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

317. National Intelligence Estimate⁰

NIE 30–60

December 13, 1960.

MIDDLE EAST OIL

The Problem

To estimate probable trends affecting Middle East oil and their political and economic implications over the next five years or so.¹

Scope Note

This estimate does not attempt to give detailed information on the production and consumption of Middle East oil; such information is already available in various forms. This estimate is a non-technical summary of major trends affecting Middle East oil and an assessment of their broad political and economic implications, including the problems likely to be raised for US interests. We avoid specific discussion of the strategic importance of oil and of wartime contingencies. We believe that, for at least the period of this estimate, the picture will not be significantly affected by the development of nuclear power or other new sources of energy.

Conclusions

1. A major factor in the world oil picture for the next several years will be the continuing surplus of producing capacity. This condition reflects the development of new sources in North Africa and expansion of Soviet export capabilities, as well as increasing capacity in the Middle East. As a result, Western Europe will draw a somewhat smaller percentage of its petroleum requirements from the Middle East. Individual sources of oil may be shut down and transit facilities may be blocked temporarily, but we believe that a lasting area-wide breakdown is unlikely during the period of this estimate. Western Europe, in particular, will remain heavily dependent on Middle Eastern oil, and the oil producing Middle Eastern countries will almost certainly continue to receive oil revenues sufficient to support substantial programs of general economic development. (Paras. 10, 34–35, 40)

2. The terms and conditions of Middle East oil concessions are likely to be considerably changed. The position of the Western oil companies will be further weakened by erosion of the 50/50 profit sharing formula and by the joint efforts of the producing countries to control prices. Greater participation by local governments in the management of the oil companies is likely. We do not believe, however, that large-scale nationalization of industry facilities is probable or that the companies will feel compelled to liquidate their interests in the area during the period of this estimate. (Paras. 24–30, 36–38)

3. By 1965 Soviet oil exports will probably account for as much as seven percent of the oil moving in international trade outside the Bloc. This will enable the Soviet Union to upset markets in various individual countries and even to displace Western companies in some smaller markets. Soviet oil is likely also to spur further price cuts in the world market, and will be used in an effort to promote Soviet influence, particularly in underdeveloped areas; such tactics, however, will probably be limited to some degree by the Soviet’s desire to enjoy the economic benefits their exports bring, especially from Western Europe. Growing Soviet exports, together with an expanded program of economic and technical assistance for the development of new oil facilities in Asia and Africa, will make the USSR a force to be reckoned with in the international petroleum field. We do not believe, however, that the USSR will be able to upset the preponderant position of the Western companies or destroy the present overall pattern of the Middle East oil industry. Even a Communist takeover in one of the producing countries would not necessarily result in a refusal to sell the country’s oil to the West. (Paras. 15–23, 39)

4. On balance, we think the odds are against developments in regard to Middle East oil that would be critically detrimental to US national interests during the period of this estimate. Nevertheless, the US will be faced with a number of broad problems. Among these will be determination of the balance of interest between the desirability of developing alternate sources of oil to meet Western Europe’s needs and the importance of assuring Middle Eastern countries of sufficient oil revenue to avoid instability; resolution of possible conflicts of interest between the US and its Western allies, especially the UK and France; policy differences between Western governments and those of the oil producing countries; and the difficulty of determining in particular circumstances whether and how US strategic and commercial interests coincide or conflict. (Paras. 39–45)

Discussion

1. The Importance of Middle East Oil

To the Free World

5. Two geographical areas, the Middle East and the Western Hemisphere, provide between them 94 percent of all oil produced outside the Soviet Bloc.² The Western Hemisphere consumes most of its own production. All but a small part of Middle East oil is exported. In 1959, Middle East oil constituted 51 percent of all Free World oil moving in international trade. Sixty-one percent of Middle East exports went to Western Europe to supply 73 percent of that area’s total needs. Most of the rest went to Asia and the Far East where it filled 67 percent of that area’s requirements. The 540,000 barrels a day (b/d) which flowed to the Western Hemisphere represented only 5 percent of total Western Hemisphere consumption.³

6. The Middle East’s key role in world oil stems partly from the richness of its petroleum resources, partly from the long-established pattern of efficient exploitation of these resources, and partly from its central geographical location. Middle East reserves are tremendous, almost 70 percent of the Free World’s proved total. Productivity is high and hence costs are low. In 1959, oil production in the Middle East averaged 4,700 b/d per well, compared with 295 b/d in Venezuela, and 12 b/d in the US. Heavy investment in pipelines and tankers has produced a surplus of low cost carrying capacity. Concession areas have generally been large; the terms of the concession have been similar; and most of the concessions have been in the hands of companies owned by several large American, British, and French firms.⁴ The resulting efficiencies and economies, plus the steadily increasing demand for oil, have provided both the companies and the host countries with substantial profits.

To the Middle East

7. In an area whose other natural resources are slight, the discovery and exploitation of petroleum has had an enormous economic, social, and political impact. To the oil-producing countries, the revenues from the production of oil are the key economic reality. Oil is the one indigenous source which can pay for the development programs, buy the arms, and acquire the myriad technical wonders and luxuries of the twentieth century. Oil revenues comprise 95 percent of total government receipts in Kuwait, 80 percent in Saudi Arabia, 66 percent in Iraq, and about 50 percent in Iran. Middle Eastern states derive additional revenues from customs receipts on goods imported with oil originated funds and additional foreign exchange from local expenditures by the oil companies. Of the countries whose oil revenues come chiefly from transit fees, the UAR derives the most substantial benefits from tanker tolls in the Suez Canal and from pipelines crossing Syria. Lebanon and Jordan get relatively small transit revenues.

8. The Middle Eastern countries could, to a varying degree, absorb a relatively small reduction in oil revenues. If they were to lose most or all of these revenues, all would be seriously affected; the impact would depend largely on the availability of alternate sources of revenue.

9. Deprived of oil revenues, Saudi Arabia would face economic ruin and probably political chaos; the country has built up no money reserves and it would be extremely difficult and probably impossible for the government to remain effective for more than a few months. Kuwait, possessor of the world’s largest proved oil reserves, equal to those of the entire Western Hemisphere, is totally a creation of the oil boom. The Ruler has invested large sums in the UK, and Kuwait could exist for a considerable time on these investments if present revenues ceased. However, these investments would probably be blocked by the British Government in the event of an ouster of the Kuwait Oil Company. Even if the funds remained unblocked, the development program would gradually grind to a halt and business would begin to stagnate. Iran and Iraq possess other sources of revenue, but would face serious economic dislocation as well as drastic reductions in their development programs and general governmental activity if oil revenues were shut off. In all these countries, substantial and prolonged deprivation of oil revenue, particularly if no resumption were in sight, would, we believe, generate sufficient dislocation and unrest to make the fall of their governments likely. In a similar situation, the economy of the UAR would be affected seriously, although probably not so much as to threaten political stability.

II. Changes in the World Oil Picture

Developments in the Industry

10. World consumption of oil has increased greatly since World War II. In Western Europe, requirements grew by about 13 percent annually between 1946 and 1959; for the Free World as a whole the rise was over 7 percent annually. However, Free World producing capacity has expanded even more rapidly, especially in recent years. As a result, there is now a substantial excess of producing capacity over consumption. This situation is expected to continue into the mid-1960’s and possibly beyond. During this period, Western European requirements will level off (to perhaps an increase of 7 percent annually); total Free World demand will rise somewhat less rapidly than in recent years; and producing capacity will continue to grow with the development of new sources of petroleum in the Middle East and elsewhere.⁵ Major discoveries in Algeria and Libya alone are expected to put 1,000,000 b/d on the market by 1965. Soviet exports to the Free World will add to available supplies. Transportation, not long ago a limiting factor in the movement of oil, is more than adequate to meet anticipated demands for the 1960’s. Free World tanker surplus is substantial and Middle Eastern pipelines are even now not working at capacity.

11. In recent years a number of new companies have entered the industry in North Africa and the Middle East. New sources of supply have been discovered and additional countries have become producers. Any oil that is discovered by the newcomers will compete increasingly with present Middle East production. In some cases there will be a temptation for the consuming areas to forsake traditional suppliers in favor of a newcomer who can be persuaded to give the consuming country markedly better terms or a share in local refining and marketing operations. Finally, of course, the more liberal terms the newcomers have offered the producing countries are adding to the pressure on the existing pattern of concessions.

12. The oil industry will be increasingly affected by the import policies of the consumer countries. Japan is already taking measures to ensure domestic markets for oil produced abroad by its nationals. Italy will probably eventually do likewise. France has already persuaded foreign-owned refining and marketing organizations within its borders to accept French-owned Algerian crude. As more and more Algerian crude becomes available, Paris may revive its now quiescent efforts to get Common Market preference for it. West Germany may also seek to ensure a place in its domestic market for any crude that may be brought in by the West German companies which are now participating in exploration abroad. The US has for some time had import controls, though these are designed to encourage domestic production rather than protect local markets for oil produced abroad by US nationals.

13. Foreign exchange problems will also continue to affect the oil industry to a considerable degree. The foreign exchange positions of the Western European importing countries have improved substantially in the past several years, and the extent to which oil must be paid for in dollars or other foreign currencies is now a less important factor than formerly. Nonetheless, most governments are still eager to husband their foreign exchange. Moreover, they will take advantage of offers by new producers selling crude at a sharp discount and be tempted by deals involving soft currency, barter exchanges, or government to government transactions.

14. There is little likelihood that the expanding market east of Suez will provide an outlet for much of the Middle East’s surplus producing capacity. Consumption in Asia and the Far East is expected to increase at about seven percent a year during the next five years, but in absolute terms this means only an average of about 130,000 b/d annually. There is a chance that these increased requirements will be partially covered by such developments as expanded production in Indonesia or new discoveries in India. Moreover Soviet oil can be expected to be sold in increasing quantities in this area, as already evidenced by shipments to Japan and India.

The Soviet Challenge

15. Before World War II the USSR exported what were for those days considerable amounts of petroleum (reaching a peak of about 120,000 b/d in 1932). Exports ceased during the war, and the Soviet Bloc did not re-enter the international oil market on a commercial scale until 1955. Since then, Bloc exports to the Free World, which are almost entirely of Soviet origin, have increased rapidly, rising, for example, from about 230,000 b/d in 1958 to 360,000 b/d in 1959.⁶ This year, the Bloc is expected to export about 450,000 b/d.

16. Soviet Bloc exports now go to at least 28 Free World countries. The USSR has used its petroleum exports to obtain capital equipment in Western Europe and Japan. Where politically expedient, as in India and Cuba, it has accepted payment in soft currencies or commodities. The private companies which control Free World oil are especially ill-equipped to cope with the latter kind of competition. The Bloc has also supplied extensive technical services and equipment for exploration activities in the UAR, Iraq, and India.

17. Soviet activities in international oil will almost certainly expand further in the next few years. The current Seven-Year Plan goal for petroleum production in the Soviet Union in 1965 is about 4.8 million b/d, almost double 1959 production. This quantity would provide the USSR with an exportable surplus of about 1 million b/d. About half of this would probably be needed to meet the requirements of other Bloc states. Hence, the volume available for exports to the Free World would be about 500,000 b/d, approximately the same as in 1960.⁷

18. However, recent information, supported by Soviet performance during the past two years, indicates that production in 1965 may exceed Plan goals and could run as high as 5.6 million b/d. Of this, we estimate that as much as 1 million b/d could be available for export to the Free World. Whether or not the USSR could export this quantity of oil would depend also on its ability to develop refinery capacity, internal transport, and tanker lift, as well as to open new markets for such oil. There is evidence that the Soviet Union has embarked on a program to do so. Its export drive will continue to be motivated by political as well as economic considerations.

19. We estimate that in 1965 Soviet oil exports will probably account for as much as seven percent of the total international movement into Free World markets. We do not believe that this of itself will upset the preponderant position of the Western companies in international trade or destroy the present overall pattern of the Middle East oil industry. It will, however, enable the Soviet Union to compete actively in the Free World market to the detriment of Middle East oil and to upset markets in various individual consuming countries. In small markets, the USSR could even displace Western oil companies. In a situation of continuing worldwide surplus, a growing influx of Soviet oil is likely also to spur further price cuts, with a consequent disrupting influence on relations between the Middle Eastern governments and the Western companies. Moreover, an expanded program of technical assistance for the development of new producing and refining facilities will probably increase Soviet leverage in various underdeveloped countries. All this will make the USSR a force to be reckoned with in the international petroleum field.

20. For the next few years at least, the USSR’s use of its influence for political purposes will probably be limited to some degree by its desire to derive maximum economic benefits for itself from its oil exports. In some areas, especially Western Europe, economic objectives are likely to predominate. Oil exports are at present the USSR’s largest earner of foreign exchange and provide a source of much sought-after machinery and manufactured goods. Hence, though the Soviets will resort to price cuts to penetrate markets, unduly deep or prolonged cuts could jeopardize their foreign exchange earnings. In the Middle East, the USSR must beware of arousing local resentment if Soviet oil displaces Middle East oil in foreign markets.

21. In the less developed countries, political considerations will be given greater weight by the USSR. In the oil-producing areas, the USSR is likely to encourage nationalist sentiment to make increased demands on the established companies. In the consuming areas, it will seek in various ways to impinge on Western markets and to promote its own influence.

22. We believe that for some time to come the USSR will neither wish nor be able to assume the political and economic burdens that would be involved in taking over responsibility for the total oil industry in the Middle East. However, in the event of withdrawal or expulsion of Western oil interests from any one country, such as occurred in Iran under Mossadegh, the Soviet Union probably could provide enough economic support of one kind or another to mitigate the resulting dislocations in the economy of the affected country.

23. In terms of physical capability, the USSR will soon, if it does not already, have sufficient transporting and marketing facilities to move and sell most of the production of one or more of the smaller Middle East producers, say Bahrein or Qatar. By the end of the period of this estimate, it may even have developed sufficient facilities to transport and market most of the oil from one of the larger producers, e.g., Iraq. We believe it unlikely, however, that the Soviet Union actually will undertake to do either. British political influence will probably continue to make the smaller producers inaccessible to the USSR; and, except in unusually favorable circumstances, the USSR is apt to be inhibited from assuming responsibility for disposal of the oil of one of the major producers by the formidable political, economic, and technical problems involved, as well as by Western opposition.

III. Middle East Developments

National Aspirations

24. The prospects for a continuing world oil surplus have introduced new problems into the relationship between the companies and the oil-producing countries. The governments of the latter are most immediately concerned with problems of revenue—revenue to add to the power and prestige of the ruling groups, to support economic development programs, and even to pay for regular government expenditures. In the past the various producing countries have taken advantage of each others’ difficulties to increase their own oil profits. The Arab states were happy to see their oil fill the gap created by Mossadegh’s shutdown of Iranian oil. Iran in turn profited when the flow of Arab oil was disrupted by the 1956–1957 Suez difficulties. Recently, however, all the producing states have seen further increases in their revenues threatened by two reductions in the posted price of crude oil.⁸ They responded in Baghdad in September 1960 by setting up with unusual speed and cooperation an Organization of Petroleum Exporting Countries (OPEC) whose demand for a voice in pricing was strongly supported by the Beirut Oil Congress in October 1960.

25. For some years there have been other deep and troublesome stirrings in the producing countries. These are based partly on the concept that the oil beneath their territories is a national patrimony which will not last forever and which is being exploited by the Western oil companies under unjust arrangements made when the area and its rulers were under the political domination of the West. From this concept the idea is derived that the national sovereignty and national interests of the contracting states should override the legal rights and commercial interests of the private companies. These feelings are shared even by many members of conservative groups, and they are deeply and widely held among most other politically conscious elements in the area. Out of them have grown a number of demands aimed at increasing local control of oil operations in addition to—and sometimes even apart from—increasing local profits. In addition, local resentment is increased by the rising conviction that ruling groups, such as that in Saudi Arabia, are squandering oil revenues without due regard for the welfare of the people as a whole.

26. In their mildest forms, the demands for change include replacement of foreign staff of the oil companies with local employees, transfer of company headquarters to the producing country, supply by the companies of technical and welfare services only remotely connected with the oil business, and more rapid relinquishment of parts of the concession areas.⁹ There will be increasing pressure on the oil companies on all these issues everywhere in the area. Most of the demands of this type are considered negotiable by the companies, however, and it is unlikely that any widespread deadlock will develop over them alone.

27. A more important area of pressure during the next few years will be the question of profit-sharing. Few Middle Eastern countries regard the 50/50 formula which is now standard in the area as equitable. In addition, these countries believe that the companies are constantly seeking to reduce the countries’ share through manipulation of prices and exorbitant claims for amortization and expenses. Demands for upward revision of the formula will, of course, be spurred by the fact that some of the new companies are offering higher percentages of profits to the host countries.

28. Other aspirations pose an even more direct challenge to the companies. Governments of some producing countries are showing increasing interest in participation in ownership and management of the producing companies. Apart from the additional profits they would receive as stockholders, this would give them a greater voice in such questions as how much oil should be produced and to whom it should be sold. It would also bring them in closer touch with the industry as a whole and would, they hope, enable them to influence international activities now beyond their control. National participation is provided for in recent ventures by Italian, American, and Canadian companies in Iran, and will almost certainly eventually appear as a demand in negotiations for revision of older concessions.

29. The most ambitious of local aspirations, put forward chiefly by Saudi Director of Petroleum Abdullah Tariki, demands that all operations from the producing well to the gasoline pump be handled by integrated companies, in the management and profits of which the host governments would have a share. This goes considerably beyond the other schemes, since it would give the producing governments a share in control over company facilities and operations beyond their own borders. The threat of nationalization, which the area governments have always seen as their weapon of last resort in dealing with the companies, could then extend to the whole integrated company and its facilities inside and outside the producing country. The Japanese company, which was the first to accept the principle of integration in its concession for the offshore areas in the Kuwait-Saudi Arabia Neutral Zone, has already struck oil in promising quantities. If, as appears likely, the Japanese company is able to operate successfully, the pressure for integration elsewhere is likely to increase rapidly.

30. Recent developments have given new impetus to discussions of cooperation between producing states. Arab oil experts have long stressed the desirability of collaboration among themselves and with non-Arab producers, such as Iran and Venezuela. An Arab tanker fleet and an Arab pipeline have been discussed, but no progress has been made to translate these schemes into action. We do not think that, for the next several years at least, any effective joint action by the producing states is likely to take place—chiefly because of mutual jealousy and suspicion because of competing economic interests. There is a possible exception to this in the field of pricing. Being unable to accomplish anything individually, the producing states will probably work more effectively through OPEC to bring pressure on the companies than they have in the past. We doubt that they will be able to agree on a workable program for prorating production, the only practical way for them to control prices, but they are likely to succeed in influencing the companies’ policies to some degree.

Company Reactions

31. The attitudes, intentions, and capabilities of the big international oil companies in regard to the pressures against them are not easy to assess. The position of the companies is strong in many ways. They have developed and control the vast and complex apparatus in Western Europe, Africa, Asia, and America through which most Middle East oil is actually marketed. This apparatus is beyond the physical control of the producing countries. They cannot tax it, nationalize it, or shut it down. The companies alone have the enormous capital and technical ability required for the heavy development and research activities required in every phase of the oil industry. The negotiating positions of most of the European companies are strengthened by the fact of their government’s participation in their ownership and by the importance which their governments place on continued access to Middle East oil.¹⁰ In addition, the companies can exert great influence—especially in a surplus market—by adjusting their off-takes from the various producing countries.

32. At the same time, the companies labor under major disadvantages. However benign or constructive their polices may be, they are inextricably linked in the Middle Eastern mind with Western imperialism and are subject to political as well as economic pressures. So strong is the bias against the companies that some local elements are likely even to be susceptible to Communist arguments that Soviet activities in the international oil field (which will almost inevitably be detrimental to Middle Eastern producers) are to be welcomed because they will help break the power of the Western monopolies. Even well-informed local officials and political leaders fail to appreciate the intricacy and complexity of the oil industry and underrate the difficulties which they would encounter in trying to run an international oil business. Finally, of course, the international oil industry is a highly competitive one, and there is a limit to how far the companies can or will go in preserving a common front.

33. There is talk among company executives, and some evidence in company activities, of a new “tough” line toward local demands. The Trans-Arabian Pipeline (TAPLINE)¹¹ appears prepared to close down rather than yield to demands for higher transit fees. The Iraq Petroleum Company is reducing its off-take from Basra because of a heavy new port tax imposed there by the Iraqi Government. The established companies have rejected requests from the producing countries for a voice in pricing, and refuse to consider integration. They view the 50/50 profit-sharing formula as a benchmark of stability and insist that breaching it would lead to a continuous spiral of governmental demands. However, the history of negotiations in the Middle East shows that the companies have time and again given in to or compromised substantially with demands which they first rejected as completely unacceptable.

IV. The Outlook

34. The continuing surplus of producing (and, secondarily, transporting) capacity will be a major factor in the world oil picture for the next several years. Because of the numerous uncertainties involved, political as well as economic and technical, it is difficult to determine precisely how this surplus will affect the Middle East. One thing is clear. The great reserves which the area possesses will continue to make it a major factor in world oil. Its exports to Western Europe will almost certainly continue to increase gradually in absolute terms as Western European consumption expands. However, with North African and Soviet oil playing a larger role in the international oil trade, its share of the Western European market is expected to decrease from 73 percent of the total in 1959 to an estimated 59 percent in 1965.

35. While Middle East production is likely to continue to rise for at least the next five years, the rate of increase will be slower, and the halcyon days of spectacular annual increases in revenue are probably over for the Middle Eastern countries. Revenues are apt to grow only modestly and new rounds of price cuts—which are by no means unlikely—could even lead to some diminution in the present level of revenue. Barring such unlikely contingencies as widespread shutdowns or large-scale destruction of oil producing and transporting facilities, however, we believe the odds are against major decreases in the present levels of revenue—chiefly because Western governments, the oil companies, and most influential elements in the producing countries are well aware of the disastrous consequences.

36. Pressures from the producing governments on the companies will grow heavier, and major changes in the present concession pattern are likely. The 50/50 profit-sharing formula will probably give way in the next five years—both because there may be no other way to keep revenues up and because the formula has already been breached in Venezuela, Iran, and the Kuwait-Saudi Arabia Neutral Zone. The companies are also likely to permit over a period of time a larger participation of the local government in management of producing companies. They will resist vigorously the demand for integrated companies, chiefly because most of the present producing companies are merely instrumentalities of the parent companies set up for the purposes of exploration and exploitation. For them to engage in marketing would place them in direct competition with the present parents. Even here, however, it is possible that eventually new limited regional refining, transporting, and marketing organizations including local interests may emerge.

37. We do not believe that large-scale nationalization of existing oil company facilities is likely during the period of this estimate, although threats of such action will probably be used from time to time for purposes of pressure. The governments of the producing countries remember the experience of Mossadegh in Iran, and they are unlikely to emulate him unless they become extremely aroused emotionally or come to believe that their loss of revenue would be made up by the Soviet Bloc. However, there may develop a kind of “creeping” nationalization under which the companies gradually retreat to a position where they are little more than managing agents of the local governments. We think the odds are against even this going very far in the next few years.

38. In the past the situation usually stabilized for some time once a new pattern in government-company relationships was established. This may happen again on a basis of greater government profits and more government participation in control. However, these periods of quiescence, if they come at all, are likely to be briefer and briefer. At some time, the companies may come to feel that the oil business in the Middle East has become so hazard-ridden and profits so marginal that they may as well liquidate their interests there and concentrate elsewhere. We believe that this is unlikely to happen within the period of this estimate.

39. On balance, we think the odds are against developments in regard to Middle East oil that would be critically detrimental to US national interests in the next few years. Actual physical seizure of the area by the USSR is unlikely short of a general war. Soviet mischief-making will continue and could become dangerous in specific cases, e.g., a Communist-exploited upheaval in Iran followed by abrogation of the consortium agreement. However, even a Communist takeover in one of the producing countries would not necessarily result in a refusal to sell the country’s oil to the West.

40. Under these circumstances, Western Europe will probably continue to get as much oil as it needs from the Middle East while developing alternate sources west of Suez. The Middle Eastern countries are likely to continue to get enough revenue to support substantial development programs. Temporary shutdowns of individual sources of oil may occur as a result of deadlocks in negotiations, or— more likely—political upheavals. Transit facilities may also be blocked, especially in the event of another outbreak of the Arab-Israeli conflict; but we believe a lasting area-wide breakdown in the Middle East oil situation is unlikely, at least for the period of this estimate. Nevertheless, the balance of interest between the desirability of developing alternate sources of oil to meet Western Europe’s needs and the importance of assuring Middle Eastern countries of sufficient oil revenues to avoid instability will continue to pose problems for US policy.

41. Other problems may emerge from possible conflicts of interest or objectives between the US and its Western allies, especially the UK and France. The UK has in the past considered it essential both strategically and economically to retain a measure of political control over the oil-producing areas. We believe the British now regard this policy as outmoded in large measure, but it will remain possible that in a crisis situation they might feel compelled to exert physical control over Kuwait. France may come to feel that increasing availability of Saharan oil enables it to take a harder line with the Arab states, who are generally hostile to French interests as a result of France’s support of Israel and repression of the Algerian rebels.

42. In addition, as the government of the producing countries gain greater influence in the management of the oil industry, there will probably be a growing number of cases in which their policies and desires conflict with those of the Western governments. A problem of this kind already exists, for example, in Saudi Arabia where the government resents US refusal to allow ARAMCO to sell asphalt to Yemen lest it be used in the Chinese Communist aid program there.

43. Another set of problems derives from the difficulty of determining in particular circumstances whether and how US strategic and commercial interests coincide or conflict. For example, the question of US import restrictions will almost certainly come up again during the period of this estimate, and policy makers will have to weigh the relative importance of promoting a vigorous US domestic petroleum production against the advantages to be derived in the Middle East through increased US imports from that area. Likewise, there will be questions involving the desires of certain allied nations, e.g., Japan and Italy, to adopt import policies designed to give preference to oil from producing companies run by their own nationals, to the detriment of the British and American companies and the general principles of reciprocal trade.

44. Over the longer term, even broader problems are likely to emerge. The ultimate aim of some Middle Eastern officials and leaders is probably an arrangement whereby the present concessionary interests of the international oil companies in the area are eliminated and Western companies act at most only as agents of the producing countries. Such an arrangement would not necessarily preclude the supply of sufficient oil for Western Europe and of sufficient revenue for the Middle East. It might even alleviate certain political problems which now confront the West in its relations with the producing countries— especially those which stem from the close association in the Middle Eastern mind of the companies with Western governments.

45. Nevertheless, a surrender or large-scale withdrawal of Western company interests under pressure would initially at least be regarded as a setback for Western prestige. Liquidation of the role traditionally played by the Western companies—even if they were subsequently replaced by other arrangements—would almost certainly result in some dislocation in the oil picture which would lend itself to Soviet exploitation. Economic factors of major interest to the West would also be involved, e.g., the loss of much of the substantial increment to the balance of payments which the Western oil companies now earn through their operations in the area.

0. Source: Department of State, OCB Files: Lot 61 D 385, Middle East Documents. Secret. A note on the cover sheet states that this estimate, submitted by the CIA, was prepared by the CIA, INR, and the intelligence organizations of the Army, the Navy, the Air Force, and The Joint Staff. All members of the USIB concurred with this estimate on December 13, with the exception of the representatives of the AEC and FBI who abstained on the grounds that the subject was outside their jurisdiction.

   Appendix I, a list of “Free World Crude Oil Production by Areas and Countries, 1959;” Appendix II, “Estimated Soviet Bloc Exports to the Free World, 1959;” Appendix III, “International Petroleum Companies with Share Holding in the Middle East,” and Appendix IV, “Ownership of Principal Middle East Producing Companies,” plus a map of the Middle East and North Africa showing oil fields and pipelines, are not printed.

1. The term Middle East is here used to include Egypt, the Arab states east of Suez, Iran, and Israel. Developments in Libya and other North African areas are considered only as they affect the Middle East. [Footnote in the source text.]
2. See Appendix I: “Free World Oil Production and Reserves by Areas and Countries, 1959.” [Footnote in the source text.]
3. Tonnage per year may be calculated roughly by multiplying b/d by 50. [Footnote in the source text.]
4. Principal companies and their holdings are outlined in Appendices III and IV. [Footnote in the source text.]
5. During this period, as technological developments provide for new transportation facilities, the consuming areas may begin to receive supplies of natural gas from overseas sources. Eventually world energy supplies will be supplemented by a variety of new sources: shale oil and tar sands, wind, solar, cellular, and nuclear power. [Footnote in the source text.]
6. See Appendix II: “Estimated Soviet Bloc Oil Exports to the Free World, 1959.” [Footnote in the source text.]
7. All estimates of future Soviet exports to the Free World are tentative because of the lack of reliable information on longer term Bloc production and requirements, especially in regard to Communist China. The figures in this and the following paragraph are based on the assumption that Communist China, which now produces about 104,000 b/d and imports about 80,000 b/d (almost entirely from the USSR), will in 1965 produce about 360,000 b/d and import 100,000 b/d from the USSR. While the figures represent our best estimate at this time, they could be upset by a number of factors, notably a greater than anticipated increase in Eastern European Satellite or Chinese Communist requirements or a less than expected expansion of production in Communist China. [Footnote in the source text.]
8. In the Middle East, a producing state’s revenue is generally calculated on the basis of posted prices, not actual selling prices. [Footnote in the source text.]
9. The concessions usually cover large areas and generally provide for the gradual relinquishment of areas which the concessionaire is not exploiting. [Footnote in the source text.]
10. This is especially true of the British Petroleum Company, in which the UK Government has majority ownership and which in turn holds major interests in Kuwait Oil Co., Iraq Petroleum Co., and the Iranian Consortium. While the UK is less dependent financially on Middle East oil now than some years ago, oil revenues are still valuable economically and access to Middle East oil remains important strategically. With the coming into production of the Algerian fields, French reliance on Middle East oil is declining. [Footnote in the source text.]
11. TAPLINE’s ownership is identical with that of the Arabian American Oil Company (ARAMCO). [Footnote in the source text.]