Officials of the United Kingdom and the United States now have ready a
joint Report, including recommendations, which deal with the problem of
oil supply if closure of Middle East oil transit facilities should
occur. The factual material in the report and in the working papers on
which it is based has been checked by appropriately cleared United
Kingdom and United States oil industry experts, and the Report itself
has been cleared at the Assistant Secretary level by the interested
United States agencies (Interior, Justice, Defense, Commerce, Office of
Defense Mobilization, and the International Cooperation Administration).
It has also been cleared by the interested Bureaus of this Department
(E, NEA, EUR, and ARA), and I
have read the Report and concur in its recommendations.
I should like to call to your attention the recommendations in Section V
of the Report, particularly those contained in paragraph 17(e),
recommending that the construction of additional trunkline pipeline
capacity from the Persian Gulf to the Eastern Mediterranean be
discouraged unless, in a particular case, political considerations are
deemed to justify it, and in paragraph 18, recommending that a further
joint study be made of the special problems that would be caused by an
interference with Middle East production at the source. The other
recommendations relate in a large part to activities already
underway.
(The United Kingdom, with our concurrence, confidentially informed the
Canadian Government of the work being done on the transit study, but no
other Governments have yet been so informed.)
The United Kingdom members of the joint study group are scheduled to
return to Washington July 9 to proceed with the further study
recommended in the Report, upon the assumption that this Report and its
recommendations would be approved by the President and British Prime
Minister at their recent meeting in Washington. It was not possible
however to submit the report to the President and the British Prime
Minister for this purpose.
That you authorize me to inform the Anglo-American Study Group when it
convenes that the Report and its recommendations are officially approved
by the United States.
Attachment
Washington,
May 12,
1958.
TRANSPORT OF OIL FROM THE MIDDLE EAST3
(Joint Report by US–UK
Officials)
1. At Bermuda, the President and the Prime Minister agreed that there
should be undertaken as a matter of urgency a study of the present
situation and probable future developments throughout the Middle
East, dealing first with those aspects of the problem bearing upon
the supply of oil to the free world, with a view to making
recommendations for furthering the common interests of the two
Governments in this area. In pursuance of this directive, U.S. and
U.K. officials have jointly examined the problem of reducing the
vulnerability of the West to interference with the flow of oil
supplies from the Middle East through the Suez Canal and the
pipelines to the Eastern Mediterranean. In this examination
conditions short of war have been assumed.
I. Nature of the Problem
2. The Middle East, with about two-thirds of the free world’s known
oil reserves, will supply a gradually increasing share of oil
requirements of other regions at least during the next five to ten
years. The Western Hemisphere will receive only marginal amounts
from the Middle East and in an emergency will be able to more than
meet its own requirements from unused productive capacity
principally in the U.S., Venezuela and Canada. Asia and the Far East
will draw heavily upon Middle East oil supplies and have ready
access to producing areas via the open ocean routes. Europe and the
rest of the Eastern Hemisphere west of Suez can expect to cover less
than one-sixth of its oil requirements from internal resources and
will depend for nearly three-quarters of its supplies on the Middle
East. No significant reduction in this [Page 67] dependence can be expected from increased
availability of other sources of energy such as nuclear field, oil
shale and tar sands.
3. Virtually all Middle East oil destined for Europe will move via
the customary routes, the Suez Canal and the pipelines terminating
on the Eastern Mediterranean. The pipelines (existing and new) may,
however, be expanded to carry a somewhat greater proportion by the
mid-sixties than at the present time.
4. In the absence of a tanker surplus and without emergency supplies
from the Western Hemisphere, closure of the Suez Canal and all
pipelines would reduce Europe’s total oil supplies by one-third of
the normal rate. Middle East exports to all destinations would fall
by one-third.
5. For the next 3 or 4 years the carrying capacity of the world
tanker fleet will be considerably in excess of normal demands upon
it. There is at present a tanker surplus amounting to some 4-1/2
million d.w.t. This is expected to increase in the next few years,
reaching its peak about 1960 or shortly thereafter. The tanker
surplus should then decline and it is expected to disappear by 1965
or perhaps even a year or two earlier, owing to the growth in oil
demand, scrapping of old tankers and a possibly reduced rate of new
construction. Consequently, in a transit crisis Europe would then be
faced with a deficit of one-third in its supplies unless it was able
to draw more oil from shorter haul sources in the Western Hemisphere
thereby increasing the carrying capacity of the world tanker
fleet.
6. The Western Hemisphere could in an emergency, conservatively,
supply to Europe an additional one million barrels a day (fifty
million tons a year). In 1960 these supplies would more than suffice
to cover Europe’s marginal deficit. In 1965 they could reduce
Europe’s shortage from one-third to one-fifth. In lifting the full
fifty million tons a year from the West the fall in Middle East
exports would be increased to one-half of the normal level and
Europe would incur a large additional dollar burden.
7. In an emergency Europe’s overall consumption of oil products could
possibly be reduced by 10% without serious economic effects. Because
of this and of the tanker surplus, it should be possible [by] about
1960 to meet Europe’s essential needs without recourse to additional
purchases from dollar sources in the Western Hemisphere. Before then
and afterwards additional purchases from the Western Hemisphere
would be necessary and might be substantial. In 1965 and possibly a
little earlier, closure of the Mediterranean transit routes would
create a deficit in Europe: the shortage after allowing for a 10%
cut in consumption would range between one-quarter—with normal
supplies from the [Page 68] Western
Hemisphere—and one-tenth with an extra one million barrels a day
(fifty million tons a year) from the Western Hemisphere.
8. Dislocation caused by interruption of Middle East oil supplies
would be greatly aggravated in the absence of close co-operation in
the West from the outset—on both Government and company levels.
II. Measures for Alleviating the
Problem
9. The problem of Europe’s vulnerability to interruption in the flow
of Middle East oil stems from normal commercial trends in the supply
of oil to the Free World. Special measures of insurance of two
general types are, however, available to protect Europe: (a) those
which make it possible to offset deficiencies in oil supplies due to
interference with the flow of Middle East oil, and (b) those which
permanently reduce the degree of dependence upon Middle East oil and
existing transit facilities.
10. Offsetting Oil Deficiencies. This could be
achieved by the creation of:
- (a)
- Emergency stocks and storage capacity
and tanker reserve fleets. Additional stocks and
storage capacity (government, oil industry or consumer)
could be built up within Europe for use during an emergency.
The principal means of establishing such stocks are:
- (i)
- Conventional (onshore, above-ground) storage in
steel tanks.
- (ii)
- Unconventional land storage, e.g., salt cavities,
the wider use of which would make possible a
reduction in the costs of a stockpiling
programme.
- (iii)
- Floating storage. Obsolescent tankers which would
otherwise be scrapped might be retained by purchase
or lease for emergency oil storage. These vessels
could also serve as tanker reserve
fleets to be reactivated for sea duty to
relieve shortages in supply in emergency
situations.
- (b)
- Active transport reserves.
Encouragement might be given to the provision of a built-in
reserve of transport capacity in active tanker fleets by
employing more super tankers on the Cape route or part
loaded through the Canal than would ordinarily be used
according to strictly commercial considerations. Surplus
tankers which would otherwise be scrapped might also be
chartered to retain them in active service.
- (c)
- Emergency plans. Stand-by plans
covering the organizational measures required on a
Government to Government and Government to industry basis
would be necessary to enable full advantage to be taken of
the re-arrangements of oil supplies in a Middle East
emergency. Stand-by plans for rationing or other measures to
restrict consumption in Europe would also be
necessary.
- (d)
- Emergency coal stocks. To the
extent that coal can be used, as a substitute for oil, an
increase in coal stocks would be the equivalent of an
increase in or an addition to emergency oil stocks.
[Page 69]
11. Reducing Dependence. This could be
achieved by:
- (a)
- Changes in the production pattern
- (i)
- Further exploration and development of alternative
sources of supply in the Free World outside the
Middle East could be assisted by:
- (1)
- encouraging investment in this activity;
and
- (2)
- fostering the maintenance or adoption in
promising areas of reasonable legal, financial and
concessionary conditions.
- (ii)
- The construction and maintenance in producing
areas (Middle East and elsewhere) of spare
facilities would aid in the rapid expansion of
exports in an emergency.
- (b)
- Changes in the transportation
pattern. The normal tanker fleet would be enlarged
by:
- (i)
- greater use of sea transport from the Persian Gulf
to the area west of Suez instead of trunk pipelines
to the Levant coast, and
- (ii)
- greater use of the Cape route instead of the Canal
route from the Persian Gulf by tankers sufficiently
large to do so economically.
III. Crisis in 1960 or
1965
12. In 1960 a deficit of 25 percent (after allowing for 10 percent
restriction on consumption) could be overcome almost entirely even
in a long drawn out crisis by use of the expected tanker surplus to
carry Middle Eastern oil via the Cape route.
13. In 1965 when tankers are not likely to be in surplus, the
principal means of dealing with a transit closure of relatively
short duration, e.g., six months, could be by the drawdown of a
previously established emergency stockpile equivalent to 30 days’
normal consumption. A stockpile of this size would, at 1965
consumption rates, cost about £360 million ($1,000 million) for both
oil and conventional storage facilities.
14. In a crisis of longer duration, e.g., one year, the 30-day
emergency stockpile would, if kept in land storage, satisfy about
one-half of the 25 percent deficit (after allowing for 10 percent
restriction on consumption). This could be cut down still further if
use were made of emergency transport capacity that had been
developed either as tanker reserve fleets (holding a portion of the
emergency oil stocks and available for reactivation) or in the
active tanker fleets.
15. Any remaining deficit could be eliminated by drawing upon
additional supplies of Western Hemisphere oil. Such imports would
involve high added dollar outlays for Europe. At the full rate of
one million barrels a day (fifty million tons a year), the
additional burden would be about $1,000 million yearly, of which
over three-quarters would fall on the U.K.
[Page 70]
IV. Interruption of
Production
16. This appreciation has been concerned with problems arising from a
possible interruption of the oil transit routes. An interruption,
partial or complete, of Middle East oil production at the source
would also present a threat to Europe. With emergency supplies from
the Western Hemisphere at a rate of one million barrels a day (fifty
million tons a year) the effects on European supplies of a partial
interruption of production would not be more serious than the
closure of the Suez Canal and pipelines at a time when there was no
surplus tanker capacity, unless the level of exports from the Middle
East available for Europe fell by more than about one-half. The risk
of interference with Middle East production at the source does,
however, raise problems which are different from those of a transit
crisis.
V. Recommendations
17. It is recommended that the two Governments undertake the
following measures to reduce the impact on the free world of reduced
availability of petroleum caused by a possible future stoppage of
Middle East oil transit facilities:
- a.
- Encourage Western European Governments (through the medium of
O.E.E.C.) to ensure the provision from internal financial
resources of one month’s additional oil stock above the average
level in terms of days’ supply normally available for commercial
purposes prior to the Suez Crisis, this additional stock may be
stored in conventional or unconventional land storage or in
floating storage, for example, surplus tankers. The present
tanker surplus reduces the urgency of this provision to meet a
transit crisis, but plans should be made forthwith and
implemented with reasonable speed because (a) the tanker surplus
cannot be expected to persist indefinitely and (b) the
additional stock would be especially valuable in a production
crisis.
- b.
- Maintain stand-by plans covering the organizational measures
required on a Government to Government and Government to
industry basis to assure speedy and effective re-adjustment of
oil supplies in a Middle East emergency. The Government to
Government measures should be implemented primarily through the
O.E.E.C, and the Government to industry measures in part through
O.E.E.C. and in part by each country in association with its
national oil industry.
- c.
- Encourage Western European Governments to maintain stand-by
plans for the introduction of rationing or other forms of
restricting oil consumption in an emergency.
- d.
- Continue to encourage the exploration and development of
alternative sources of supply in the free world, particularly
west of Suez, by seeking to obtain in promising areas a
favorable investment climate and the maintenance or adoption of
reasonable legal, financial and concessionary conditions.
- e.
- Middle East pipelines projects should be considered
individually on their merits bearing in mina the advantages of
tankers in a transit emergency and the need to diversify transit
routes. The construction of additional trunkline pipeline
capacity from the Persian Gulf to the [Page 71] Eastern Mediterranean should be discouraged
unless, in a particular case, political considerations are
deemed to justify it.
- f.
- Encourage the crude oil-producing companies, through
individual approaches, to construct and maintain, consistent
with their commercial resources, reserve production and loading
facilities in the various producing areas (Middle East and
elsewhere) to aid in the rapid expansion of exports in an
emergency.
- g.
- Encourage the oil industry to maintain as large tanker fleets
in being as possible and to make maximum use of the Cape route.
To this end practical studies should be undertaken in
consultation with industry representatives, of the means, cost
and implications (including the adequacy of port facilities) of
maintaining a reserve of tanker capacity.
18. It is also recommended that in the light of recent political
developments in the Middle East the two Governments make a joint
study of the special problems that would be caused by an
interference with Middle East production at the source.
