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

259. Memorandum From the Deputy Assistant Secretary of State for Economic Affairs (Kalijarvi) to the Secretary of State¹

Washington, June 26, 1957.

SUBJECT

• Crude Oil Imports in Relation to National Security

At your request we have prepared the attached memorandum which summarizes our conclusions and recommendations for the Department’s position on the crude oil imports problem as related to national security. An underlying memorandum providing the details is in preparation and will reach you shortly.

[Attachment]

²

SUMMARY AND CONCLUSIONS

1. The national security with respect to petroleum has two aspects:

a) Maintaining and improving the strength of the free world.

The dollars earned by foreign producers in selling crude oil to the United States aid in maintaining high production levels, employment, prosperity and standards of living in the free world. Our oil imports thus contribute toward free world economic and political stability which are essential to our national security.

The opportunity to import crude oil into the United States encourages the outflow of United States capital and of technical and managerial skills for foreign oil development, thereby contributing to United States’ access to foreign petroleum resources which are and will be an essential factor in our national security.

b) Assurance of adequate petroleum supplies, wherever needed, in the event of war.

In the event of war, huge quantities of oil must be made available to the United States and its allies to support the Armed Forces and the civilian economies in all areas not lost to the enemy. Definitive answers to these supply and logistics problems are a function of the military, but certain facts are clear. United States domestic oil production can not be increased sufficiently to supply these requirements. In some instances, for example, military operations in the Pacific and Far Eastern areas and the economies of Australia, New Zealand, and Japan must be supplied from foreign sources, in this case largely from the Middle East and Indonesia. Access to the oil resources of Venezuela, Canada, Indonesia, the Middle East and other foreign countries must be safeguarded so that they can be drawn upon to the maximum extent possible. Our oil imports tend to assure us of access to these supplies.

2. Although recognizing the importance of safeguarding our capacity to produce oil, the Department does not believe that crude oil imports at the present level are a threat to the national security.

The Department recognizes that at some point not easily determinable, oil imports might so depress the income of the domestic crude oil producing industry as to discourage the search for oil and thus impair the national security. At this time most indices show that the industry is prosperous and expects prosperity to continue. Restrictions on crude oil imports would probably add little to the industry’s effectiveness in finding oil. Therefore, at this time, the Department does not believe that oil imports have increased to a level where the national security is threatened.

3. The Department is well aware of the mounting pressure for oil import restrictions. If it becomes clear that such import restrictions must be imposed, certain technical and policy questions should be considered.

a) The use of escape clause procedures rather than Section 7 of the Trade Agreements Extension Act of 1955.

Although the domestic crude oil industry demands administrative action under the national security amendment, statements by oil company officials and in the oil press clearly indicate that the industry’s primary goal is reduced competition from “cheap foreign oil” in order to secure higher crude oil prices. National security is a convenient cloak covering these aspirations.

Since competition, not national security, is the immediate problem, escape clause procedures under our trade agreements and the General Agreement on Tariffs and Trade would seem to be the appropriate remedy to provide relief against excessive competition. It is significant that the industry is not seeking relief through this method.

b) “Voluntary” versus formal restrictions imposed by the Government.

The “voluntary” method, whereby importing companies, at the suggestion of the Government, individually restrict imports through their normal commercial operations, has been used thus far and has caused few international problems. With the progressive interpretation of the President’s Advisory Committee’s imports formula, the voluntary method has with few exceptions worked well.

On the other hand, formal Government restrictions might involve the United States in serious difficulties under our trade agreements and the GATT. Our professed support for high levels of world trade would be questioned, especially since the industry protected by the restrictions is obviously prosperous. Earlier, when countries feared we might impose oil import restrictions, vigorous protests were made by the Governments of Canada, Venezuela, France, the Netherlands and the United Kingdom.

c) Preferential treatment for imports from some countries.

Preferential treatment for oil imports from Canada on national security grounds is widely supported. Such treatment, however, would violate the long-standing United States policy of non-discrimination in trade relations.

Preferential treatment for Canadian oil would cause serious repercussions in Venezuela, whose oil is also important to our national security. Preferential treatment for Venezuela would require similar treatment for other Latin American countries whose oil is less plentiful but equally useful in the event of national emergency.

These preferences would represent discrimination against Middle East oil, which is of great economic and strategic importance. Such discrimination could seriously hamper the implementation of the President’s Middle East policy.

d) Special treatment for crude oil imports into certain parts of the United States.

This method has been used with respect to the West Coast. It is objectionable because it fragmentizes the country from the standpoint of trade and favors the industries and consumers of one part of the country over those of other parts. This method, if it is to be formally applied by Government action, should be considered in the light of Article 1, Section 9, Clause 6 of the Constitution, which provides that “No preference shall be given by Regulation of Commerce or Revenue to the Ports of one State over those of another … .”³

e) Import quotas versus increased tariffs.

Import quotas are favored by domestic crude oil producers since they would effectively restrict imports. Quota restrictions would, however, be highly objectionable from the standpoint of United States trade commitments and would undoubtedly be considered by Venezuela as a violation of specific provisions of the Venezuelan Supplementary Trade Agreement. Attempts would of course be made to renegotiate those provisions. It is likely, however, that such attempts would be unsuccessful because of the importance of oil in our trade with Venezuela. There would be a strong probability that the trade agreement would be terminated with possibly serious repercussions for the large United States investments in Venezuela.

Import quotas, unless carefully devised and administered, would make it very difficult for oil importers since they could not know whether the oil they had contracted to import or sell or use would fall within the import quota for a given period. Small importers would be particularly harmed since their tanker arrivals are often unevenly spaced. Imports from distant sources would be at a disadvantage in comparison with sources less distant. Import quotas would tend to discriminate against imports from distant sources.

The imposition of higher duties would also be highly objectionable from the standpoint of United States trade commitments, and would undoubtedly be considered by Venezuela as a violation of the Venezuelan Supplementary Trade Agreement. To be effective in restricting imports such import taxes would have to be substantial. In effect they would favor low cost sources, such as the Middle East, which could absorb the taxes, and discourage higher cost sources, such as Venezuela.

It should be noted that import restrictions enforced by quotas or higher import taxes would result in higher prices of petroleum products in the United States. They would detrimentally affect every industry and every consumer in every part of the United States. They would add to the inflationary pressures about which the President has recently expressed concern.

RECOMMENDATIONS

It is recommended that you take the following position with respect to the crude oil imports problem.

1. Import restrictions should not be imposed, since a clear case has not been made that oil imports are discouraging the domestic industry’s search for oil to such degree that the national security is threatened. On the other hand, continued high levels of crude oil imports tend to safeguard continued access to foreign petroleum supplies which are essential to the national security.

[Discussion: It is clear that increased crude oil imports will be required as time goes on in view of the growing difficulty of finding domestic oil reserves. On the West Coast the oil producers recognize their inability to supply the increased demand for petroleum products and are fully adjusted to increased levels of imports. Producers east of the Rockies will ultimately come to the same conclusion.

At present, domestic producers east of the Rockies must adjust also to several unusual factors generally unrelated to oil imports, for example, the great quantities of natural gas and natural gas liquids that must be marketed; the increased capacity of highly efficient refineries which are producing large quantities of light products not readily marketable; and the slowing down of demand due to continued adverse weather in the Southwest, unusually low heating oil demand, and the slower tempo in the over-all economy.]⁴

2. Inasmuch as no formula has been devised which clearly indicates the point at which oil imports threaten to impair the national security, the Committee should avoid the adoption of any formula. The problem before the Committee is one requiring sound appraisal of rapidly shifting elements. The solution should, therefore, be kept open.

3. If in spite of your presentation recommendation “1” above is not adopted, and only if it should be determined that imports must be restricted in some manner, then it is recommended as a fall back position that you urge the adoption of the proposal set forth in “4”. The technical, legal and policy questions involved in the proposal, which is derived from the “voluntary” method of restrictions, should be carefully reviewed.

It is believed that this proposal will create a minimum of international complications and should reasonably satisfy even the most ardent supporters of restrictions.

Every effort should be made to prevent the imposition of formal import restrictions.

4. The following program consists of several steps, each designed to meet a specific aspect of the imports problem.

a) Some Federal Government official, preferably the Director of ODM, should be designated administrator of the program. He should determine periodically the total permissible crude oil imports and the quantities each importer may bring in. The latter is necessary since specific determinations for each importer will be required if all importers are to be kept in line. The Director of the ODM is proposed as the administrator because of his high position and his responsibility for dealing with matters of national security.

b) Each prospective importer should be required to state periodically how much crude oil he wishes to import.

c) Importers on the West Coast, which is a deficit area with known crude oil producing capacity and requirements, should be allotted the amounts they request if the total requested by all such importers bears some reasonable relationship to the known import needs of the West Coast.

d) For importers east of the Rockies, the total requested crude oil imports should arbitrarily be cut back somewhat from present import levels in order to meet in some measure the restrictive demands of the domestic producers and disarm their opposition. No drastic reduction from present levels should be made.

e) The administrator should then weigh all of the factors affecting each prospective importer’s situation in the area east of the Rockies and arrive at a permissible import figure for each importer. Since thus far no formula has been devised to provide a satisfactory exact answer in each case, the administrator must rely largely on his informed judgment after a review of the facts. The basic factors that should be considered are, of course, generally known, for example, the historic import pattern, reasonable allowance for new importers, and the proportion of foreign crude in each importer’s refinery operations. The administrator would have to keep in mind both fairness and practicability in making his decisions.

f) The administrator should scrupulously avoid making decisions as to the country sources of crude oil the importers may tap. This is essential from the standpoint of international relations. Each company, as part of its normal commercial operations, should make its own decision on this question. Producing countries are unlikely to protest seriously against commercial decisions the companies make, but would have grounds for protesting against any United States Government decisions.

g) The decisions of the administrator on permissible over-all crude oil import totals for the West Coast and the area east of the Rockies and the imports permitted to each importer in those areas should be promptly made public. The administrator should not undertake to justify his specific decisions but should confine himself to mention of the general factors in the crude oil situation which he had considered.

h) There is every reason to believe that almost without exception importers would comply with the decisions of the administrator. Nearly all would welcome such a program. If, however, any importer refused to adhere to his import allotment, the case should be referred to the President for formal determination of the action to be taken. The availability of enforcement methods, including the use of Section 7 as an enforcement device, would require further consideration. This should be done by the committee in the course of its deliberations.

5. Regardless of the decision reached on the basic question of whether or not import restrictions should be imposed, the committee should periodically review the level of crude oil imports and the operation of any imports control system that might be adopted. It should make such further recommendations as may be required by the public interest. If some form of import controls, additional to the import taxes now applicable, is deemed necessary, it is believed that the use of a control system, such as the one described above, and a periodic review of the situation by the committee should enable the Government to deal with the problem at this time. Probably no controls over the industry beyond those outlined would be needed.

In the meantime it should become more and more apparent that the area east of the Rockies is becoming a crude oil deficit area requiring ever larger proportions of crude oil imports to domestic demand. It should also become clear that a continued rise in imports is compatible with prosperity in the crude oil producing industry.

1. Source: Department of State, Central Files, 411.006/6–2657. Confidential. Drafted by Beckner and concurred in by L, ARA, EUR, FE, and NEA.
2. Confidential.
3. Ellipsis in the source text.
4. Brackets in the source text.