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

880.2553/8–1753

No. 306
Memorandum of Conversation, by the Deputy Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Jernegan)

secret

[Washington,] August 17, 1953.

Subject:

• Middle East Oil

Participants:

• Robert H. Scott, British Minister
• The Acting Secretary, W. Bedell Smith
• NEA: Mr. Jernegan

Mr. Scott said that his Government was greatly concerned over the Middle East oil picture and wished to propose that informal talks be initiated on the subject between representatives of the British Embassy in Washington and appropriate officers of the Department. He suggested that Mr. Harold Beeley, Counselor of the Embassy, would be designated on the British side and that Assistant Secretary Byroade would seem to be an appropriate officer on the American side.

General Smith observed that he fully shared the British Government’s concern over the oil picture in the Middle East and that he saw no objection to the proposed talks. Our Officers were always at the disposal of the Embassy for discussion on any subject. He agreed that Mr. Byroade was the indicated Officer in this case.

General Smith and Mr. Jernegan both remarked, however, that while we agreed on the danger we would probably find ourselves in disagreement with the British on the tactics to be followed. The United States was inclined to think that the oil companies should accept the realities of the situation and make the best bargains they could to retain their foothold in the Near East. General Smith hoped that the proposed discussions would not degenerate into a haggling over tactical questions. He did not want a repetition of the Iranian affair in which the United States had constantly been pushing the British to make concessions to the understandable irritation of the British Government. He hoped that in the present case we could agree on general principles without attempting to settle all the tactical details.

Parenthetically, General Smith remarked, [we?] were convinced the Anglo-Iranian Oil Company could have made an acceptable settlement with the Iranian Government two or three years ago on the same fifty-fifty basis as that adopted by the Arabian American Oil Company. He pointed out that Aramco had successfully maintained its position in contrast to the AIOC. He assumed that one thing which had inspired the present British approach was fear that Aramco was about to make further concessions to the Saudi Arabian Government which would have repercussions on British oil interests. He thought Aramco had done very well so far in keeping a little bit ahead of the procession in its dealings with the Arabs and we were not inclined to discourage this policy.

Mr. Scott agreed that this was one, but only one, of the elements which the British Government undoubtedly had in mind. He said the British Government felt the problem of Middle East oil should be approached from a political rather than a commercial basis. There were major political and strategic interests involved. For that reason, his Government wanted the proposed talks to be conducted by political officers rather than oil experts.

Mr. Scott also observed that even from the commercial-financial point of view, the British Government had a more direct interest in Middle East oil than the United States. From this angle, the American Government was interested only in seeing that American companies continued to have successful operations and make profits. The British Government was interested not so much in the profits made by the companies as in the continued free flow of oil payable in sterling, thus avoiding a foreign exchange drain on the British Treasury. Mr. Jernegan replied that this might be a reason why the British themselves should have less objection to larger payments by the oil companies to the Arab Governments. To take a hypothetical case, if IPC should agree to pay Iraq sixty percent of its profits instead of the present fifty, this would have no effect on the flow of sterling oil. Mr. Scott agreed that this seemed to be a valid point.

Mr. Scott left with General Smith the attached memorandum on Middle East oil¹ which, it was understood, was intended to serve as a starting point for the discussions between the Embassy and the Department. It was agreed that arrangements for the talks would be made between Mr. Byroade’s office and Mr. Harold Beeley.²

[Attachment]

Paper Prepared in the British Embassy

Middle East Oil

I. The Eastern Hemisphere’s Dependence on Middle East Oil

The countries of the Eastern Hemisphere, and in particular those in Western Europe who are members of N.A.T.O., are becoming increasingly dependent on Middle East Oil. At the present time the Middle East is providing Europe with about 70% of total requirements, and about 60% of the requirements of the remainder of the Eastern Hemisphere. It is also becoming an important source of supply for South America. Moreover, as the Middle East is the only major proven production area that is capable within the next few years of a large expansion in output it will be called upon to supply the greater part of the free world’s additional requirements outside North America. By 1958 it is expected that the Middle East will be supplying about 90% of the requirements of the Eastern Hemisphere. The maintenance of access to Middle East sources is therefore a vital interest to the entire western world both in peace and war.

II. Threats to Western Oil Interests

(i) The confiscation of Persian oil has meant denial of access to Persian resources. While increased output elsewhere has, for all practical purposes, made good this loss, the fact remains that Persia has set a bad example by unilateral action in breach of her solemn undertakings. There remains the possibility that other producing countries, especially in the Middle East, may be tempted to follow the Persian example.

(ii) Apart from the impact of the Persian affair, the growth of militant and often irrational nationalism threatens Western interests throughout the Middle East. The political pressure in the Middle East is such that these countries will have no compunction in using nationalist and xenophobe fanaticism as a weapon against foreign companies, or in diverting against the companies the discontent of the people with conditions obtaining under existing regimes.

(iii) The present situation in Saudi Arabia is of immediate concern. The price negotiations with Aramco, which are tantamount to a renegotiation of a contractual obligation, have been in suspense but are expected to be renewed shortly. The uncertainty of the existing situation, and of its possible outcome, will inevitably affect similar current negotiations in other Middle East countries and notably in Iraq, where, in fact, the pressure has already begun. Moreover the possibility of wider repercussion elsewhere cannot be ignored.

(iv) It is known that the Saudis and the Iraqis have been in close consultation over prices, and are in process of ‘ganging up’ against the companies, with the object of extorting every cent they can.

(v) The ‘pipeline’ countries (notably Syria and Lebanon), dissatisfied with present agreements in respect of the pipelines which cross their territories, are demanding a new form of transit agreement involving a sharing of profits, although their contribution in fact amounts to little more than a wayleave.

(vi) Egyptian interferences with the Suez Canal and the growing pressure of the Egyptian Government on the Suez Canal Company may endanger the passage of oil through the Canal.

III. Urgent Problems

If the burdens imposed upon the oil industry continue to be recklessly increased the ability of the companies to maintain and expand their operations will be jeopardized. The interests of the British and United States Governments are closely allied in all these problems. Certain of them cry out for an early solution, and the case for a coordinated policy towards them is overwhelming. For example:—

(i) What happens in Saudi Arabia is bound to have an effect in neighbouring countries, and it is most important that no precipitate action should be taken during the present Aramco-Saudi negotiations. Urgent consultation between the companies and between Her Majesty’s Government and the United States Government is therefore most desirable.

(ii) The pipeline negotiations with the transit countries also require co-ordinated Anglo–American action.

IV. Action Advocated

Her Majesty’s Government would propose the following as appropriate action:

A. General

(i) Both Governments should facilitate consultation between their respective oil companies in order:

(a) to exchange information, and

(b) to work out common policies on particular problems.

The two Governments should also coordinate their own policies towards these problems.

(ii) The two Governments should be ready to support each other’s representations on behalf of their respective oil companies in appropriate cases.

(iii) Governments and companies should give urgent consideration to the steps necessary to improve Arab understanding of Western enterprise and intentions. They should encourage the Arabs to develop a sense of common interest with the West and to realize that by cooperating with the West they will be enabled to utilize their oil resources to the best advantage of their countries.

B. Specific

The arrangements contemplated under A (i) above should be made without delay so that there may be full consultation between the Companies concerned and subsequently between the United Kingdom and United States Governments on the subject of—

(i) the Saudi Arabia/Aramco and the Iraq/Iraq Petroleum Company price talks.

(ii) the Syria/Lebanon pipelines transit charges problem.³

1. See below.
2. A memorandum by Byroade to Waugh and Phleger, dated Aug. 19, not printed, asked them to read this memorandum and its attachment. Byroade’s memorandum advised that past conversations with the British had generally had negative results, and he feared the forthcoming talks would be the same. His main concern was that the Department of State would be talking to the British on a general subject on which there was no coordinated government policy line, and he had “reluctantly come to the conclusion that there cannot be any U.S. Government policy line in the near future.” (880.2553/8–1953)
3. Despatch 793 from London, Aug. 20, not printed, reported the views of the Embassy on the British paper. The Embassy believed the subject of Middle East oil was so important that policy discussions with the British should be given the most careful study. It expressed the view that attempts to foresee and forestall problems relating to Middle East oil were overdue, and said its despatch was stimulated in part “by the dangers of too much complacency regarding present developments affecting Middle East oil, of too little interest in decisions by companies which seem likely to have serious international repercussions in the near future and of a failure to foresee situations similar to that which resulted in Iran from the attitude of the British Government toward the Anglo-Iranian Company’s policy and problems.” The despatch concluded that a U.S. Government policy should be developed soon and should be coordinated with the Government of the United Kingdom. (880.2553/8–2053)