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

247. Memorandum From the Deputy Assistant Secretary of State for Economic Affairs (Kalijarvi) to the Deputy Under Secretary of State for Economic Affairs (Dillon)¹

Washington , April 8, 1957 .

SUBJECT

• Meeting of President’s Advisory Committee re Oil Imports, 4:00 P.M. April 9, 1957

Mr. Gordon Gray, the new Director of the Office of Defense Mobilization in his capacity as Chairman of the President’s Advisory Committee on Energy Supplies and Resources Policy, is calling a meeting of that Committee on April 9 to consider oil imports. The meeting will probably be exploratory, inasmuch as Mr. Gray feels that the presence of several new members, including himself, makes necessary one meeting devoted to a familiarization with the issues.

Mr. Gray met last week with several persons who have been intimately associated with this question, including: Herbert Hoover, Jr. who represented the Department of State on the Committee from the date of its formation on July 30, 1954 until his recent departure; Dr. Arthur S. Flemming, Mr. Gray’s predecessor in ODM; Mr. Robert Anderson, the former Deputy Secretary of Defense; and Mr. J. Ed Warren, long identified with the domestic crude oil producing industry, formerly a President of the Independent Petroleum Association of America, and now a Senior Vice President of the First National City Bank.

Oil imports are a perennial problem for the Department. The problem has now reached a critical stage wherein domestic political pressures, under the guise of a narrow concept of national security, may bring about the imposition of formal governmental oil import restrictions harmful to our broad security interests and in violation of broad foreign policy principles long followed by this country.

The Issues

Restrictions on crude oil imports are demanded by the domestic crude producing interests, chiefly through such organizations as the Independent Petroleum Association of America and the Texas Independent Producers and Royalty Owners Association. These interests contend that the expansion of the domestic crude oil industry is hindered by oil imports to the extent that national security is endangered. The IPAA uses as its motto the statement, “There is no security in foreign oil for the defense of our own borders”.

For several years the United States coal interests, including the mine operators, the miners’ union and the railroads, have demanded severe legislative restrictions on residual fuel oil imports on the ground that such imports have lowered the coal industry’s coal producing capacity to a level which threatens our national security. Although bills have been introduced in the present Congress to restrict residual fuel oil imports, it appears that this problem will not be viewed seriously because of the substantial recovery of the coal industry since its low point in 1954.

Restrictions on oil imports have been opposed generally by three groups: the larger oil companies who have holdings abroad and who import much of the oil involved; the oil jobbers (distributors) and the larger fuel oil consumers along the eastern seaboard and in New England; and those manufacturing groups scattered throughout the country who have any considerable export trade dependent upon the dollar income of various foreign economies. These opposition groups are not well organized—in contrast to the domestic oil producers—and in general they are less vocal and less effective in their efforts.

The Department of State is the only government agency which has strongly opposed formal oil import restrictions. Over the years the Department has maintained:

(1) That it has not been shown that the domestic oil producing industry is being harmed or the national security threatened by oil imports;

(2) That long range trends indicate the probable need for the United States to import an increasing proportion of its oil supplies;

(3) That the imposition of formal import restrictions would contravene our established principles related to the strengthening of Free World economies by the encouragement of world trade and United States investments abroad.

(4) That the imposition of restrictions would violate our commitments under GATT and our reciprocal trade agreements;

(5) That the national defense requires continued access to foreign sources of oil.²

Recent Developments

The import issue is now tied in with the earlier recommendations of the Advisory Committee and the provisions of Section 7 of the Trade Agreements Extension Act of 1955—the so-called “national security amendment”.

The Advisory Committee issued its basic report on February 26, 1955. It stated that a strong petroleum industry, both in the United States and in friendly countries, and a coal industry operating at a satisfactory level, are essential to our national defense, but that the domestic fuels situation would be impaired if imports of crude and residual fuel oil were to exceed significantly the proportion which they bore to domestic crude oil production in 1954. The report recommended that such a balance be maintained by the voluntary individual action of the importing companies and that every effort be made to avoid governmental intervention. It further recommended that “appropriate action” should be taken in the event imports exceed their 1954 proportion, and that the Committee review the desirable proportionate relationships between imports and domestic production from time to time in the light of industrial expansion and changing economic and national defense requirements. (Tab A)³

Shortly after the issuance of this report, numerous bills were introduced into Congress, including the Neely Amendment to the Trade Agreements Extension Act, which would have restricted crude and residual fuel oil imports by the imposition of fixed legislative quotas. These bills had strong support in the Congress but were dropped when the Administration agreed to the inclusion of Section 7 in the Trade Agreements Extension Act (Tab B). There exists some implication that ODM is obligated to hold oil imports to the level of the Advisory Committee’s recommendations or, failing that, to certify to the President that such imports threaten to impair the national security.

The only reference which the President has ever made to the recommendations of the Cabinet Committee and the implementation of voluntary restrictions was contained in his request last fall that ODM study the problem of tanker availability; he stated that any proposed program should be compatible with the objectives of our oil import policy.

During the course of 1955 and 1956, Dr. Flemming, as Chairman of the Advisory Committee and as Director of ODM, sought by the use of letters addressed to the individual importing companies, and on the basis of reports of importing plans submitted individually by those companies, to keep imports of oil substantially at the 1954 formula levels. After consultation with the Committee, Dr. Flemming modified the formula by permitting, subject to constant surveillance, unrestricted imports of residual fuel oil, crude oil from Canada and Venezuela, and crude oil imports into the Pacific Coast area (District V). These exclusions in effect limited the application of the formula to crude oil imports into the eastern part of the United States from the Middle East—or only some 30–35 per cent of our total crude oil imports.

When the mid-1956 reports of the importing companies indicated that their planned imports would appreciably exceed the 1954 rations, the Advisory Committee undertook a broad review of the situation. A report was issued on October 7, 1956, reaffirming the principles and recommendations enunciated in the February 1955 report and confirming the exceptions and exclusions to the formula which had developed in the interim. (Tab C)

Meanwhile, on August 7, 1956, the Independent Petroleum Association and eighteen other affiliated associations petitioned ODM to make a finding under Section 7 that imports were endangering the national security and to so certify to the President.

Dr. Flemming on October 22, 1956 instituted hearings on this petition and, at the conclusion of the hearings, requested the oil importing companies to review their import plans in the light of the October 7 report of the Advisory Committee and to submit in November revised plans of their imports for the year 1957. Dr. Flemming undertook to judge the resultant import picture by the standards which were set forth in the October 7 report.

On December 4, Dr. Flemming announced that he was suspending action on the Section 7 hearings, in view of the Suez crisis and the attendant disruption of the oil import trade. He stated at the same time, however, that had it not been for this circumstance he would have had to certify to the President a finding that imports were a threat to the national security.

Just prior to his leaving ODM, Dr. Flemming requested the importing companies to submit plans showing what their crude oil imports will be in the event of resumption of a normal flow of oil from the Middle East. The plans reveal a generally upward trend in crude oil imports which exceeds the rate of growth of our domestic crude oil production. Imports into the eastern part of the United States from the Middle East would total some 5.4 per cent of domestic production in that part of the United States, compared to the suggested formula, or 1954 ration, of 3.8 per cent. Total crude imports into all sections of the United States from all sources would rise to 16.8 per cent of total domestic crude oil production, compared to the permissible imports under the original formula of 10.34 per cent.

You have already received from Mr. Gray an ODM staff paper⁴ which summarizes all of the above developments and which includes a statistical presentation of the latest plans of the importing companies.

Immediate Considerations

It is generally conceded in the oil industry that during the course of the past two years the Advisory Committee and ODM have “gotten themselves into a box”, with formal restrictions almost a certainty at the next turning. The Advisory Committee faces forthwith the necessity of deciding whether to consider the October 7, 1956 report as still valid and its standards still applicable. If so, it is implicit that Mr. Gray carry forward the course of action initiated by Dr. Flemming and certify to the President under Section 7 that oil imports are threatening to impair our national security.

Such a finding would be based on the fact that the 1957 scheduled imports from the Middle East into Districts I–IV of some 310,000 barrels per day exceed by 16 per cent, or about 50,000 barrels per day, the quantity which would be permitted under their 1954 ratio. Yet, in fact, such imports would constitute only a minor part of the total import picture. The industry which would be “threatened” would be the entire United States petroleum industry—producing currently at the rate of 7,800,000 barrels per day, the highest in its history.

Alternately, now, the Advisory Committee could, by the issuance of new recommendations and the establishment of other standards, obviate such a portentous course of action. As already noted, the February 1955 report of the Committee recommended that the issue be reviewed from time to time in the light of changing conditions. Dr. Flemming himself also paved the way for such a new review when, during the course of an informal press conference late in December 1956, he said that after the Suez crisis the whole picture should be looked at again—and that this should be done from the point of view of the original 1955 concepts.

It is important to bear in mind that, during the course of the past two years, the recommendations of the Advisory Committee and the concepts implicit in the language of Section 7 have become almost inextricably intertwined. At the same time, the refinements and modifications of the import formula have been so substantial that only a third of our total crude oil imports come strictly within its purview; thus the proponents of restrictions can with some justification say that the voluntary restrictions as presently constituted are a mockery. Additionally, during the past two years the Committee had come to look at the oil import situation more and more in the light of a literal interpretation or application of statistics, and had lost sight of the final observation of the February 1955 report: “… the importance to the economies of friendly countries of their oil exports to the United States as well as the importance to the United States of the accessibility of foreign oil supplies both in peace and war”.⁵

Recommendations

It is recommended that you express your reluctance to proceed any further along what Dr. Flemming very early termed the “long, long road toward restrictions”.

It is recommended that you state that the Department feels it imperative that the Committee go back to the February 1955 report with the intention of looking at all of the factors listed therein, and not solely the one phrase as to whether, “… imports … exceed significantly the respective proportions… .”

We suggest that you urge renewed consideration of the following points:

1. The United States has become a deficit nation in oil supplies and will need in the future an increasing proportion of imports. The report of the President’s Materials Policy Commission in 1952, observed that, “Ultimately the growth in United States crude production will have to taper off as it becomes increasingly difficult to make new discoveries” and that, “It is generally accepted, however, that at some time in the future the job [of meeting growing demands]⁶ will become considerably more difficult”. A widely recognized Chase Manhattan Bank report indicates that United States crude production will reach its peak about 1965 and decline thereafter, although domestic demand will continue its rapid increase. The January 15, 1957 World Petroleum Report, an authoritative annual review of international oil operations, states that, “As a result of the decreasing yields, and other factors, the US has become increasingly dependent on foreign sources for its oil supply… There are many indications that this trend will continue at an accelerated rate in the future”.

The rate of increase in the United States demand for oil has far out-stripped the rate of growth in production. Our once large exports have dwindled; deficits in supplies have been made up by constantly increasing imports. In recent years the additions to proved crude oil reserves have barely kept pace with domestic crude oil production, and the ratio of total proved reserves to demand is down to a low level. (Tab D)

This situation, however, is the result of a physical circumstance: most of our readily accessible oil has already been discovered. The domestic industry has not slackened in its search for oil; to the contrary, present incentives are such that the efforts going into wildcatting and production drilling are constantly increasing. (Tab E) The higher price for crude oil, which would accompany any limitation on imports, might inspire a slightly more liberal exploration program, but it could not insure the finding of any considerable amounts of additional oil. Thus, the reduction of the competition from imports would not necessarily improve our oil reserve position nor the strength of our domestic crude oil producing industry.

2. The crude oil being imported into the United States is almost entirely the product of United States investment and industrial enterprise. These imports represent another segment of the United States oil industry. Our companies have gone abroad to search for sources of oil additional to those which they possess in the United States; they have been encouraged to do so by the United States Government. The investments abroad of our oil companies now total some eight billion dollars, or approximately one third of our total investments abroad. A repudiation of the faith and initiative of these companies, by the imposition of restrictions on the importation of their oil, cannot be lightly undertaken.

It can no longer be claimed that only the five major companies are involved in this import problem. A number of “semi-majors” such as Atlantic, Amerada, Cities Service, Continental, Phillips, Richfield, Sinclair, Standard of Indiana, Standard of Ohio, Ohio Oil Company, Tidewater, Superior, and Union of California are also either importing considerable quantities of crude from abroad or have secured concessions abroad. More recently other companies have joined this list; some of them might have been included not too long ago in the ranks of the “Independents”: Wilshire, General Petroleum, Gabriel, Hancock, Signal, Honolulu, Pure, Union of Louisiana, Texas Gas and Transmission and H. L. Hunt. The 1957 World Petroleum Report observed that, “This trend toward foreign operations is probably the outstanding recent tendency in the US petroleum industry”.

3. Not until it is clear that our broad national security interests will permit the imposition of oil import restrictions, and not until it is clear that our domestic oil producers are bung significantly harmed by imports to the detriment of national security, should we consider paying the price of imposing restrictions.

The United States has strenuously opposed the imposition of quantitative trade restrictions by many countries; in the absence of overriding reasons to the contrary, the United States should not itself resort to such restrictions. The “voluntary” controls which we have attempted to implement during the past two years have themselves been of a questionable nature; it is certain that legislative or other fixed quotas, even though based on alleged national security considerations, would fail of acceptance by the other members of GATT and the partners to our Reciprocal Trade Agreements, and that the United States would be called upon for extensive compensatory concessions.

The imposition of oil import quotas would in all likelihood result in the immediate abrogation by Venezuela of our 1952 trade agreement with that country which forms the basis for a half billion dollar annual export business beneficial to every part of our country.

Regional, national and inter-company discriminations would be concomitant with quantitative restrictions. The recent report of the Boggs Subcommittee of the Ways and Means Committee on Customs, Tariffs and Reciprocal Trade Agreements noted that, “Even where the effort is made to avoid discriminatory impact of such restriction on the supplying countries, discrimination according to the standards of the free-enterprise system cannot entirely be avoided”. The experience of the Advisory Committee during the past two years had already led to the conclusion that certain discriminations would be necessary. Even the more extreme of the oil import restrictionist group admit, for instance, that the Canadian industry is almost completely identified with that of the United States and that imports from Canada form a natural part of our domestic supply. Other shades of discrimination are evident: the domestic oil producing industry has as a foremost objective the elimination of Middle East imports, rather than the Caribbean where costs of production are more comparable to those of our own industry.

Quotas limiting growth of imports from the Middle East would have a severe impact there which could tend largely to negate the effects of the Eisenhower Doctrine. Three of the politically strategic countries of the Middle East are the source of most of the oil which comes to the United States from that area: Iran, Iraq, and Saudi Arabia. The governments of those countries are eager that the companies producing their oil should continue to find expanding markets which in turn make possible larger revenue and tax bases. Those countries are highly cognizant that their only important commodity in international trade is oil.

It has just come to our attention that the huge world tanker building program, which is a major defense of the West against interruption or loss of supplies of Middle East oil, is showing signs of weakness. A principal cause is the uncertainty in the industry as to possible United States Government restrictions on oil imports.

In addition to foreign policy considerations, part of the price which we would pay for restrictions would be the increased cost of petroleum products to the United States domestic consumer; price increases in crude oil would be inherent in a limitation of supplies. The increase of 300 per barrel which accompanied the Suez crisis resulted in about $1.5 billion annually to be passed on to the consumer for gasoline, distillates and fuel oils. The oil producing interests say that even this was insufficient and that another 50¢ would be fully justified by the increased costs of finding oil. The price increase just experienced has already been the subject of Congressional investigation; certainly the President in recent months has stressed the greater need for economy and the necessity of avoiding any new cycle of price increases and inflation.

4. Foreign supplies of oil, including those in the Middle East as well as those in the Caribbean, are necessary to our National Defense. The overseas engagements of World War II and the Korean crisis were largely fueled out of the refineries of Venezuela and the Netherlands West Indies and the refineries in the Persian Gulf. The only practicable source of petroleum to support large military operations in the Pacific and Indian Ocean areas is the Middle East.

5. The United States domestic oil industry is presently strong and prosperous. The income, profits and reinvestments of the oil industry are every year at higher rates. (Tab E) An editorial in the Oil and Gas Journal of January 28, 1957 expressed the confident attitude of the industry: “The best year in history is forecast for 1957… . Don’t let anybody tell you that the oil industry in the United States has passed its peak and is going into a decline. The record for 1956 and the planning for 1957 reveal a vigorous, aggressive, optimistic industry, an industry that has good reason to see growth opportunity in every direction”.

Importantly responsible for this condition of well-being in the oil industry are the advantageous tax provisions under which it operates. The depletion allowance of 27½ per cent is higher than that granted any other industry. The larger part of all drilling costs—the intangible costs, such as labor, services and supplies—may be written off in the calculation of taxable net income. References to the increasing costs of finding oil are therefore not fully justified inasmuch as such costs are to a considerable degree offset by reductions in taxes paid.

Since its organization in 1929, the IPAA has constantly claimed serious injury from oil imports. Typical is the following testimony of Independent Petroleum Association witnesses before the Senate Finance Committee in 1931 and 1932 respectively: “… the domestic oil industry is being ruthlessly destroyed …”; “… make us compete … with foreign oil … which is the cause of the destruction of the American petroleum industry …”; and “… the independent branch of the oil industry cannot exist for another year unless relief is obtained”. A well known oil journal, The Oil Forum, published an article in March 1954 entitled, “The IPAA: The False Prophet”, which traced these claims during the first twenty-four years of the Independent Petroleum Association history. During this period the domestic oil industry has reached ever greater heights of prosperity, with only a few temporary set-backs.

As a summary recommendation, it is believed that you would be well guided by a dictum expressed by Mr. Gray himself in his 1950 Report to the President on Foreign Economic Policies:

“… There is real danger that the defense effort will lead many countries to impose unnecessary and harmful barriers on their trade. Such a development would be harmful both to the immediate objective of mobilizing resources for common defense and economic welfare, and to our long-range objective of achieving the highest possible degree of freedom in the commercial and financial relationships among the nations of the world. It is now even more essential that the resources of the non-Communist world be employed as efficiently as possible and that protective and autarchial practices which serve only the narrow interests of specialized groups be abandoned.”

1. Source: Department of State, Central Files, 100.4/4–857. Confidential. Drafted by Beckner and Rutherford on April 5.
2. In a memorandum of April 9 to Dillon, Rubottom underscored Kalijarvi’s arguments by stating that petroleum imports did not endanger national security by discouraging exploratory and development effort in the U.S. domestic petroleum industry. (Ibid., 411.006/4–957)
3. Tabs A through E were not found with the source text.
4. Not found in Department of State files.
5. All ellipses in this document are in the source text.
6. Brackets in the source text.