780.5 MSP/61252

No. 258
Memorandum by the Deputy Director of the Office of International Materials Policy (Evans) to the Deputy Assistant Secretary of State for Economic Affairs (Linder)1



  • Future MSA Financing of Crude Oil

Mr. W. John Kenney, Deputy Director of MSA, has advised the Department that MSA intends to take action this week with respect to future financing of crude oil shipments to participating countries. MSA is considering the following two possible courses of action:

Notify the oil companies involved that shipments of Middle East crude oil priced in excess of a specified price per barrel (maximum price to be specified by MSA, probably $1.43 per barrel f.o.b. Persian Gulf ports) are not eligible for MSA financing.
Remove crude oil from the list of commodities eligible for MSA financing.

The need for MSA action along the lines indicated is the result of the Middle East crude oil price controversy between MSA and the American oil companies which export Middle East crude oil to participating countries at $1.75 per barrel f.o.b. Persian Gulf ports and at the same time export the same crude to Western Hemisphere customers at $1.43 per barrel. MSA contends that the price charged on shipments to the Western Hemisphere is the maximum price eligible for MSA financing of Middle East crude oil under MSA Regulation 1. A claim for reimbursement of the overcharge on past shipments has been turned over to the Department of Justice. MSA is now concerned with the course of action to be followed in the future in respect to the price of Middle East crude.

The possible courses of action indicated have been discussed with BNA, WE, CA and OFD who all agree that this is a decision for MSA to make after they have carefully considered the impact of their action on the participating countries.

There is a strong tendency, however, to favor the first course of action for the following reasons:

The participating countries rely on Western Hemisphere sources for special types of crude which should continue to be financed by MSA;
A reduction in Middle East crude prices is more likely to be achieved if MSA financing continues to be available in the event [Page 601] the companies, or any one of the companies, elect to ship at a price eligible for MSA financing. If MSA financing is not available, as would be the case under the second course of action, the burden of obtaining a price reduction would be entirely on the participating countries; and
Removal of crude oil from the list of commodities eligible for MSA financing would immediately raise questions as to the logic of continuing to finance refined petroleum products. The first course of action would avoid raising this issue unnecessarily.

The only real argument in favor of the second course of action is that the participating countries will eventually have to face up to the problem of providing the dollars necessary to meet their dollar crude oil requirements, so there is no real reason for delaying that eventuality.

We have also considered the possibility that a refusal on the part of the oil companies to sell Middle East oil to the participating countries at a price acceptable to MSA might have the result of diverting purchases to the Western Hemisphere at a higher price and thus result in an unnecessary drain on MSA resources. MSA, however, has assured us that this cannot happen and that they would not finance increased purchases in the Western Hemisphere which might result from any action taken by MSA.

On the basis of these views, it is recommended that the Department advise MSA that the course of action to be followed is a decision for MSA to make, but of the two courses of action being considered the Department would prefer the first.

As long as Mr. Kenney requested the Department’s views by telephone, it seems to me that an expression of our views to MSA by telephone would be appropriate. Do you want to call Mr. Kenney, or shall I?

  1. This memorandum was drafted by McMaster.