending petroleum products has been created. While it is probably true that most of the private companies’ service personnel will be willing to accept state employment, it remains for the state to provide competent managerial people. Failure to replace the management of the private companies with a competent administration will almost certainly result in an inefficient—and more costly—system of distribution.
Additional costs, if lack of efficiency cannot be overcome, will be a charge upon the state for both salaries and expenses.[Page 301]
E. How Will Nationalization Affect State Revenues and Prices of Products
The decision to nationalize petroleum marketing implies the State’s readiness to assume responsibility for assuring distribution and vending of petroleum products. Should operating expenses prove to be more costly than under private management, so that the profit margin enjoyed by private enterprise were eliminated, a reduction in retail prices could be accomplished only through a reduction in the tax income derived by the State, since the State would be obliged to defray a greater operating overhead while reducing the margin between the cost of products and their sale price.