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

221. Letter From the Director of the Oil and Gas Division, Department of the Interior (Stewart), to the Counselor of the Department of State (MacArthur)¹

Washington, May 16, 1956.

My Dear Mr. Macarthur: The attached memorandum has been prepared in this Office with the assistance of the Departments of Defense and State after a joint discussion of the U.K./Middle East oil paper.²

I wish to point out that, although our estimate of Western Hemisphere availability contained therein is preliminary, we are satisfied of its soundness as an “order of magnitude” figure. It is understood, of course, that no commitment in regard to future eventualities is implied or should be inferred from this estimate.

If it should become necessary to maximize shipments from the Western Hemisphere to the U.K./Europe area in emergency, the initial impact would fall primarily on the U.S./Gulf Coast. Far-reaching adjustments to the U.S. petroleum position would result, not the least of which would be a sharp rise in the price of crude petroleum at the wells and of products to the American public, and a lamentable draft upon U.S. oil reserves. Restrictive governmental actions, such as price and use controls, might be called for to cope with problems incident to these changes. To adopt such controls, for which there is no precedent or authority in existing law under conditions of peace, would entail serious political consequences.

A corollary to rising oil prices in the U.S. would be higher prices and shipping costs on shipments to the U.K. and Western Europe with the need for dollar payments to a much greater extent than at present. Although the British paper mentions 250 to 300 million dollars as an estimate of added dollar needs “at current prices” under Case A, this is believed to represent only a part of the probable potential liability. It seems realistic to assume that such liability would seriously aggravate the already difficult balance of payments position of the U.K. and perhaps other countries as well.

As to the more detailed appraisal of operating factors mentioned in paragraph 12 of the U.K. paper, we propose to explore this second phase of our assignment in consultation with experts of the Military Petroleum Advisory Board, and would thereafter be prepared to meet with the British on the technical aspects of the problem.

Sincerely yours,

H.A. Stewart

[Attachment]

Memorandum From the Director of the Oil and Gas Division, Department of the Interior (Stewart), to the Counselor of the Department of State (MacArthur)

As agreed at the meeting with you on May 10, 1956, the following brief comments are submitted with reference to the United Kingdom paper on Middle East oil which you might wish to discuss with the British.

We have studied this paper and believe that the only specific question raised that requires an immediate reply is contained in Section 7, page 2. This relates to the assumption that an additional output of about 25 million tons per year (500,000 B/D) could be promptly obtained from Western Hemisphere sources in the type of emergency contemplated.

This assumption appears conservative in the light of information available to us. It is estimated, solely upon the basis of a preliminary appraisal of physical facilities and operational capabilities, that about 40 million tons per year (800,000 B/D) of oil could be made available in a short time for emergency shipment from the U.S. Gulf/Caribbean area to the U.K./Western Europe. Use of this figure would change some of the British calculations.

In making this estimate no consideration has been given to the effect upon prices or costs, either at the well or delivered to Europe, that might result from the addition of so great an increment to the oil production required from Western Hemisphere sources. Under conditions of maximum production and tanker use, prices at the well and costs of ocean transport would undoubtedly increase significantly. Neither has consideration been given to political questions involving the possibility of controls on price or use which might be required of the U.S. or other governments under the conditions assumed. In peacetime an act of Congress would be needed to authorize such controls.³

H.A. Stewart

1. Source: Department of State, Central Files, 880.2553/5–1656. Secret.
2. Not printed. (Ibid., State–JCS Meetings: Lot 61 D 417)
3. The substance of this memorandum was conveyed to the British Embassy in a memorandum from Rountree to Bailey, May 17. In a memorandum for Hoover, May 21, MacArthur wrote, “In handing the memorandum to Mr. Bailey, Mr. Rountree would make clear that this is a technical evaluation of certain of the assumptions in the British memorandum and carries with it no commitment of any kind.” (Department of State, Central Files, 880.2553/5–2156. Roundtree’s memorandum to Bailey is attached to MacArthur’s May 21 memorandum.)