Foreign Relations of the United States, 1955–1957, Foreign Aid and Economic Defense Policy, Volume X

219. Preliminary Report by the Economic Intelligence Committee¹

Washington , May 8, 1956 .

ECONOMIC IMPLICATIONS OF THE DENIAL OF MIDDLE EAST OIL

Summary

1. The Middle East is potentially the Free World’s most important petroleum area. It contains the bulk of the proved oil reserves, is the principal oil exporter and is second only to the U.S. in oil production. Middle East oil now supplies nearly one-half of Free World oil requirements (excluding the U.S.). Eastern Europe is almost entirely dependent on that area for its crude oil supplies.

2. If the oil-producing and oil-transit states in the Middle East deny oil to the Western nations, they could, with their own manpower and resources, operate their oil industries at a low level but sufficient to meet their own limited needs. The principal weakness of these states is not in production but in the lack of their own tankers to move the oil and the distribution facilities to market it in the Free World.

3. The Sino-Soviet Bloc is capable of assisting the oil states with respect to skilled personnel, know-how, materials, and equipment. However, since the Bloc is a net exporter of petroleum, it is unlikely that the Bloc could absorb any significant quantities of Middle East oil without a corresponding cutback in Bloc production. Moreover, the relatively few Bloc tankers represent a maximum lift capability of only about one-tenth of the current Middle East output.

4. Denial of Middle East oil would involve serious dislocations of supplies for the West, necessitating governmental and intergovernmental arrangements. The kind and degree of impact would depend in part on whether the denial was partial or complete, and in part on its duration. In any case, major production and tanker shifts would be required in order to maximize the oil potential of other Free World sources, principally the U.S. Gulf and nearby areas, and at the expense of Western Hemisphere reserves. The fuel shortages would be severe, especially in Western Europe. Pressure on oil and other fuel prices and tanker rates would be intense.

5. Partial denial (as outlined in Case 1 of this report) would probably reduce Western Europe’s supply of oil by approximately 15 percent of present consumption, but further increases in production elsewhere and rearrangements of transport could eliminate this shortage within a year. By contrast, complete denial (Case 2) even a year after the initial impact would probably result in a reduction of Western Europe’s supply by approximately 80 percent, if the entire burden were borne by that area. If the United States rationed its consumption in order to equalize the loss, the Western European deficiency would be reduced, but the over-all Free World loss would still be about 15 percent of present consumption. In either case denial would result in higher oil costs, a significant dollar drain on West Europe’s balance of payments, and a slowdown in energy consumption throughout the Free World, presently growing at a rapid rate.

6. The immediate economic effect of denial on the producing and transit states would not be severe, but after six months or more, and in the absence of external economic assistance, a critical economic situation would exist in those states which depend almost entirely on oil revenues.

1. Source: Department of State, PPS Files: Lot 66 D 487, Strategic Materials (Oil). Secret. Prepared at the request of the NSC Planning Board by an ad hoc working group of the Economic Intelligence Committee (EIC) that consisted of representatives of the Departments of State and the Interior, the Office of the Secretary of Defense, the International Cooperation Administration, and the Central Intelligence Agency. It was approved as a preliminary EIC report for selected distribution and was sent to Hoover under cover of a May 23 memorandum by W. Park Armstrong. Only the summary of the report is printed. The full text includes a foreword, an introduction, tables, and charts. A copy of the May 3 draft of this report, sent to Hoover by Armstrong under cover of a memorandum dated May 4, is ibid., State–JCS Meetings: Lot 61 D 417. Copies of both the draft and the report are also in Eisenhower Library. The May 3 draft is attached to a memorandum of May 4 from Robert Komer to Dillon Anderson in the Project Clean Up Records, 1953–1961, and the May 8 report is in CFEP Chairman Records, 1953–1961.