Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

295. Study Prepared by an Interagency Group Chaired by the Office of Civil and Defense Mobilization⁰

Undated.

FREE EUROPE’S DEPENDENCE ON MIDDLE EAST PETROLEUM

Nature of the Problem

1. The objective of this study is to suggest actions which will decrease Europe’s dependence on Middle East oil. It has been prepared by an inter-agency group composed of representatives of the Departments of State, Defense, Interior and Commerce, with a representative of the Office of Civil and Defense Mobilization as Chairman, in response to the assignment made to the Director OCDM, pursuant to National Security Council Action No. 1999.¹

2. This study is directed primarily to the operational and economic aspects of the problem but also considers broad financial implications.

3. Discussion and conclusions are based on the major premise of a continuation of the cold war. The terms of the assignment are interpreted to exclude consideration of increases in military requirements by reason of local wars or mobilization build-ups. Similarly, political factors are generally excluded.

4. Extensive studies, including two US/UK papers of May 12² and December 11, 1958,³ on various phases of this problem have recently been completed. This paper makes use of material covered in these studies but includes new material and takes into consideration currently available data.

Free Europe’s Energy Position

5. The following table presents a breakdown of the relative importance of demand for primary energy in 1955, 1960, and 1965, based on the most recent data available.

TABLE I TOTAL CONSUMPTION OF PRIMARY ENERGY IN FREE EUROPE

	1955 Percent	19604 Percent	19644 Percent
Coal and Lignite	70.5	62.3	56.0
Hydro	7.4	8.1	8.6
Natural Gas	0.7	1.1	1.3
Oil	21.4	28.5	32.3
Atomic Energy	—	—	1.8
Total	100.0	100.0	100.0

6. Coal is expected to continue to be the most important energy source supplying as much as 56 percent of Europe’s requirements in 1965. The relative importance of coal, however, will decline by more than fourteen percentage points from its 1955 position. Although this relative decrease will be made up in part by water power and by atomic energy, the bulk will be supplied by petroleum which since World War II has been responsible for a major part of the growth in energy use in Free Europe.

Sources of Oil Supplies for Free Europe

7. Table II shows the primary sources of Europe’s oil supplies under normal conditions and points up the significance of the Middle East as a source of supply. For purposes of perspective, Appendix 1⁵ shows the regional supply and demand position of the Free World in 1955, and estimates on a normal basis for 1960 and 1965.

TABLE II FREE EUROPE (Thousands of b/d)

19556 (Actual)	19607 (Est.)	19657 (Est.)
Total normal demand	2,368	3,750	4,800
Indigenous production	178	300	350
Imports—Middle East	1,730	2,675	3,150
North Africa (prin. Algeria)	--	100	400
West Africa	--	50	100
United States	50	50	50
Other W. Hemisphere	350	450	450
Communist Bloc	60	200	300

Western Hemisphere Availability

8. The Western Hemisphere is expected to have logistic capability to export emergency supplies to the Eastern Hemisphere in the following quantities in addition to normal shipments and in addition to supplying its own total needs:

• Immediately after a crisis
  • 1960—1.5 million b/d
  • 1965—1.0 million b/d
• After emergency efforts become effective
  • 2.0 million b/d
  • 1.5 million b/d

The decrease in surplus available in 1965 contrasted with 1960 is due primarily to estimated increases in United States domestic demand which would reduce excess productive capacity above anticipated production from United States wells to approximately 15% from the present 30%.

9. Productive capacities of the Western Hemisphere are treated as a single unit consisting primarily of the United States, Canada, and the Caribbean area, including Venezuela. Surplus export capability is considered to be nil from other South American countries and from the Central American area. It is estimated that roughly half of emergency exports would come from the United States after making allowance for some increase of United States imports from Canada, and that the remainder would be supplied from the Caribbean, mainly from Venezuela. The indicated volume of shipments given above could be sustained for at least one year in an emergency. Although rationing and other measures to restrict consumption in the Western Hemisphere countries are not contemplated in this paper, substantial increases in the above quantities would be possible in an extreme crisis if such measures were taken—especially by the United States.

Costs to the Western Hemisphere of Full-out Support for Free Europe

10. If the Western Hemisphere were suddenly called upon to furnish the quantities mentioned in paragraph 8 and to sustain exports indefinitely at that level, it would constitute a severe drain on Western Hemisphere resources involving (a) a reduction of reserves including those in the United States, (b) an uneconomic expansion of producing facilities, and (c) increased product prices to the United States consumer.

Tanker Availability

11. Under normal conditions it is estimated that a tanker surplus of over 700 T–2 equivalents will be available in 1960 in excess of Free World requirements. By 1965 it is assumed that this surplus will have disappeared and that tankers will not be available beyond those required to meet normal requirements. The position in 1965 assumes that by that date there will have been scrapped those tankers which by normal commercial standards have ceased to be operationally profitable, including substantially all of the United States built World War II tanker fleet.

12. Under emergency conditions, and depending upon the extent that Middle East oil is denied, shipments to Europe would be reduced from the Middle East and increased from the Western Hemisphere. The shorter haul involved would result in the utilization of fewer tankers than under normal conditions. Under these conditions the limiting factor would be the availability of oil and not a shortage of tankers.

Availabilities in the Absence of Additional Measures

13. Recommendations for additional measures to decrease reliance on Middle East oil can be developed in the light of the situation which would exist in the absence of such measures. In examining each of the three cases which follow, it is assumed (a) that Western Hemisphere oil will be available in the quantities stated in paragraph 8, and (b) that tanker availability will be that given in paragraph 11. The three cases are:

• Case I—Middle East Transit Stoppage. A transportation crisis involving both a closure of the Suez Canal and a shutdown of the pipelines to the Eastern Mediterranean could be fully met both in 1960 and in 1965 by reorganizing the pattern of supply sources to Free Europe. This reorganization in 1960 would involve routing the bulk of Europe’s requirements around the Cape of Good Hope as only limited supplies would be required from the Western Hemisphere; in 1965 however, because of tanker limitations Europe will draw on the Western Hemisphere for maximum availabilities, routing only about one quarter of its requirements around the Cape of Good Hope. (See Appendix 2) North Africa and Communist Bloc oil are assumed to be available in this case.
• Case II—Denial of all Middle East Sources. If in addition to the loss of transit facilities as in Case I, all Middle East, North Africa, and Communist Bloc sources were unavailable, Free Europe’s supply level after drawing on available Western Hemisphere sources and after taking the required emergency measures discussed in paragraph 15 would be 69% and 59% of normal respectively, in 1960 and 1965. Of the above sources assumed to be denied, if North African production only were available, these percentages would be 71% and 67% respectively. If in addition Communist Bloc exports were available, Europe would receive 75% of demand in 1960 and 74% in 1965. (See Appendix 3) These estimates are exclusive of rationing which is discussed in paragraph 19 below.
• Case III—Denial of Middle East Sources except Iran. Again assuming the loss of transit facilities as in Case I, if all Middle East sources are denied except Iran, and in addition oil from both North Africa and the Communist Bloc were unavailable, Free Europe’s supply level after drawing on available Western Hemisphere sources and after taking the required emergency measures discussed in paragraph 15 would be 88% and 84% of normal respectively in 1960 and 1965. In this case if North African production also remained available, Europe would receive 90% of normal requirements in 1960 and 91% in 1965. Additionally, if Communist Bloc shipments remained available, these percentages would become 94% and 98% respectively. (See Appendix 4) These estimates are exclusive of rationing discussed in paragraph 19 below.

Emergency Export Capabilities of Middle East Countries

14. While Case III assumes availability of Iranian sources, the possibility exists that at least equal quantities of oil might instead be available from one or more other Middle East countries. Results would then be comparable to or better than those discussed under Case III. Estimated emergency export capabilities from the various Middle East countries through the Persian Gulf are as follows:

TABLE III

1960	1965		000 b/d	Percent	000 b/d	Percent
Iran	1,000	21.3	1,700	25.8
Iraq	300	6.4	500	7.6
Kuwait	1,800	28.3	2,300	34.8
Saudi Arabia	1,300	27.6	1,500	22.7
Other	300	6.4	600	9.1
Total	4,7008	100.0	6,6008	100.0

Time Element in Emergency Programs

15. The percentages cited in Cases II and III assume a lapse of sufficient time to realize the full effect of emergency actions, in particular the making available of Western Hemisphere oil. During the first months, not more than five, there might be a brief period when Europe’s shortfall would be greater than indicated above. During the first two weeks of an emergency, loaded tankers already at sea West of Suez would continue to arrive at European destinations from the Middle East at normal rates. It is expected that European countries would then begin to draw down on stocks which now in total average about 60 days normal commercial requirements of which at least half would be available in an emergency. Past experience indicates that the oil industry would act at once to reschedule tankers without waiting for direction from Government-Industry Committees. Accordingly, the arrival of emergency shipments from the Western Hemisphere would start during the second month and would increase from then on until maximum efficiencies are attained. This analysis of phasing represents a conservative estimate from the logistics standpoint of the expected flow of oil to Europe.

Non-logistic Considerations

16. The discussion thus far does not consider non-operational and non-logistical problems which might affect adversely deliveries in the first months of an emergency. In this paper it is assumed that cutbacks will be shared ratably between Europe and other areas of the Eastern Hemisphere. But whereas the OEEC could allocate oil in Europe, no inter-governmental machinery exists elsewhere in the Eastern Hemisphere. Negotiations to persuade these non-European governments to cooperate with the West could be time-consuming and might fall far short of success. While they were in progress (or even thereafter, in the event of their failure) it might prove necessary or expedient to divert to areas outside Western Europe part of the oil being made available on an emergency basis from the Western Hemisphere.

17. Other difficult problems of a non-logistic nature exist. Important among these is the difficulty of securing agreement among the affected Western Governments that a crisis exists and that emergency action is necessary. Inability to reach such an agreement would delay increases in production both here and abroad and the imposition of rationing measures in consuming countries. Also companies might have difficulty in altering contracts for deliveries East of Suez.

18. The cumulative impact of these factors suggests the wisdom of allowing three months to meet initial rates given in paragraph 8 and six months to meet the maximum rates. On this basis, the levels of supply for Western Europe during the first six months would be substantially below those shown under Cases II and III in paragraph 13.

Effect of Reduced Availability

19. The importance of oil to the energy requirements of Free Europe is growing, particularly in relation to basic industry and essential services. However, in the event of an emergency, it is considered that European requirements could be cut back by at least 10 percent without any appreciable effect on industrial production or employment and that if the cut back were increased to 15 percent the probable consequences would not be severe. Since oil will represent about 30% of Europe’s total energy supplies during the early sixties, a 10 percent cut back in oil could reduce over-all energy availabilities by about 3 percent.

20. Of the three cases the most serious from the viewpoint of internal economic effects of energy shortages is Case II both in 1960 and 1965. The deficit in Case II under complete denial of North African and Soviet oil, in addition to all the Middle East, would be about 30 and 40% of normal requirements in 1960 and 1965 respectively. The overall energy deficit could be in the range of 8 to 13%, a deficiency that would contribute significantly to a decline of industrial production in a number of countries.

21. Case I and Case III would pose less serious problems. The oil shortfall in Case I amounting to nil in 1960 and in 1965, and in Case III ranging in the absence of North African and Soviet oil from about 12 to 16% in 1960 and 1965 respectively, cannot be expected to cause an appreciable reduction in economic activity. However, even a small reduction in economic activity should be measured against the rate of growth that otherwise might be maintained. Moreover, during the early months of a crisis the level of oil supply will be lower until emergency measures have been completed. Oil from North Africa, if available, would materially improve the supply picture as would oil from the Communist Bloc.

Financial Implications

22. The disruption of oil production and transit facilities in the Middle East and the import of emergency supplies from the Western Hemisphere would require very large additional dollar outlays by Free Europe. These added outlays are roughly estimated, after emergency measures are taken, to be in the range of $1.2 to $1.9 billion on an annual basis in 1960 and $1.1 to $1.4 billion in 1965. During the early months of the crisis when emergency shipments from the Western Hemisphere have not yet reached their peak levels, the annual rate of extra dollar outlays would be smaller by several hundred million dollars. These estimates are based on current oil prices and tanker rates. In a major crisis, both prices and rates would undoubtedly rise.

23. The major part of the extra dollar outlays would fall upon the UK and to a lesser extent on France. The financial problems of these countries would be aggravated if the crisis were accompanied by a loss of confidence in their currencies and pressure on their foreign exchange reserves. The method by which Free Europe might meet these outlays is not considered in this paper. It can be determined only when the exact nature and scope of the emergency is known. The extra dollar expenditures would occur primarily because of the switch from cheaper Middle East oil with a low dollar element to more expensive Western Hemisphere oil with a high dollar content. To pay for the emergency oil, Europe would either have to expand its exports of goods and services to the Western Hemisphere or be faced with an outflow of dollars or gold. But the extent to which Europe’s trade can be redirected in this manner is questionable. The limited convertibility measures recently taken by the European governments do not materially affect the basic nature of the dollar drain that would ensue as the result of an emergency.

Actions to Reduce Free Europe’s Dependence on Middle East Oil

24. Development of Alternative Petroleum Sources. The surest most permanent means of reducing Europe’s dependence on Middle East oil is the development of alternative sources in Europe and in other areas of the Free World, which are reasonably accessible to Europe. North and West Africa sources would be particularly valuable because of their proximity to European markets. In addition, increased capacity in other Western Hemisphere countries and to a lesser degree in the Far East would be of great assistance.

Recommendation. To increase availability of oil from other areas in the event of transit stoppages or denial of Middle East oil, the United States (a) should encourage free foreign governments to foster new investment in oil development, (b) should continue to encourage new investment in oil development abroad by fostering reasonable financial arrangements and legal conditions in promising areas outside the Middle East, (c) should, in order not to discourage this effort, permit imports into the United States on as liberal a basis as feasible, and (d) should in any United States system of imports restriction have as an objective a preference for imports of petroleum and petroleum products from Canada and other Western Hemisphere countries. (See NSC 5822/1, approved Dec. 30, 1958)⁹

25. Organizational Planning. The need is recognized for organizational measures on a Government to Government, and a Government to Industry basis, to assure speedy and effective readjustment of oil supplies in a Middle East emergency. The Government to Government organization in Europe is necessary to provide plans for an equitable sharing of available emergency supplies among OEEC countries during such a crisis. This sharing was a troublesome matter during the Suez crisis but it was vital to the success of supplying Europe’s essential needs. The Government to Industry organization is necessary in the United States to maintain current and accurate data with respect to foreign petroleum operations and to have statistics on foreign petroleum requirements and supplies immediately available for the operational phase of an emergency.

Recommendation. The United States should encourage early completion of plans currently under study by the OEEC to establish agreement on sharing of supplies in OEEC countries in times of emergency through a Government to Government organization. The United States should also resolve the legal difficulties which restrict the functioning of the Foreign Petroleum Supply Committee and which cast doubt upon the prompt reactivation of a Middle East Emergency Committee.

26. Standby Plans for Rationing and Conservation of Supplies in Europe. Prompt and effective rationing of oil in an emergency is an inexpensive substitute for oil stockpiling. It has been stated by Europeans that without advance planning as long as three months might be required to make consumer rationing fully effective in Europe.

Recommendation. The United States should urge Western European Governments, where appropriate, through the OEEC, to take whatever advance actions may be necessary to assure in an emergency prompt initiation and enforcement of consumer rationing and other practicable oil conservation measures.

27. Stockpiling. The provision of stocks in excess of normal commercial requirements would cushion the effects of an oil shortage and would provide time to implement emergency actions. OEEC countries have agreed on the need to provide one month’s emergency tankage and stocks beyond the normal holdings of about 60 days. Several countries have already taken steps to put into effect the OEEC recommendation. The United Kingdom has unilaterally decided to provide two months’ emergency stocks.

Recommendation. The United States should encourage Western European Governments to support the OEEC 30-day emergency stockpiling program.

28. Storage. Alternatives to the provision of additional conventional tankage in the form of (a) floating storage or (b) salt dome cavities or underground structures do not seem to have been given adequate consideration in Europe. Costs involved appear under favorable conditions to be considerably less than for conventional tankage.

Recommendation. The United States should, through normal channels, provide more complete information on technology and costs of these methods, and encourage European Governments to utilize the development of unconventional forms of storage.

29. Transportation Facilities—Tankers. The maintenance of a surplus tanker fleet through 1965 would act as a deterrent to a cut-off of Middle East supplies. If the amount of available Middle East oil production were greater than is assumed in Cases II or III, a tanker surplus in 1965 could have the effect of (a) reducing the dollar cost to Europe by providing a choice between oil sources in the light of all existing conditions at the time, (b) minimizing the drain on Western Hemisphere reserves, and (c) moderating the impact upon tanker rates and upon the Western Hemisphere price structure.

Recommendation. The United States should indicate to European Governments the advantages resulting from (a) utilization in a reserve fleet in Europe of serviceable but obsolescent tankers not only to provide additional (floating) storage as mentioned in paragraph 28, above, but also to slow down the high rate of tanker scrapping that is expected during the early and middle nineteen sixties, thus keeping in being a potential fleet in excess of normal requirements, (b) maintenance of surplus operational tankers by such measures as operating at reduced speeds or on uneconomical routes, or for the transportation of unconventional cargoes, and (c) moth-balling of surplus tankers.

The United States should also continue its present policy regarding maintenance of a moth-balled tanker fleet.

30. Transportation Facilities—Pipelines. Two 24-inch pipelines each with a potential carrying capacity of 300,000 b/d or more are presently being constructed or definitely planned from the Sahara to the Mediterranean Coast. The secure operation of these North Africa pipelines would add a considerable insurance factor to Europe’s supply position.

Recommendation. The United States should continue to encourage the affected foreign governments to provide favorable conditions which would assure the uninterrupted transportation of oil through these pipelines.

31. Oil Shale and Tar Sands Development. Although it now appears doubtful that output from United States oil shale and Canadian tar sands will become a significant alternative source before 1965, recent developments include plans for testing the practicability of the use of nuclear bombs to improve mining techniques, and thus produce economical substitutes for crude oil. Capability to produce oil in significant amounts from United States oil shale would add significantly to available reserves.

Recommendation. The United States should (a) continue its active research program to solve shale oil refining and extraction problems, (b) encourage private enterprise to solve such problems, and (c) if requested, cooperate with Canada in solving similar problems relating to tar sands.

32. Natural Gas Development. Experiments have been nearly completed with the present trial run of the S.S. Methane Power to test the technical and economic feasibility of shipping liquefied natural gas by tanker. This revolutionary development appears to hold great promise of making possible for the first time, shipment of natural gas by sea. Great reserves of natural gas are now available in Venezuela and in North Africa that may be utilized as a new source of energy for Europe and that may provide a significant further easing of Europe’s supply position. Authorities in the UK are participating in and are alive to the economic potentialities of this project that has excited active interest also in France and Europe generally.

Recommendation. The United States should follow closely this development and provide technical assistance as required.

33. Development of Nuclear Energy. Energy from nuclear reaction gives great promise of becoming an important source of power and may tend, perhaps by 1970, to stabilize Europe’s imports of oil by offsetting Europe’s growing energy requirements. By 1965, as shown in Table I, nuclear energy will grow in importance although at a rate less than the increase of total requirements.

Recommendation. The United States should maintain close and continuing contact with Euratom and with the International Atomic [Energy] Agency to develop nuclear power reactors in Europe, and should offer technical and other appropriate assistance to obtain that objective.

0. Source: Department of State, S/P Files: Lot 67 D 548, Near and Middle East, 1959–1961. Secret. The source text is undated but the study was transmitted to the National Security Council under a March 26 memorandum by Lay; see footnote 2, Document 309.
1. NSC Action No. 1999, approved by the President on October 20, requested preparation of this study. (Ibid., S/S–NSC (Miscellaneous) Files: Lot 66 D 95)
2. See Document 283.
3. Not printed. (Department of State, S/P Files: Lot 67 D 548, Near and Middle East, 1959–1961)
4. These percentages are based on estimates from the OEEC and from other authoritative sources. [Footnote in the source text.]
4. These percentages are based on estimates from the OEEC and from other authoritative sources. [Footnote in the source text.]
5. Appendix 1, “Normal Supply and Demand for Petroleum Liquids in the Free World;” Appendix 2, (Case I), “Free Europe Emergency Oil Deliveries,” Appendix 3, (Case II), “Free Europe Emergency Oil Deliveries,” and Appendix 4, (Case III), “Free Europe Emergency Oil Deliveries,” are not printed.
6. 1955 was used as the base year because figures for 1956 and 1957 were distorted by the Suez crisis. [Footnote in the source text.]
7. Office of Oil and Gas estimates are based on the most recent information available. [Footnote in the source text.]
7. Office of Oil and Gas estimates are based on the most recent information available. [Footnote in the source text.]
8. For comparison, normal exports through the Persian Gulf are estimated to be 2,855,000 b/d in 1960 and 3,100,000 b/d in 1965. [Footnote in the source text.]
8. For comparison, normal exports through the Persian Gulf are estimated to be 2,855,000 b/d in 1960 and 3,100,000 b/d in 1965. [Footnote in the source text.]
9. It should be noted in connection with the above recommendations that NSC 5820/1, approved Nov. 4, 1958, states that the critical importance of Near East oil to our NATO allies requires that we make every effort to ensure its continued availability to us and to our allies. [Footnote in the source text. NSC 5820/1 is scheduled for publication in volume VII, Regarding NSC 5822/1, see footnote 1, Document 291.]