240. Memorandum From the Officer in Charge of Economic Organization
Affairs (Moline) to the
Special Assistant to the Under Secretary of State (Sohm)1
Washington, January 7,
1957.
SUBJECT
- The British Memorandum Presented January 4 on Transport of Middle East
Oil2
The subject of the memorandum is most important. It warrants the prompt
attention by governments and oil companies which the British suggest.
Defense, Interior, ODM and State are
importantly concerned with the issues which are raised.
The problem could be solved if the U.S. and UK
oil companies were able and willing to build tankers sufficient in numbers
to bypass the Canal. They are not. The solution depends in the main on
political arrangements guaranteeing secure oil transit through pipelines in
the Middle East or through the Canal. The consequences of failure are also
political deriving from an undermining of the economies and military
position of Western Europe and our relations with this key area.
In view of the political factors mentioned, I believe that the U.S. position
should be worked out interdepartmentally under State Department
chairmanship. Other agencies such as ODM
could deal
[Page 648]
with particular aspects
of the problem such as tankers. A case could be made for E, EUR, or NEA chairmanship. I would favor either of the
latter in view of the predominance of political elements.
In addition to the transport considerations raised by the British I would
suggest broadening the study to include under Section VII3 the question of guaranteeing adequate production of oil
in the Middle East. In another few years the production of single countries,
e.g. Saudi Arabia and Kuwait in particular, will be so large that the loss
of any one will create difficult problems of replacing the lost supplies
especially as the Western Hemisphere may then be a net importer of oil.
[Attachment]
PRELIMINARY DFI COMMENTS ON THE RECENT
UK PAPER ON OIL
1. The UK paper on the long-term problem
of transport of Middle East oil makes the following assumptions which
require further study by this government:
- a)
- that the demand for Middle East oil to be shipped west of Suez
(including the Western Hemisphere)
will increase from 2,200,000 b/d in 1955 to 3,800,000 b/d in
1960, 6,100,000 b/d in 1965 and to 8,700,000 b/d or even
10,200,000 b/d in 1970 (depending on whether the US would import
3 million b/d or content itself with 1.5 million b/d); demand
west of Suez excluding the Western
Hemisphere, will increase from 1,860,000 in 1955 to 3,200,000 in
1960, 4,900,000 in 1965 and 6,800,000 in 1970. A relatively
small amount increasing from 80,000 b/d in 1955 to 800,000 b/d
in 1970, corresponding to movements to South America via the
Cape and to the west coast of the USA via the Pacific, would not be affected by the
Suez and pipeline problems.
- b)
- that to cope with the transportation problem a compromise be
adopted between the three principal solutions, building up of
the Suez Canal, construction or expansion of pipelines and
construction of supertankers for the Cape route. The paper
argues in this respect that in view of political risks involved
Canal and pipelines should be expanded with caution. The Canal—through which more than 1.5 million
b/d were carried in 1956—should be built up only to a capacity
of 3 million b/d (No. 18), in other words only the 8th
improvement program of the old Canal Company should be carried
out. This program had been started in December, 1954 and
probably would have been finished long before 1965. The Company
appeared to be willing to finance it without outside help. The
pipelines through which 800,000 to 900,000 b/d are moved now,
should reach a total
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capacity of 1.6 million b/d including the 400,000 b/d capacity
of a line from Northern Iraq to Turkey. These ends, both as
regards the Canal and the pipelines, would be achieved by 1965
(which presumably means the end of that year). The remainder of
West-bound Middle Eastern oil would have to move via the Cape.
These shipments would increase from 400,000 b/d in 1960 to 1.1
million b/d in 1965—and since Canal and pipeline development
would stop at that time—rise rapidly to 3.3 million or even 4.8
million b/d in 1970.
2. The British estimate (Annex ‘A’) of demand for Middle East oil in
Western Europe and West and North Africa (that is, west of Suez
excluding the Western Hemisphere) shows the following rates of growth:
|
thousands of barrels daily |
average annual rate of increase (compound) |
| 1955 |
1,860 |
12 |
| 1960 |
3,200 |
9 |
| 1965 |
4,900 |
7 |
| 1970 |
6,800 |
|
These rates represent an average rate of growth in oil consumption of 9%
per annum (compound) during the period 1955–1970, compared with a post
war average of over 13 percent in OEEC
oil consumption from all sources. The British estimate of oil
requirements for the decade 1960–1970 may, therefore, be on the
conservative side. This is in marked contrast to the general tone of
their paper which is to emphasize the enormity of Western requirements
for Middle Eastern oil. It should be noted, however, that the British
estimates for the 1960’s are higher than those of the OEEC Oil Committee in their report of
September 1956. For 1960, they are about 5% higher than the OEEC, while for 1970 they use the OEEC forecast for 1975. Nevertheless, we
should explore with the British the basis for their assumption of a
considerable decrease in the rate of growth in oil use during the
1960’s.
We have no comment at this time regarding the British estimates for the
entire area west of Suez including the Western Hemisphere.
3. It would seem questionable, at first sight, whether to increase the
capacity of the Suez route beyond 3 million b/d, a second Canal would
have to be built (No. 19). However, the UK view might be correct, after all, since not only about
150 million tons of oil, but probably 30 to 40 million tons of other
west-bound goods would use—or try to use—the Canal by 1965. Increasing
quantities of dry cargo also are moving westward through the Canal,
amounting (in tons) to roughly speaking thirty percent of the oil moved
in the
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same direction. The
UK paper suggests priorities in favor
of the tankers (No. 19), a measure not devoid of political risks. The
statement that “the cost of moving oil through the pipelines or through
the Canal is, at present, roughly equivalent” (No. 15) does not seem to
be quite convincing. But supposing all assumptions of the UK’s paper to be correct, many contingent
problems need to be investigated thoroughly, among them:
- a)
- the total dead weight tonnage of new tankers needed. This
figure depends largely on the speed of the vessels which is
assumed to be 16 knots (No. 21). It should be mentioned,
however, that even now 20 knot tankers are being built
(Petroleum Press Service, January 1957) and that the
calculations of the UK paper
(mainly in No. 21) seem to be based on speeds of less than 16
knots. The “additional requirements” therefore might be less
than 25.5 million dwt.
- b)
- The UK paper (No. 21) expects
an annual net increase in tanker tonnage of 3 million dwt of
which about 1 million dwt might be required for routes other
than the route from the Middle East to destinations west of
Suez. Other observers, however, estimate the deadweight tonnage
of tankers on order or under construction in the Free World
alone at 23.5 million dwt (Am. B. of Shipp., Bull, of Dec.
1956), or even 28.9 million dwt (Petroleum Press Service January
1957) as compared with an operable total of about 43 million dwt
now. Fairplay, London (December 13, 1956) expects that 5.5
million dwt might be delivered in each of the next four years
while scrappings would amount to about 750,000 dwt per year. If
these estimates are correct, the net increase available to
Suez-west routes would amount to 3.75 million dwt (5.5 million
minus 750,000 minus 1 million for “other” routes) and not to 2
million dwt. Between 1961 and 1965 tanker building capacity very
probably will increase. But even assuming no such increase in
capacity and output there would be hardly any world-wide tanker
deficit by 1965 unless scrappings were greatly stepped up and
“other” routes unexpectedly would require large additional
tanker fleets. For the total increase of the Free World’s tanker
fleet would amount to more than 30 million dwt (nine times
3,750,000) as compared with “additional requirements” of 25.5
million dwt.
- c)
- The UK paper seems to endorse
the assumption that super tankers of 60,000 dwt could be
operated on the Cape route at a cost roughly comparable to that
of operating 40,000 dwt tankers through the Canal (No. 15). It
is not quite clear whether total costs or direct costs are
meant. Considering the importance of wages as a cost factor,
there would be a considerable difference between the costs of
transportation in American flag and foreign flag tankers. Some
thought also should be given to the routing of empty tankers
through the Canal while moving them via the Cape when
loaded.
- d)
- The UK paper (No. 22 Sept.)
mentions some of the problems connected with the construction of
super tankers, as the expansion of yard capacities, the
construction of berthing and dry dock facilities and the
scarcity of steel. Perhaps the manpower problem should be
mentioned too. (According to one source, the output of tonnage
in the UK is restricted to about
seventy percent of the yard capacity
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for lack of skilled manpower. (Norway
Shipping News, October, 1956.)
- e)
- The UK paper makes no mention
of possible pipelines from the new fields in Iran through Turkey
which may not be subject to the risks encountered in the present
oil transit countries.
- f)
- Regarding insurance against interruption of oil supplies (No.
26), there are two additional possibilities not discussed by the
British:
- 1)
- If the US Government continues to encourage excess
productive capacity in oil for defense purposes, this
could be utilized in times of transport emergencies, as
it is now during the Suez Canal and IPC pipeline
closures.
- 2)
- Instead of scrapping old tankers, they might be put
into a mothball fleet as a national reserve.
