345. Summary Minutes of Meeting of the Interdepartmental Committee of Under Secretaries on Foreign Economic Policy0

[Here follows a list of participants.]

WORLD OIL SITUATION

Opening remarks were made by Under Secretary of the Interior James K. Carr. This was followed by a detailed presentation of the strategic and foreign policy considerations of oil by Assistant Secretary of Interior John M. Kelly. Interior felt the subject so important that it put together a set of reference documents which were distributed to all members of the group and which Mr. Kelly used as the basis for his presentation. Interior believed these papers would be useful and could be widely distributed.1

Mr. Martin, Assistant Secretary of State, who was presiding in Under Secretary Ball’s absence, asked that the summary paper and the paper on Soviet oil not be made available to anyone outside of the Government until the State Department had checked with its Soviet experts as to the classification.

The papers submitted by the Department of Interior were as follows:

  • Strategic and Foreign Policy Considerations of Oil (summary paper)
  • Illustrative Charts
  • Statistical DataSupplemental Paper 1—Petroleum Refining Capacity of the Free World
  • Supplemental Paper 2—World Tanker Situation
  • Supplemental Paper 3—Oil Import Program
  • Supplemental Paper 4—Petroleum Prices Supplemental Paper 5—Organization of Petroleum Exporting Countries (OPEC)
  • Supplemental Paper 6—Soviet Oil Expansion

Since these readily accessible papers cover the subject-matter so thoroughly and since Mr. Kelly’s presentation followed the papers closely, this summary record covers only the discussion.

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Discussion

Present import quota system questioned as a defense measure. One of the major points raised and around which a number of questions centered was whether the present oil import controls serve the national security interest as effectively and as cheaply as other arrangements would. If the national security interest requires a large quantity of readily available oil in this country, should not oil be stockpiled? One method would be for the Government to buy up some fields and keep them largely out of production until they were needed. Another method would be to import Middle East oil and store it in old oil wells in the United States, particularly in Pennsylvania. Mr. Kelly said that these measures were possible. He pointed out that only about two-thirds of the oil put into old wells would be recovered because of loss through “wetting.” Mr. Kelly thought that curtailment of U.S. production would be unwise, however, because of the changing fuel picture. He said that 50 years ago lots of people wanted the Government to take over the coal areas and hold them for future use, but that the emergence of oil and gas has shown that such a policy would have been unwise. Likewise, conservation measures for oil might turn out later to have been unnecessary. Mr. Rowen inquired whether Mr. Kelly meant by this that we need not worry about oil for defense? Mr. Kelly replied that he thought that enough U.S. oil would be forthcoming if the domestic industry, particularly because of its exploration activities, could be protected from large imports.

The cost of the present import quota system to U.S. oil users was estimated by Mr. Gordon (CEA) at $3 billion per year. (This figure is based on U.S. consumption of 10,000,000 barrels per day at a price $1.25 per barrel above the price of Middle East oil delivered to East Coast refineries, reduced by one-third.) Mr. Kelly replied that this figure assumes that all oil consumed in the United States would be imported from the Middle East at a two-thirds saving of the $1.25 differential. Mr. Gordon questioned this inference stating that he assumed only that the United States domestic price would be governed by the world price. Questions were raised as to whether this cost served effectively to promote the discovery and development of new oil fields in the United States, and whether less costly means could not be found for assuring the availability of adequate oil for defense purposes.

Profits from import controls. There were several questions about who should be allowed to profit from our import controls. Mr. Kelly noted that the import restrictions were a response to the difference in production costs in the U.S. and in the Middle East. Though the price difference was about $1.25 per barrel, not all this difference represented profit for domestic U.S. producers. Importers into the U.S. were able, however, to pocket the difference between the U.S. price and the import cost. Mr. Kelly, in reply to a question as to why we did not tax away this profit on [Page 773]imports, said that this would involve a tariff. He said that a sizable part of the industry would prefer a tariff to quotas, so that they could operate in a freer market, and Interior does not close the door to this approach. He said there would be problems in the use of a tariff, however, because of the different cost conditions between, for example, Venezuela and the Middle East.

The Canadian problem. The U.S. consumer is subsidizing Canadian producers at the rate of about $250,000 per day, Mr. Kelly said, since oil from Canada enters the U.S. without any quota restrictions. Canada could meet its entire market by itself, but finds it more economic to export its oil to our Middle West rather than ship it to the Montreal area, and to supply the Montreal area from imports, largely Venezuelan. Others commented that it is in our national security interest to receive Canadian oil. Mr. Kelly replied that both countries have the same security interests and that we have protected our East Coast security interest by pipelines while Canada has not, though within five years Canada may start taking care of the Montreal complex by pipeline from its West. In the meantime, Canadian oil competes with U.S. oil in our Midwest.

The broad international problem. Mr. Martin noted that not only does the Free World get two-thirds of its oil from the Middle East now but that 50 years from now it will probably be even more dependent on Middle East supplies. From the security standpoint of our longer-term interest in the broadest sense, we must consider what kind of arrangements we can work out to insure Free World access to Middle East oil.

Already we have an irrational situation in the Middle East producing and distributing situation. It is irrational not only economically but politically. The international oil companies within the borders of these countries are in a position to dominate completely the political life of the countries because the companies are the source of the bulk of the Governments’ revenues. The companies are earning enormous amounts of money and this is resented. This makes them a likely target for the worst kind of attack on political and economic grounds.

On the other end of the spectrum, the companies themselves are faced with all kinds of problems. They are faced with the surpluses of stocks and capacity, with increasing competition of substitutes, with new oil discoveries which jeopardize their traditional markets, with competition from Soviet oil, with having to use their Middle East profits to cover costs of explorations elsewhere that prove sterile, with the constant demand of the Middle East Governments for a larger share of oil revenue, and with no flexibility on prices. These all add up to a serious state of tension.

As a result our oil companies are handicapped in other less developed countries where the Soviets use cheap oil and oil exploration to penetrate the countries. Shall Western companies try to compete with the [Page 774]Soviets in price? (The French assumed that we put import controls on to get high profits for our international oil companies so that they could sell at cut prices in the less developed countries in order to compete with the Soviets.) The companies are in difficulty on exploratory concessions. They come in and spend lots of money and if they don’t find oil, they are faced with the charge that they didn’t really want to as it would have cut down on their Middle East profits. Then the less developed countries say they will ask the Soviets to come in.

The companies are scared of OPEC because they don’t think the people running it have a sufficient understanding of the economies of oil. They are frightened that the OPEC Governments will put international prorationing into effect.

Then there is the problem of the European countries in connection with the Soviet oil offensive. The average person in Italy gets his oil cheaper because Italy is importing Soviet oil. Industrialists in Europe can produce at less cost because of Soviet oil. It is hard, under those circumstances, to work up resistance to imports of Soviet oil. Our argument has to be the danger of dependence on Soviet oil. We have made some headway on this, Mr. Martin said, as we have agreement (in NATO) that the whole question of Soviet dependence has to be watched very carefully and steps taken if necessary. We also think we have now made a little progress on the oil pipe question.

Mr. Martin stressed the importance of the Administration address-ing itself to these international oil problems.

Joseph D. Coppock2
Executive Secretary
  1. Source: Washington National Records Center, RG 59, E Files: FRC 71 A 6682, ICFEP, December 13, 1961, World Oil Situation. Official Use Only. Presumably drafted by Ruth Donahue, who is identified on the list of participants as Recording Secretary. Regarding the origins of this interdepartmental committee, see Document 5.
  2. Not printed.
  3. Printed from a copy that bears this typed signature.