Foreign Relations of the United States, 1952–1954, The Near and Middle East, Volume IX, Part 1

880.2553/6–652

No. 257
Memorandum by David Longanecker of the Office of African Affairs to the Deputy Director of the Office of Near Eastern Affairs (Kopper)

confidential

[Washington,] June 6, 1952.

Subject:

• Conferences with major oil companies in New York on June 2–4.

In accordance with your suggestion, I accompanied Mr. Moline and Mr. Ortiz to New York for the conferences they arranged for June 2–4 with officials of the major oil companies concerned with foreign production, refining and marketing operations, particularly in the Middle East. These conferences were arranged to give the appropriate officials of the companies an opportunity to meet and discuss their problems, current and anticipated, with Messrs. Moline and Ortiz before their departure this month for their assignments as Petroleum Attachés to London and the Middle East, respectively.

We met with officials representing the (1) Asiatic Petroleum Company on Monday morning; (2) Socony Vacuum Oil Company on Monday afternoon; (3) Standard Oil Company of New Jersey on Tuesday morning; (4) Aramco followed by Standard Oil Company of California Tuesday afternoon; (5) California–Texas Oil Company on Wednesday morning; and (6) Gulf Oil Corporation Wednesday afternoon. The discussions were very cordial, and the principal points may be summarized as follows:

(1) The companies all feel they will be faced with continuing governmental demands for larger payments for producing concessions and transit rights in the Middle East. All share the opinion in varying degrees that some means should be developed to stabilize their position on bases which are equitable to both the governments and the companies. Aramco, however, appears to feel that for the time being the companies must struggle along on their own with the customary degree of informal assistance from the Department. At the same time, there is a general feeling that the U.S. and UK Governments should be working on developing a solution to the problem in view of the security interest involved. The companies do not have any clear ideas of how their position might be stabilized, but are giving the problem serious thought in the expectation that it will continue to grow worse and requires solution sooner or later.

Inquiry revealed that all of the companies are increasingly conscious of the need for greater attention to public relations, including company activities such as vocational-academic training-on-the-job, medical services, social facilities, etc. Cal-Tex reported they have led the way in on-the-job-training in their Bahrein production and refining operations which have been followed by Aramco in Saudi Arabia and Gulf Oil in Kuwait. Other contributions by the companies include foreign scholarships for eligible local people; funds for public buildings, hospitals, schools; the drilling of water wells for local use throughout the areas in which they operate, but the more the companies give, the greater are the demands (a nouveau riche behavior pattern on the part of the governments). The situation grows increasingly unpalatable to the companies operating in those countries where the Rulers have relatively tremendous incomes of which very little is used for improving the health, productivity and welfare of their people.

(2) One company commented on the withdrawal of the Superior Oil Company from Qatar, to the effect that (a) Superior’s relinquishment of its offshore concession had not had any noticeable salutary effect on the attitude of the other governments toward the oil companies operating in their territory, and (b) Superior did not give up its concession because of lack of confidence in its future relations with the Shiekhdom but because of financial developments in the company’s U.S. operations.

The industry also doubts that Iran’s predicament resulting from the extreme action taken by the Government against AIOC has had any moderating influence on the other governments in the area. The consensus appears to be that the other governments are fully conscious of the adverse effects of the Iranian Government’s extreme action, have little sympathy for that Government, but consistent with the behavior pattern of the “nouveau riche” will continue for some time to face the companies with ever-increasng demands short of nationalization.

(3) The companies are in general agreement that the annual rate of increase in world oil demand will gradually drop to a 6–8 percent annual rate of growth. Crude oil supplies will be adequate but the margin over demand will remain close if Iranian production is not resumed.

(4) The relationship between refinery capacity and products demand will also remain very close despite the new refineries under construction or planned. Here again, resumption of crude production in Iran and reopening of the Abadan Refinery would provide a more comfortable margin between products output and demand.

(5) The transportation situation, despite the substantial tanker building program, will also remain in close balance. Tanker rates are expected to remain above the USMC rate, and may be again very high during the coming winter as the tanker market is very sensitive to even slight variations between tanker supply and demand.

(6) The companies generally realize they may again face a dollar-sterling oil problem, the substitution of “sterling” for “dollar” oil in markets long on sterling and short of dollar exchange. The first impact of substitution would be on Western Hemisphere dollar oil shipments to Eastern Hemisphere markets, the second would be on Arabian oil for Eastern Hemisphere markets. Cal-Tex is not too pessimistic over the outlook, feeling that the British Treasury will be sufficiently flexible with respect to the arrangements made several years ago under which the company is permitted (a) to sell dollar oil for sterling in sterling areas as well as in some third countries, and (b) to obtain dollars from the British Treasury for reasonable profit remittances and dollar cost elements in the oil sold. Standard of New Jersey and Socony-Vacuum would be most affected by reappearance of the dollar-sterling oil problem. Gulf Oil is not involved in this marketing problem, as most of its 50 percent share of Kuwait production is taken by Shell under a long-term contract and the remainder shipped to refineries in the U.S.

Mr. Moline pointed this problem up by mentioning that Japan has a burdensome accumulation of sterling and a shortage of dollars, and oil appears to be the major item which the Japanese might acquire with sterling. While the American companies appreciate the possibility of currency developments favoring greater purchases of sterling oil, they find some comfort in the belief that the British companies cannot produce, in the continued absence of Iranian supplies, any appreciable quantity of oil beyond their normal share of the world market.

(7) Aramco expressed some concern over the possibility that with the federation of Eritrea with Ethiopia, the Ethiopian Government would, in favoring the Government-owned Ethiopian Airline, interfere with the company’s present arrangements under which it flies its own planes and when necessary charters Air Djibouti planes to transport personnel and foodstuffs from Eritrea to Dhahran. Mr. Duce was informed that the Department is now looking into this matter, as we are interested in both the company’s needs for labor and foodstuffs from Eritrea and the important economic contributions these activities make to the Eritrean economy.

(8) In the meetings with Standard of New Jersey and Aramco, Mr. Moline asked whether the companies had any views on the possibility of the development eventually of a separate price structure for Middle East oil based on its natural Eastern Hemisphere market, i.e., independent of the Gulf Coast price basis.

On this point, the company representatives expressed the possibility that as the Eastern Hemisphere petroleum market is supplied increasingly from Middle East and other non-Western Hemisphere sources, a price structure independent of the U.S. Gulf Coast may develop. The matter was considered interesting and deserving of consideration, as fuel oil, by far the major product quantity-wise from Middle East crude, is priced too low, in the opinion of the companies, in relation to both the price of crude oil and of coal with which it competes in the European and other Eastern Hemisphere fuel markets. At least a theoretical case can be made for this viewpoint, as the price structure for Middle East crude and products is based on the U.S. Gulf Coast price pattern which in turn is based on the dominant position of the higher-priced lighter products (particularly gasoline) in both (1) the product yield pattern of Western Hemisphere crude and (2) the product demand pattern in the Western Hemisphere market. The petroleum industry developed primarily on the basis of demand of gasoline and kerosene (and lube oils), with the heavier products considered as residuals to be minimized in refinery yields and priced accordingly. In general outline, this price pattern still holds and does not fit either the product yield pattern of Middle East crude in which fuel oil (which is priced at less than the crude oil from which it is derived) predominates, or the demand pattern of the Eastern Hemisphere market in which the lower-priced products, kerosene, distillates, and fuel oil predominate.