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

270. Letter From the Secretary of Commerce (Weeks) to the President¹

Washington, July 29, 1957.

Dear Mr. President: On June 26, 1957, you established the Special Committee to Investigate Crude Oil Imports. You directed the Committee to report its findings and recommendations at the earliest practicable date.

The Committee’s report is attached herewith.²

Respectfully yours,

Sinclair Weeks³

[Attachment]

PETROLEUM IMPORTS

I. Background.

The problem of oil imports, and their effect upon the domestic petroleum industry, was one of the primary reasons that caused President Eisenhower to establish the Cabinet Committee on Energy Supplies and Resources Policy in July, 1954. The President directed the Committee to study and evaluate all factors pertaining to the continued development of energy supplies and resources in the United States, “with the aim of strengthening the national defense, providing orderly industrial growth, and assuring supplies for our expanding national economy and for any future emergency.”

On February 26, 1955, the White House released a report on energy supplies and resources policy in which the Cabinet Committee concluded that in the interest of national security imports of crude and residual oils should be kept in balance with the domestic production of crude oil at the proportionate relationships that existed in 1954. The Committee also recommended that these ratios should be re-evaluated from time to time in the light of changing circumstances.

As a result of this study the importing companies were requested to restrict imports of petroleum to the United States on a voluntary, individual basis in conformity with the policies enunciated by the Committee. The voluntary method was chosen as a matter of basic policy in preference to tariffs, quotas, or other methods of mandatory limitation in order to avoid regulatory controls wherever possible.

As a result of considerable debate in Congress upon the subject of petroleum imports, the Trade Agreements Extension Act of 1955 included the following Section (7):

“(b) In order to further the policy and purpose of this section, whenever the Director of the Office of Defense Mobilization has reason to believe that any article is being imported into the United States in such quantities as to threaten to impair the national security, he shall so advise the President, and if the President agrees that there is reason for such belief, the President shall cause an immediate investigation to be made to determine the facts. If, on the basis of such investigation, and the report to him of the findings and recommendations made in connection therewith, the President finds that the article is being imported into the United States in such quantities as to threaten to impair the national security, he shall take such action as he deems necessary to adjust the imports of such article to a level that will not threaten to impair the national security.”

The policy of voluntary restriction worked with reasonable success until the middle of 1956. At that time the schedules submitted to ODM by the importing companies for the last half of 1956 and the first half of 1957 indicated that there would be a sharp rise in imports, and that the volume would be substantially in excess of the proportional relationship that had been recommended by the Committee.

As a consequence of the increased level of imports scheduled for the last half of 1956, the Independent Petroleum Association of America (IPAA) filed a petition on August 7, requesting action under Section 7 of the Trade Agreements Extension Act of 1955.

After the petition had been filed, the Director of Defense Mobilization announced that a public hearing would be held at which all interested parties would be provided with the opportunity of presenting their points of view. This hearing began on October 22, 1956, and was conducted by the General Counsel of ODM. Representatives of persons and groups favoring and opposing action under Section 7 were heard. In addition, at the request of ODM, representatives of oil importing companies made statements relative to their plans for the future. The hearing was concluded on October 24, 1956. Information developed in the hearing has been considered by this Committee.

Early in December, 1956, the Director of Defense Mobilization announced that he was suspending action on the case because of the changed conditions growing out of the Suez crisis. At the same time he made this statement:

“Import programs of the importing companies recently filed with the ODM show that the plans they had formulated for 1957, if carried out, would be contrary to the Committee’s recommendations and would constitute a threat to our national security. This situation, without other intervening circumstances (the Suez crisis), would have left no course for me but to make a certification to the President under Section 7 of the Trade Agreements Extension Act of 1955.”

In a letter dated March 6, 1957, the Director requested the importing companies to furnish ODM with more recent estimates of their import plans for the balance of 1957, assuming that normal oil movements could be resumed in the near future.

The estimates for imports during the last half of 1957 were compiled and presented a situation of even greater seriousness than that which prevailed prior to the Suez crisis, for the new schedules were considerably higher than those that were submitted for the fall of 1956.

On April 23, 1957, the new director, Mr. Gordon Gray, advised the President pursuant to Section 7 of the Trade Agreements Extension Act of 1955 that he had reason to believe that crude oil is being imported into the United States in such quantities as to threaten to impair the national security.

The analysis of the petroleum import situation that follows is made, therefore, in the light of the foregoing events.

II. Recent Events.

Review of the oil import levels year by year does not indicate that through the first half of 1956 crude oil imports had reached such a high level as to constitute a threat to the national security. Imports scheduled for the last half of 1956 and for the first half of 1957 were of such a magnitude that in the judgment of the then Director of the Office of Defense Mobilization they would have constituted a threat to national security. However, the interruption of petroleum transportation from the Middle East to the area west of the Suez which occurred in November 1956 disrupted the normal pattern of petroleum movements over a period of several months, and, as a result, the schedule of imports for the last half of 1956, as well as the one for the first half of 1957, was never put into effect.

The program of imports for the last half of 1957 as presented to the Director of the Office of Defense Mobilization during March and April indicated that the importers planned to increase materially the import levels over those of 1956 (See Table I).⁴

III. Effect on National Security.

Your Committee’s investigation of the oil import problem has been confined to the effect of the present trend of imports on national security.

It is clear that there is a direct relationship between the nation’s security and adequate and available sources of energy. Oil and gas account for two-thirds of all the energy that is consumed in this country. Furthermore, there is no adequate substitute in sight for the foreseeable future. Therefore, we must have available adequate supplies of oil.

We have concluded, for reasons that are set forth later in this section of the report, that if we are to have enough oil to meet our national security needs, there must be a limitation on imports that will insure a proper balance between imports and domestic production.

Before arriving at this conclusion, we considered and rejected, for the reasons noted below, the following three proposals that are based on a policy of permitting imports to follow whatever course they may take:

1. Import foreign crude oil and store it in this country within depleted fields or elsewhere. The practical problems of cost and the physical problems connected with the storage of crude oil would make this solution impracticable from the standpoint of industry and government alike.

2. Enlarge government participation in exploring for oil reserves which, when discovered, would not be put into production. Such a course would be costly to an already overburdened government and would be contrary to the principles of free enterprise which characterize American industry.

3. Encourage increased importations in order that our own natural resources might be conserved. Your committee has concluded that for the following reasons such a policy would be unsound.

(a) It would result in a sharp decline in domestic exploration by private enterprise because the industry would have no assurance of an adequate market for domestic oil after discoveries had been made and, as a result, would reduce its exploratory operations. Barring government operations which would be undesirable, adequate exploration and the development of additional reserves can only be generated by a healthy domestic production industry.

(b) Consequently, as the extent of the Nation’s useful reserves are not known until they are discovered and developed, the United States would be unable to make a sound appraisal of its petroleum resources because it would not know the extent to which our reserve capacity could be developed.

(c) Furthermore, in the event of an emergency which denied the United States access to oil in other countries and which called for additional availability of domestic oil, the Nation would be faced with the long delays that characterize exploratory activity, as well as with the possible necessity of making large expenditures of public funds for exploration, production, and transportation. In this connection, it should be borne in mind that no matter how large the expenditures might be, it would be impossible to recover the momentum of a vigorous domestic industry.

(d) In brief, such a policy of encouraging importation as a means of conserving our petroleum resources would mean that in an emergency the Nation would be confronted with all of the liabilities inherent in a static, as contrasted with a dynamic mobilization base, including the delays, waste and inefficiency that accompany efforts to strengthen any part of the mobilization base on a “crash” basis.

In the light of the above examination of suggestions looking toward a policy of unrestricted imports, your committee has concluded that if we are to have a vigorous program of exploration in this country by private enterprise in order to care for increasing domestic consumption and to meet emergency needs, and if we are to know what our reserve potential is in this country, it is essential that we follow a policy which will encourage continuation of free enterprise exploration at a rate consistent with the demands of a growing economy.

The latest available figures demonstrate that the amount of oil we are adding to our reserves is not keeping pace with the increase in domestic consumption, in spite of the fact that our reserves are at an all-time high. Indeed, there has been some recent indication of a decrease in exploratory drilling, notwithstanding an increase in domestic demand for petroleum. There has also been a decrease in the number of exploratory crews in operation. It is not possible to attribute this decline to any single cause. The sharp increase in imports programmed by the importers in their report to ODM indicates such a trend of increase in relation to domestic production as will bring about a further decline in domestic exploratory and development activities. This should not be permitted. The time lag between exploration and production requires that we explore today for tomorrow’s useable reserves. Any other course will impair industrial expansion, availability of supplies for consumer use, and preparedness for an emergency.

In summary, unless a reasonable limitation of petroleum imports is brought about, your committee believes that:

(a) Oil imports will flow into this country in ever-mounting quantities, entirely disproportionate to the quantities needed to supplement domestic supply.

(b) There will be a resultant discouragement of, and decrease in, domestic production.

(c) There will be a marked decline in domestic exploration and development.

(d) In the event of a serious emergency, this Nation will find itself years away from attaining the level of petroleum production necessary to meet our national security needs.

Your committee recognizes that there are important foreign policy aspects to the problem of limiting petroleum imports. The oil reserves and production capacities of other free nations, as well as our own, are important to our national security. A number of countries inevitably depend in varying degree upon access to our domestic market for their petroleum exports and it must be recognized that it is also in the interest of our national security that our allies and friends have healthy and expanding economies. It is believed, however, that taking all factors into consideration, our national security requires the maintenance of some reasonable balance between imports and domestic production at this time. In light of the foregoing considerations, our recommendations are framed with the objective of limiting imports in order to maintain such a balance and yet to allow other nations to participate in the growth of our domestic demand to a degree consistent with our national security.

It is our conviction that as a Nation we must pursue a careful, considered course that will permit reasonable imports into our country and still stimulate a dynamic and vigorous exploratory and development effort in this country.

IV. Effect on Consumers.

Domestic consumers are utilizing an increasing amount of petroleum products for transportation, fuel, heating and many other aspects of consumer life. In the event of a national emergency, it is essential to these consumers that there be adequate supplies at reasonable cost, both now and in the future. The low cost of imported oil is attractive, but excessive reliance upon it in the short run may put the nation in a long-term vulnerable position. Imported supplies could be cut off in an emergency and might well be diminished by events beyond our control. This vulnerability could easily result in a much higher cost, or even in the unavailability, of oil to consumers. It is therefore believed that the best interests of domestic consumers, as well as of national security, will be served if a reasonable balance is maintained between domestic and foreign supplies.

V. Conclusions and Recommendations.

1. Increased volume of crude oil imports and the proposed imports for the latter half of 1957 threaten to impair the national security. This threat, under existing conditions, requires a limitation on imports. The Committee recommends, therefore, that unless the importing companies comply voluntarily with the import limitation plan hereinafter set forth, you find that there is a threat to the national security within the meaning of Section 7 of the Trade Agreements Extension Act of 1955. Pending the outcome of this voluntary program, this Committee should continue as now constituted.

2. For the initial phase of such a program of limitation, in the interest of national security, the following plan is recommended, to cover the period of the last half of 1957 and the first half of 1958:⁵

a. Districts I–IV

i. All importing companies, except those referred to in (ii) below, should be requested to cut back 10% below their average crude oil imports for the years 1954, 1955 and 1956.

ii. In order that small 1954 importers, and companies that have started to import since 1954, should have the opportunity to participate in the United States market on a basis more equitable than if the above cutback were applied to them, it is recommended that companies having crude oil imports of less than 20,000 barrels per day in 1954 should be allowed to import the amounts set forth in the schedules submitted by them to ODM in July 1957, but in no instance to exceed an increase of over 12,000 barrels per day over their actual 1956 imports. (See Table II for analysis of effect of this formula on importing companies.)⁶

b. District V⁷

Imports should be determined on a semi-annual basis. Pending a change in the deficit condition now pending in the area by, for example, the development of an economical means of inter-regional transportation, the level of imports must be such as to make up the difference between the demand and the quantity of domestic crude oil available to the area, as established by the Department of the Interior. The schedule of imports for the last half of 1957, as submitted by the companies to the Director of Defense Mobilization appears to be slightly higher than would be called for by the foregoing formula. However, there is reason to believe that the imports for this period will not exceed 275,000 barrels per day and, consequently, no voluntary import limitations are proposed for this District at the present time. This situation should be reviewed, however, during the latter part of 1957 from the point of view of the plans of importers for the first half of 1958, in view of the fact that additional pipeline capacity to the West Coast is scheduled to become available during the first half of 1958. (See Table III).⁸

c. Imports under proposed plan.

Districts I–IV		756,000 B/D
Percentage ratio, Imports to Production	12.0
Percentage ratio, Imports to Demand	9.6
District V		275,000 B/D
Percentage ratio, Imports to Production	29.8
Percentage ratio, Imports to Demand	23.3
Total		1,031,000 B/D

d. New importers should have the opportunity to enter and share in a reasonable manner in the United States market. Companies planning to become importers should present their plans to the Department of the Interior at least six months before their plans are to become operative. A determination should then be made as to the extent these importers should share in the market initially, and as to whether room can be made for them as a result of the increase in permissible imports arising out of the increase in domestic demand or whether it will be necessary for older importers to decrease their imports in order to make room for the new companies.

e. All imports into the United States should be for the direct account of the importers, and no importer should be allowed to increase its imports through oil sale and product purchase agreements by transfer of allotments or by other indirect means.

f. The committee recognizes that it would be possible to circumvent this plan by companies entering into certain types of arrangements for the importation of distilled products. We recommend that the Office of Defense Mobilization and the Department of the Interior follow this situation very closely.

3. The plan above outlined should be reviewed by this or some comparable committee at least once a year. Under normal peacetime conditions we believe that such a review should proceed on the assumption that in Districts I–IV an effort will be made to maintain a ratio between imports and domestic production of approximately 12.0%⁹ and that in District V imports will be restricted to the difference between demand and the domestic crude oil that can be made available to the area on a reasonably competitive basis.

4. The plan above outlined should be administered by the Department of the Interior under policy guidance from the Office of Defense Mobilization. In the administration of the plan, provision should be made for the hearing and consideration of cases where it is alleged that inequities would result from the application of the plan, with the understanding that the administrator will have authority to establish the necessary administrative procedures and act in such a manner as to alleviate inequities when they are found to exist, including any showing that the plan does not provide competitive opportunities for newer importers.

Respectfully submitted,

• John Foster Dulles
  Secretary of State
• Donald A. Quarles
  for Secretary of Defense
• George M. Humphrey
  Secretary of the Treasury
• Fred A. Seaton
  Secretary of the Interior
• James T. O’Connell
  for Secretary of Labor
• Sinclair Weeks
  Secretary of Commerce—Chairman¹⁰

1. Source: Eisenhower Library, Cabinet Secretariat Records.
2. In a memorandum to Seaton and Flemming, July 29, Eisenhower approved the recommendations of the Special Committee as set forth in the report and directed them to put the recommendations into effect as rapidly as possible. (Ibid.)
3. Printed from a copy that bears this typed signature.
4. Not printed.
5. The term “crude oil” as used throughout this plan is oil at the wellhead. [Footnote in the source text.]
6. Not printed.
7. See Appendix A for reasons for separating Districts I–IV and District V. [Footnote in the source text. Appendix A is not printed.]
8. Not printed.
9. The relationship between imports and domestic demand would be approximately 9.6%. In this report we have referred to the ratio between imports and production in order to be consistent with the report made by the Presidential Advisory Committee on Energy Supplies and Resources Policy in February 1955. In the future it is recommended that the statistics dealing with this problem be compiled on the basis of the relationship between imports and demand, instead of between imports and production. [Footnote in the source text.]
10. Printed from a copy that bears these typed signatures.