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

310. Memorandum of Conversation⁰

October 19, 1960.

SUBJECT

• Standard Oil Company (New Jersey) views on the Organization of Petroleum Oil Exporting Countries

PARTICIPANTS

• Standard Oil Company (New Jersey):
  • Mr. Leo Welch, Chairman of the Board
  • Mr. E.G. Collado, Board Member
  • Mr. M.A. Wright, Board Member
• Department of State:
  • Under Secretary Dillon
  • FSD—Mr. Beckner

The Jersey company representatives called at their own request to discuss problems resulting from the formation of the Organization of Petroleum Exporting Countries (OPEC).¹

Mr. Welch stated that the Jersey company is greatly concerned about the implications for the oil industry and the security position of the West resulting from the formation of OPEC. He fears that the companies will be caught between producer country controls and the demands of consuming countries. They will no longer be able to manage their business in a normal way since the governments would take over the determination of oil prices, the amounts of oil to be produced, and the destination of oil shipments.

The Jersey representatives believe a sharp distinction should be drawn between prorationing in Texas and the international prorationing scheme proposed by OPEC. They also believe that experience with other commodities is not pertinent in determining whether an international oil agreement is feasible or desirable.

Although OPEC has been set up in a preliminary form, Jersey thinks it has basic weaknesses which will prevent the development and administration of a restriction program. Iran and Iraq would not be reliable members since they badly need increased output. The Iranian minister in charge of oil matters has indicated that he did not know that Rouhani, Iranian delegate to the Baghdad conference, had been authorized to sign the OPEC agreement. This may result in dissension within the Iranian Government on relations with OPEC. The Kuwaiti representative is reported to have stated that Kuwait would be willing to reduce its crude production in the general interest; but Jersey believes that the Ruler of Kuwait, for prestige reasons, may not be able to do this if the other OPEC members’ production increases. Moreover, Kuwait is requesting bids on its potentially rich offshore area. Venezuela, although very optimistic about OPEC, may find itself in a weak competitive position and be unable to protect itself vis-à-vis Arab countries or to influence Soviet oil export policies. Jersey thinks the Soviets cannot be trusted to cooperate on oil although they are cooperating on tin and diamonds. Mattei, head of the Italian Government oil company, is currently buying oil from the Soviets at 90 cents per barrel below posted price and Soviet price cutting would continue. Mr. Rathbone, President of Jersey, is now in Libya attempting to convince Libyan officials that they would have much to lose by joining OPEC. Libya will have low cost oil favorably situated for the European market. By 1962 the Jersey company may be producing 200,000 b/d in Libya and in four years as much as 500,000 b/d. Oasis may also be able to reach this amount by 1964. With such prospects Libya would have little advantage from joining a production cartel. Output from the French Sahara will also be large. France is not expected to join OPEC.

The Jersey officials expect that there will be a large surplus crude oil producing capacity for quite a number of years. They are uncertain, however, how long crude oil without a “home” will remain a serious problem. The major producers, who can increase their output to an almost unlimited degree, may cut prices, if necessary, in order to protect their marketing position. How long the present unsatisfactory situation will exist will depend largely on Soviet Bloc price pressures and the sales efforts of newcomers. Cutting below posted price is still prevalent. Mr. Welch pointed to recent quotations to Ancap, the Uruguayan oil agency. Creole and Shell did not bid since Venezuela objects to big discounts off posted price, but bids at 90 cents below postings were received from other companies.

Jersey thinks that progress can be made with the Arabs by talking oil economics. They would argue the Arabs not to go too fast in OPEC without knowing what the consequences may be. The companies can show the Arabs that they have not been hurt by the present concession system or by the recent price cuts; there has been no reduction in national revenues from oil, and increases in world demand should protect governments against future loss of revenues. OPEC on the other hand might hold production back, for example in Iran, Iraq, and Kuwait, without offering certainty of higher prices to compensate for it. Moreover, the companies can point out that if a bloc of powerful consuming countries is formed and new oil and energy sources are tapped, the OPEC countries would be hurt.

Mr. Welch stated that he thought the companies could work out arrangements with individual countries to meet their most pressing problems. He stated also that he hoped it would be possible to convince the Arabs that if any future discounts below posted prices are required that they should share the reduction in income with the companies. No further reduction of postings is contemplated.

Mr. Welch stated that he hoped the U.S. Government would use its influence in urging the OPEC countries to go slowly in completing the OPEC organization and implementing its program. He said that the United States obviously cannot say that it opposes OPEC, but he did think that the U.S. Government could express the hope that the OPEC countries would consider fully the economic factors involved in their program and would not reach hasty decisions.

Mr. Welch said that he understood that the U.K. Government was opposed to the formation of OPEC and believed to be approaching Iran regarding it.

Mr. Dillon expressed appreciation on behalf of the Department for Jersey’s views on the OPEC.²

In closing, Mr. Welch stated that the Jersey company was deeply concerned about the situation in Peru, where the Government, as a result of communistic and nationalistic pressures, was not using its strength in the Parliament to push through the bill which is designed to settle the International Petroleum Company’s concession problem. Mr. Dillon suggested that the Jersey representatives discuss this problem with Assistant Secretary Mann. This they agreed to do.

0. Source: Department of State, Secretary’s Memoranda of Conversation: Lot 64 D 199. Confidential. Drafted by Beckner and approved in Dillon’s office by Special Assistant Theodore Eliot on October 27.
1. See Document 314.
2. This paragraph originally read: “Mr. Dillon indicated interest in the suggestion that the United States might discreetly attempt to discourage certain countries, particularly Iran, from going ahead with its membership in OPEC, but did not indicate whether or not the U.S. Government would take any action.” It was crossed through and the paragraph as printed was substituted.