Foreign Relations of the United States, 1952–1954, General: Economic and Political Matters, Volume I, Part 2

811.2553/4–954

The Under Secretary of State (Smith) to the Attorney General (Brownell)¹

secret

[Washington,] April 9, 1954.

My Dear Mr. Attorney General: On January, 1954, the Department received a letter² from attorneys representing Socony-Vacuum Oil Company, Inc., Standard Oil Company of California and The Texas Company in connection with the pending civil antitrust suit against these companies. In this letter the oil companies requested an opportunity to place before the Department of State and other interested agencies the results of their investigation concerning the probable effects on United States interests of pursuing the case against them. This request apparently resulted from a suggestion made in Judge Stanley N. Barnes’ letter of December 24, 1953,² to a representative of one of the companies.

On January 23, 1954, representatives of the companies concerned met representatives of this Department, the Department of Defense and the Central Intelligence Agency and presented evidence of the effect upon United States interests which may be expected to follow prosecution of this suit.³ A transcript of this presentation was transmitted to Judge Barnes shortly thereafter. Since then the Department of State has sought and obtained the views of our Ambassadors in the Near East concerning this question and has made an intelligence estimate of it. I enclose two copies of this estimate for your consideration.

In view of the conclusions reached in the estimate, it is my hope that arrangements can be made to settle the suit without protracted proceedings or publicity which would serve to damage United States interests in the Middle East.⁴

Sincerely,

Walter B. Smith

[Attachment]

Memorandum by Herbert J. Liebesny of the Division of Research for Near East, South Asia, and Africa to the Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Byroade)⁵

secret

[Washington,] April 1, 1954.

• Subject:
• Estimate of the Consequences of the Prosecution of the Pending Civil Suit Against Certain Oil Companies in the US

The Problem

To estimate the consequences for US national security interests in the Middle East^* of the prosecution of the pending civil suit against certain American oil companies.

Scope

This estimate considers the consequences in the Middle East of a vigorously pressed, protracted civil suit. It is assumed that there will be extensive evidence on the points raised in the government’s complaint and that the suit will be widely publicized in all its phases. No attempt will be made to forecast the nature of an eventual judgment in the suit or to estimate the actual economic consequences for the companies or the local governments of such a judgment, except insofar as speculations on the eventual outcome of the suit may influence reaction to the suit in the Middle East.

The consequences of prosecution of the civil suit will be considered solely from the point of view of US national security interests, which are assumed to comprise (a) maintenance of stable governments friendly to Western objectives, (b) maintenance of control of Middle Eastern oil resources by US or Allied Western interests, (c) maintenance of Western military facilities in the area, and (d) denial of Middle Eastern resources and strategic facilities to hostile interests. Consequences for the private interests will be considered only as far as they affect directly or indirectly the US national security interests. It is assumed that general world conditions and the basic aims of US foreign policy will remain essentially the same (i.e., that no general war will break out), that there will be no renewal of large scale Arab-Israeli hostilities, that the cold war will continue, and that the US cold war objectives will not undergo a significant change.

Background for the Estimate

1. Basic Factors Affecting the Estimate.

The US national security interest in the Middle East in its basic aspect is concentrated upon keeping the area available to the West and denying it to the Soviet Bloc. Availability of the area is considered important because of the increasing role of the area’s petroleum resources in the supply of the West and because of the strategic position of the area as a whole. Under the assumption of continued cold war it has been considered essential that the oil resources of the Middle East be available to Western Europe so as to avoid the depletion of Western hemisphere resources during the period of cold war. If control of these oil resources by the West is lost, an element of chance would be injected which may make advance planning difficult. As the Iranian example has shown, the aftermath of nationalization stopped the flow of oil from that country for several years and made the development of alternate sources of crude oil mandatory. Even if the flow of oil is restored, control by a government not friendly to the West or by unfriendly private sources might lead to an interruption of the flow at some critical juncture in East-West relations thereby providing interests hostile to the West with an additional means of pressure and strategic and economic advantage.

The strategic position of the West in the Near East can be maintained without a significant increase of Western military force in the area only if there are in the Middle Eastern countries stable governments friendly to the West. The stability of the governments of the Middle East is in many instances closely related to the continued exploitation of oil resources and the steady flow of oil revenue. This dependence probably is greatest in Saudi Arabia but it is true to a significant degree also in the other oil producing areas such as Kuwait, Bahrein and Iraq. Iran’s pressing financial problems are not likely to be solved satisfactorily without the restoration of the flow of oil revenue. Up to the present time all important Middle Eastern oil resources have been controlled by Western companies. Nationalization has been carried out only in Iran and is not believed to be an immediate threat in any of the other oil producing countries. Since approximately 1948, however, there has been an acute and ever increasing pressure on the part of the governments of the oil producing countries for higher oil revenues and this trend is likely to continue. It is likely to receive a stimulus if the Iranian oil controversy is resolved in such a manner as to give Iran real or apparent benefits which the Arab governments feel that they are not receiving.

The fact that there is significant participation by the respective governments in major British and French oil companies in the Middle East is well-known to the local governments and peoples. As a result, the interests of the oil companies and the interests of their home governments are frequently considered very closely linked and local grievances against one almost automatically become grievances against the other. The fact that the US adheres strictly to the principle of free enterprise and does not participate in the American companies exploiting oil resources in the Middle East, does not make any appreciable difference in this approach. The concept of large and interlocking corporate entities, such as the oil companies with their various subsidiaries constitute, is difficult for the average Middle Easterner to grasp, as are the complicated financial transactions involved in the operations of these companies. Therefore, it is difficult for the Middle Easterner in general to discern the difference between private companies operating independently, supported by their government only when they need such diplomatic support to preserve their acquired rights, and companies which actually come close to being instrumentalities of their home governments. This does not mean that the local governments are wholly unaware of the difference between the relationship of US companies to their government and that of British and French companies to theirs. However, it is difficult for them to realize that this difference is basic and not merely in the degree and form of influence.

Nationalist and leftist propaganda in the Middle East has exploited this close link in the Middle Eastern mind between oil companies and Western governments to represent the former as “tools of imperialism” and instrumentalities of the Western governments through which they exercise political and economic control in the Middle East. In addition this propaganda has stressed the theme that the oil companies use all possible means to exploit the Middle Eastern countries and to deprive the people of their just share in their countries’ natural resources.

The US is a relative newcomer to this area both with regard to large-scale economic as well as strategic and political interests. However, in this short span of time it has become deeply involved in the controversies affecting the area. The Palestine War significantly lowered the prestige of the US in the Arab states because of alleged partiality toward Israel and the continued tension between the Arab states and Israel has not allowed the suspicion of US motives to subside. In addition, nationalist and leftist propaganda have frequently pictured the US either as fully supporting alleged British imperialist moves in the area or as attempting to replace the UK in the position of prime “imperialist” power.

The actual relationship between the US and the UK in the region has been marked by collaboration on the broad questions of security facing the West in the Middle East. However, British and US aims are not identical, since the UK is attempting to preserve the remnants of its imperial position in the Middle East and to consolidate its control in selected areas, such as for example the Persian Gulf principalities as far as feasible. With regard to oil, too, the aims of the US and the UK are parallel but not identical. While the oil resources of the Middle East are of importance to the US primarily from the viewpoint of its NATO defense interests rather than from the standpoint of domestic requirements, the UK’s principal source of oil is the Middle East.

The aims of the USSR in the Middle East can probably best be characterized at this time as being directed toward denial of the area to the Free World as a base and source of raw materials in case of a crisis. While it may be true that the Soviet Bloc does not need the Middle Eastern oil resources under present cold war conditions, it would be very advantageous to it if Western Europe could be made to feel that continued availability of Middle Eastern oil is in last analysis dependent on Soviet good will.

2. The Impact of Earlier Disclosures.

Aside from these general considerations, the extent and impact of the publication of the “Report of the Federal Trade Commission on the International Petroleum Cartel” and of the criminal suit which was dropped will have to be taken into account in estimating the consequences of a sustained and vigorously pressed civil suit. Before the publication of the FTC report it was estimated that the effects of that publication would significantly aid Soviet propaganda in the Middle East and adversely affect the US position. The immediate tangible effects of the publication and the institution of the criminal suit were not as severe as anticipated. This may in part have been due to the fact that the more potentially damaging portions of the report were deleted before publication. In addition, in the fall of 1952 the attention of the Middle East public was rapidly drawn away from the report and the suit by the ouster of King Faruq and the events following it in Egypt, the worsening of the Iranian situation, and the possible effects for the Middle East of the forthcoming presidential elections in the US. However, the governments were aware of the existence of the report and of its implications and there have been definite indications that they were ready to use it against the oil companies should occasion warrant. The Saudi Government had the report translated into Arabic and used it during negotiations with ARAMCO. The stay in criminal proceedings in January 1953 and the dropping of the criminal suit in April 1953 further removed the oil cartel issue from public attention in the Middle East. The filing of a civil suit as such does not appear to have aroused great or sustained interest, probably because it was a technical move which was not followed by any intensive action and was not accompanied by large-scale publicity.

Estimate

1. General.

It is not estimated that a vigorously pressed and widely publicized civil suit will provoke entirely new trends in the Middle East or that any failure to press the civil suit will of necessity prevent the development or the intensification of trends adverse to Western interests in the Middle East. It is believed, however, that revelations in the course of a civil suit with their attendant publicity could intensify adverse trends and provide interests hostile to the US and its Allies with effective propaganda material.

2. Effects Upon the Attitude of Middle Eastern Governments.

The effects of a vigorously pressed civil action upon the attitude of the Middle Eastern governments would vary from country to country. The character and the intensity of these reactions would depend not only on the nature of the arguments made and the evidence produced in the suit, but also on such variables as the policy objectives the individual government may have at the moment; the state of its relations with the companies, with the US and with other Western powers at the time; and, to some extent, on cold war and general Middle East political developments.

In general, effects are likely to be most adverse in areas where local pressures on the companies have been strongest. In Iran, it is probable that the suit would not lead the Zahedi government to refuse to reach an agreement with the oil companies, since the Zahedi government is strongly inclined toward such an agreement. However, those elements in Iran which are strongly opposed to any foreign participation in the production of Iranian oil could utilize the revelations during a civil suit, along with other arguments, to make it more difficult for the Zahedi government to “sell” the oil agreement to the general public and to obtain parliamentary ratification. Should these elements again come to power in Iran they might well use such revelations to justify complete ousting of foreign interests from the Iranian oil picture.

However, even if there are no immediate tangible adverse effects in Iran, Iranian developments may increase adverse reactions in the neighboring oil producing Arab states. Should US companies be permitted to combine with other Western companies for the exploitation and marketing of Iranian oil while combinations of oil companies in the Arab states are at the same time under attack in court by the US Government, the governments of the Arab states involved will be very likely to reach the conclusion that the US is applying two yardsticks—one for Iran where the Palestine question is not involved and where the US feels “it has to come to the support of the British,” the other in the Arab states where the US does not want to give any decisive help because of the Arab-Israeli tension.

In Saudi Arabia governmental reactions to the civil suit are likely to be twofold. On the one hand there will probably be bewilderment that the US Government regarded as Saudi Arabia’s fast friend, is moving against major American commercial interests in the Middle East with the likelihood of hurting Saudi Arabia economically. It is not to be ruled out that the strongly anti-Israeli King might see some pro-Zionist angle in the pressing of the civil suit, even without taking Iranian developments into account. On the other hand the Saudi Government may conclude that the company should be more urgently pressed for increased revenues since it apparently made profits which were far too large. These two reactions may at first glance seem contradictory. However, Western logic cannot be applied to Middle Eastern reactions which are likely to be governed more strongly by emotions than by coldly logical deductions. In addition, the Saudi Government will probably be impressed much more by superficial deductions and conclusions stemming from isolated facts than by a careful, reasoned analysis of the whole suit which is likely to be beyond comprehension even of most of their experts except the very few who have at least some training in Western law.

In Iraq, the suit may not have an immediate effect upon the standing of the oil companies there since US firms hold only a minority interest in the Iraq Petroleum Company (IPC) and its subsidiaries. In addition, the present Iraqi Government and its probable successors (unless the complexion of the government changes radically) may not want to use the suit as means of pressure for increased revenues. They may regard it as more politic to await the results of Saudi pressure on ARAMCO and then move against IPC.

Reaction among the governments of the Persian Gulf principalities will probably be extremely limited since these governments are under effective British control and could not move freely unless present British controls were considerably relaxed.

In view of the present uncertain situation in Egypt, governmental reaction there is difficult to predict However, it is very probable that whatever the complexion of the Egyptian Government, it will be preoccupied by the questions of the Suez Canal and of the Sudan. While revelations of the suit may be taken as another indication of “imperialist machinations” they are unlikely to influence governmental attitudes very strongly.

In the non-producing countries which have granted pipeline transit rights—Jordan, Lebanon and Syria—governmental reactions to the suit are likely to manifest themselves in increased pressures for greater benefits from the pipeline companies, thereby merely intensifying an existing trend. Here too increased suspicion of US as well as company aims may result.

An additional possible effect of a prolonged suit on all governments of the Middle East countries may be the raising of doubts as to the security of their oil revenues and the usefulness of continued negotiations or dealings with the oil companies. Such a reaction is likely to come later, when speculations as to the eventual outcome of the suit may become strong with an outcome adverse to the oil companies being forecast. It is unlikely that the governments would be able to evaluate the consequences of a possible judgment against the oil companies beyond the fact that the oil companies operating within their borders would be affected seriously. At that point the governments might even begin to ask themselves whether they should not try to find other interests to take over the exploitation of the national oil resources or perhaps approach some form of nationalization.

3. Effect on Non-Governmental Attitudes.

In most Arab states outside the Arabian Peninsula, the urban middle group constitutes the politically articulate element. This group is growing, in general is dissatisfied with its economic and political position within Middle Eastern society and supplies most of the leaders and supporters both for nationalist and leftist movements. It is generally hostile to the former imperial powers, Great Britain and France, and strongly resents what it regards as support given to these powers and to Israel by the US. This group is likely to seize immediately upon any issue which would put US motives into question. Revelations made during the suit are likely to be played up by the Middle Eastern press which frequently indulges in sensationalism. They may then be used by elements in the middle group to support their argument that the US cannot be trusted, that it tolerated exploitation of the Middle Eastern countries by the oil companies for a long time and even now stepped in not because it had the interests of the Middle Eastern countries at heart but because of internal US political reasons or possibly in order to help Israel or the UK. The longer the suit lasts, the more sustained and sensational the publicity and the more detailed the evidence, the more profound and widespread are the effects of this exploitation of the suit by middle group elements likely to be.

4. Communist and Fellow Traveler Reactions.

In pursuance of their ultimate strategic goal of swinging the Middle East into the Soviet orbit, the Communists are taking the initial tactical approach of attempting (a) to eliminate Western economic interests from the Middle East as a step in isolating the area from the West and (b) to undermine all non-Communist governments or groups in power by identifying them as willing tools of Western economic “exploitation.” The section of the press dominated by Communists or fellow travelers took the line in 1952 especially in Beirut, the center of Communist propaganda machine activities in the Arab states, that the FTC report demonstrated what the Communists had always contended: namely that the oil companies were exploiting the Middle East. Therefore it was argued, “popular” demands for the nationalization of the oil companies was justified. It is likely that a prolonged and vigorously pressed civil suit will bring not only a revival but an intensification of this propaganda line. It could be utilized with some chance for success in attempts to jeopardize negotiations between the governments and the oil companies for increased benefits by publicizing the belief that the oil companies are not to be trusted, that the governments are falling into the traps set by “international monopolies,” and that the solution of the Middle East’s oil problem is nationalization and not negotiation. It should be pointed out that Communist and fellow traveler propaganda is likely in any event to stress the alleged sinister motives and the need for nationalization. However, the allegations made and facts divulged and broadcast during a civil suit would provide these groups with additional propaganda material which would have the great advantage from a propaganda viewpoint of not being wild accusations but statements made in a US court. It is to be expected that propaganda by local Communists and fellow travelers will be supported by similar propaganda from Moscow.

5. Effects of Adverse Reactions on Other Western Interests in the Middle East.

Strong adverse reactions in the Middle East to a civil suit may also reflect upon other Western interests, especially oil interests, in the area. Middle Eastern opinion and least of all Soviet and Communist propaganda are not likely to distinguish between American and non-American companies, especially since the latter are involved in the suit and evidence showing their dealings with the American defendants in the suit is likely to be submitted. Therefore, it is likely that whatever adverse reactions there are will be directed against the oil companies in general. By the same token, any “anti-imperialist” propaganda derived from facts established or allegations made during the suit is likely to be extended to all Western countries with interests in the Middle East and not restricted to the US.

6. Effects on Relations Between the US and Its Allies in the Area.

While it is unlikely that the civil suit and attendant propaganda will have a decisive influence on the relations between the US and its allies in the area, it may exacerbate existing tensions and difficulties. The relations between American and non-American oil interests are likely to be affected to some degree. British oil interests have not always approved of the methods of operation of American oil companies in the Middle East, feeling that they were too prone to give in too easily to local government pressure. The possible revelations of the suit and the uncertainties created thereby are likely to reinforce the feeling particularly on the part of British interests, that collaboration with American interests is difficult. The overall impression might also be created among our European allies that the US does not have a clear cut and forceful Middle Eastern policy and that the US Government allows itself to be swayed by the contingencies of the domestic political situation in the US.

7. Conclusions: Probable Overall Effects on the US National Security Interests in the Middle East.

A protracted and vigorously pressed civil suit is likely to intensify the already existing atmosphere of suspicion and distrust with regard to the aims in the Middle East of the US and the Western powers in general. The exact extent of the damage that might be done is difficult to estimate since the intensity of the exploitation of the suit in adverse propaganda will depend to a considerable degree on the general political situation developing in the Middle East. However, it is estimated that the overall effect will be damaging and will render the achievement of US policy goals more difficult. The prestige of the US, already impaired as a consequence of the Arab-Israeli conflict, is likely to be further lowered if it is revealed that companies regarded for so long more or less as symbols of the US, have indulged in practices strongly disapproved by their government. Uncertainty about US aims is likely to be increased and the willingness to believe in announced US policy goals may possibly be affected. While hardly the decisive element in US relations with the Middle East the suit is likely to constitute a potent aid to those elements in and beyond the Middle East which wish to diminish if not eliminate the role of the US in that area.

1. Drafted by A. David Fritzlan of the Office of Near Eastern Affairs and Armstrong and cleared by Fritzlan with Phleger, Kalijarvi, and Eakens. A note on the source text indicates that the original letter was delivered by special messenger on Apr. 10.
2. A copy of the letter under reference here is in file 800.2553/4–554.
2. A copy of the letter under reference here is in file 800.2553/4–554.
3. For extracts of a 57-page transcript of the discussion at this meeting, see volume ix.
4. No reply to this letter has been found in Department of State files.
5. The memorandum was sent to Assistant Secretary Byroade through Philip H. Tresize, the Deputy Director of the Office of Intelligence Research. There is no indication on the source text as to who drafted the memorandum.
6. For purposes of this estimate the Middle East is defined to comprise Aden, Bahrein, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Muscat, Qatar, Saudi Arabia, Syria, Trucial Oman, and Yemen. Israel and Turkey are excluded. [Footnote in the source text.]