Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

VE–35. Memorandum from the Acting Secretary of State (Murphy) to the President¹

Washington, September 10, 1959

SUBJECT

• Venezuela: Imports of Residual Fuel Oil

For the reasons set out below, the Department of State proposes that the importation of residual fuel oil be liberalized.

Because of large United States private investments in the Venezuelan oil industry and the strategic importance to us of the large Venezuelan oil reserves, demonstrated by the Second World War, the Korean conflict and the Suez crisis, the Venezuelan people have come to expect privileged treatment from us.

The Venezuelan Government accordingly protested when the imposition of our import controls restricted their access to their largest market. It also protested the exemption from our controls of oil imported by overland means on the ground that this was discrimination in favor of Canada even though this action probably will prevent, for an indefinite period, Canadian restrictions on the importation of Venezuelan oil and even though the limited increase in Canadian exports resulting from the exemption have not yet displaced Venezuelan oil.

At the same time, there exists in Venezuela a growing nationalism directed principally against the foreign oil companies, which are accused of depleting Venezuela’s irreplaceable oil reserves while making unconscionable profits.

The present Venezuela Minister of Mines, who thus far has enjoyed the complete confidence and support of President Betancourt, seeks to exploit this situation. On the one hand, he has proposed that Western Hemisphere oil be exempted from our import controls and, on the other, he has publicly announced his intention of

a) progressively increasing the Government’s share of industry profits;

b) invading management prerogatives in the production, exportation and marketing of oil; and

c) encouraging Near Eastern oil producing states to increase their share of profits and to cooperate with Venezuela in the control of prices.

The implementation of nationalistic policies outlined above would not be limited to the possible unsettling effect on American investment and interests in Venezuela and Latin America. The position of our oil companies throughout the world would be weakened, as would the assured access of consuming nations to adequate supplies of oil at reasonable prices. The importance to Western Europe of an assured access to oil was demonstrated in the recent Suez crisis.

Moreover, these nationalistic policies will not serve Venezuela’s own economic self-interest. Venezuela is already in a weak competitive posture, attributable in part to its action, taken without consultation, to upset the “50-50” division of profits through large income tax increases. Given the present situation of world oversupply of all and the threat that cheaper Near and Far Eastern oil will displace Venezuelan exports in its traditional markets, our task is to get Venezuela to understand that it can best maintain a satisfactory level of oil income by improving its competitive posture rather than by seeking an international commodity agreement for government control of production, prices and marketing.

Against this background, the Department of State considered the possibility of offering Venezuela a country import quota in exchange for abandonment by Venezuela of it nationalistic oil policies. This course of action is believed to be impracticable because it would discriminate against Far and Near Eastern producing countries; because Venezuela is in any case unwilling to change its policy at this time; and because such action would, by appearing to reward nationalism, encourage nationalistic oil policies in Venezuela and in the Near and Far East. Those companies which have the largest investments in Venezuela concur in this estimate.

The Department of State has also considered the possibility of completely rejecting Venezuela’s desire for special treatment and has concluded that this would create a situation of maximum risk of nationalistic reaction.

In an effort to find a middle ground – one which, on the one hand, could be regarded as a gesture of equal importance to the one which we have made toward Canada, and, on the other, which would not facilitate the carrying out of nationalistic oil program—the Department of State has recommended that the importation of residual fuel oil to be used for burning be freely licensed to historic importers who have used storage capacity. This course of action would be tantamount to an effective decontrol of residual imports but it would not remove residual from the import control program. It would favor Venezuela because more than 40 percent of its oil exports to the United States are in the form of residual.

This action would not satisfy Venezuela’s aspirations. The serious risk that Venezuela will implement nationalistic oil policies will remain. But a concession of this kind will weaken the position of those Venezuelans who assert that our oil policy disregards Venezuela’s needs and it involves less risk than either of the other alternatives open to us.

Liberalization would be strongly opposed by the coal industry, both capital and labor, which hopes that import quotas, will ultimately raise residual fuel oil prices to the point where coal will become more competitive. The “independent” sector of our oil industry has expressed concern, but not opposition, on the ground that liberalization of imports may result in lower prices for domestic residual fuel oil.

On the other hand, liberalization would be strongly supported by the major oil companies who are faced with a very difficult situation in Venezuela. Consumers along our Atlantic coast, who are increasingly dependent on residual imports and who fear that the present import quotas will result in scarcities and high prices during the winter months of peak demand, will also welcome the assurance of adequate supply at reasonable cost.

The Department of State believes that, on balance, the national interest will best be served by liberalizing imports of residual fuel oil and recommends that this now be done.

Robert Murphy

1. Source: Department of State, Central Files, 411.316/9–1059. Confidential. Drafted by Thomas C. Mann, Assistant Secretary of. State for Economic Affairs, on September 8.