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

314. Memorandum From the Director of the Office of Near Eastern Affairs (Meyer) to the Assistant Secretary of State for Near Eastern and South Asian Affairs (Jones)⁰

November 21, 1960.

SUBJECT

• Organization of Petroleum Exporting Countries

A. Background:

At a conference attended by six major oil producing nations held in Baghdad, September 10–14, 1960, a permanent body called the Organization of Petroleum Exporting Countries (OPEC) was established. Five of the nations represented—Iraq, Iran, Kuwait, Saudi Arabia and Venezuela—became charter members and Qatar has been given observer status.

At the conclusion of the conference, it was announced that the purpose of the OPEC would be to provide a forum for the unification of oil policies of member countries and to determine ways to safeguard the interests of the members, both individually and collectively. It was further agreed that: (1) the members could no longer remain indifferent to the attitude of oil companies in modifying prices; (2) the members would demand that oil companies keep prices stable and that they restore present prices to those prevailing prior to the August, 1960, reduction; (3) the members would study and formulate a system to insure price stability by, among other means, the regulation of production giving proper consideration to the interests of producer and consumer countries; and (4) in the event the application of any unanimous decision by member countries should result in sanctions by an oil company against one member country, no other member would take advantage of the situation by accepting any offer from an oil company whether in the form of increased exports or an improvement in prices.

A sub-committee of OPEC is to meet in November in Baghdad to organize an agenda for the second meeting which is to be held in Caracas in January, 1961. In the meantime, a permanent Secretariat is being established but its location has not yet been determined.

The creation of OPEC was triggered by the major oil companies reducing Middle East posted prices for crude oil in August, 1960. A prior Soviet offer of cheap oil to India forced the three Western firms operating there to reduce their prices 12¼% below the Persian Gulf price. This in turn made price cuts for Middle East crude inevitable because of the interlocking system of oil company ownership and their pressure from other consumer countries for lower prices. Furthermore, a considerable amount of crude was being sold at discounts because of the intense competition for markets. Meanwhile, Abdulla Tariki, Director of Saudi Petroleum and Mineral Affairs and Juan Perez Alfonso, Venezuelan Minister of Mines and Hydrocarbons, had been advocating a system to pro-ration oil output through the establishment of an organization with the power to determine each member’s share in the world market and, thus, maintain favorable oil prices. Following the price cut, the Middle East countries and Venezuela called an emergency meeting in Baghdad to create an organization to study pro-rationing, which they felt might help protect their interests.

Membership in the OPEC is restricted to countries with net substantial exports of oil unless the country is accepted unanimously by the five charter members. By restricting membership in this way, it keeps out the UAR and Bahrain and, thus, makes it possible for both Iraq and Iran to participate. Although the United States is a major oil producer, it cannot qualify for membership since it is a net importer of oil. This leaves membership open to such countries as the Soviet Union, Libya, Indonesia, Canada, and perhaps Argentina and Colombia, which are net exporters.

B. OPEC’s Future:

At the present time, it is too early to judge the effectiveness and the future growth of OPEC. However, the following observations are believed to be pertinent:

1. Since the creation of OPEC, member countries have informed the oil companies that they do not recognize the new posted prices for crude as the basis for royalty or income tax purposes.

2. Although it would appear from the resolutions at the OPEC meeting that the member countries will not work for a change in the present 50/50 formula, the formula will be subject to severe strains if the OPEC countries insist on being compensated at the posted price level existing prior to August, 1960.

3. Russian participation in OPEC is a possibility, but it does not seem likely at the present time. During the Second Arab League Petroleum Congress held in Beirut October 17–22, 1960, Perez Alfonso (attending as an observer) stated that OPEC countries should study the possibility of Russian participation. If necessary, he was prepared to go to Moscow although his country had no diplomatic relations with the Soviet Union. The Russian observers also attending the conference did not take the hint. On the contrary, their condescending attitude and their statement to the Congress that the Soviet Union was determined to reestablish its historic share in the West European oil market appears, at least to some extent, to have frightened and angered the Arab countries attending the Congress.

4. While the motivation behind the creation of OPEC is to establish some form of joint pro-rationing among the member countries, this goal seems almost impossible to realize. On the one hand, OPEC suffers from the major weakness that neither Libya nor Algeria are represented. These countries are not likely to become members since they are preoccupied in becoming major oil producers. On the other hand, there are many obstacles in the way of parceling out each country’s share of the world’s oil market unless all producer and consumer countries are members of the same organization. During the Arab League Petroleum Congress in Beirut, M. J. Sladic of the Saudi Directorate for Petroleum Affairs, presented a paper on pro-rationing. The paper appears to have made the delegates aware of the problems involved in administering such a system and they failed to consider any resolution favoring pro-rationing. Several criteria can be used to determine each country’s share (proven oil reserves, historical markets, present production, population, etc.) but each one favors one or two producers to the disadvantage of the others. There is no indication that Middle East oil producers are willing at the present time to forego production increases if it points to a loss in revenue. In this connection, it is worth noting that Iraq, one of the founders of OPEC, is even now seeking to obtain IPC relinquishment of vast areas in Iraq—to award new concessions and thus step up Iraqi production well above present levels.

C. U.S. Attitude Toward OPEC:

The policy of the United States is to encourage the free movement of petroleum by private enterprise in world trade. Although pro-rationing originated in the United States in 1931 in east Texas and continues to exist in seven major oil producing states in the US, it bears no relationship to pro-rationing by Middle East countries. The former is primarily a conservation measure. However, by having pro-rationing at home and by participating in international commodity agreements (coffee, wheat), where production controls are exercised, it is difficult for the United States to take a public position against pro-rationing of oil by oil exporting countries.

Before the US adopts a policy with regard to the OPEC, it will have to wait to determine what sort of an organization it is dealing with. Although the member countries have agreed to study pro-rationing as a measure to insure price stability, there is no indication at this time that they will be successful. So far, OPEC countries seem to be unanimous in only one respect—their unwillingness to allow the oil companies to make any further reductions in the price of crude oil without prior approval of the member countries.

When the OPEC becomes a permanent functioning organization, the US will have three choices:

(1) Support the organization. In the event the US should support OPEC, it would probably be necessary for us to revise existing antitrust laws to enable American oil companies to consult jointly when discussing prices with oil producing countries. It would also seem to violate our present policy that international commodity arrangements should allow for equal representation between consumer and producer countries.

(2) Oppose OPEC. Should the US oppose the OPEC by pointing out its shortcomings (as suggested by several oil company representatives), it would undoubtedly antagonize the oil producing countries that have joined the organization. They would view this as unwarranted interference and as evidence that the US is working hand in glove with oil monopolies. It would probably strengthen OPEC and encourage member countries to take further measures to control the operations of the oil companies working in their respective countries. There is also the danger that the Soviet Union could exploit this antagonism.

(3) Remain neutral. By not taking sides with regard to the OPEC, the US would be carrying out its existing policy of remaining in the background in matters affecting relations between oil companies and oil exporting nations and thus avoid intervening on behalf of American oil companies except in extreme cases involving questions of security of international law. This policy gives us the greatest flexibility and allows us to deal with petroleum matters on a case by case basis.

0. Source: Department of State, NEA Files: Lot 62 D 435, 1960 Chron. Confidential. Drafted by F.M. Dickman of NE/E.