115. Report of the Working Group on Economic Vulnerabilities1
Washington, May 31, 1967.
GULF OF AQABA: THE ECONOMIC VULNERABILITIES
The papers attached2 outline a first look at the probable economic consequences of a US/UK decision to hold open the Gulf of Aqaba to Israeli-bound shipping, if necessary by force. We find that:
- We have little economic leverage on the Arab countries, almost none on Egypt. We have run down our aid programs close to the vanishing [Page 212] point, except to Jordan-where a cut-off would almost certainly bring down Hussein’s moderate regime. The food import needs of Egypt and other Arab countries are less this year than normally; the USSR can supply them-at least through the summer-without difficulty. Our exports are largely standard items easily available elsewhere; denial would hurt the Arabs only in the implausible event of a worldwide embargo. We could deny them use of their deposits-more than $2 billion in London, $700 million in New York. But this is more a gun at our head than at theirs.
- The Arab countries together have powerful economic weapons to use against the Atlantic nations, particularly Britain.
- Egypt and Syria alone cannot inflict serious damage. Their direct power is limited to closure of the Canal and pipelines; we could manage the effects of both of these acts.
- The costs become very high when the oil-producing states-Saudi Arabia, Kuwait, Iraq, and the Gulf Shaikhdoms-find it necessary to move against Anglo-American oil interests.
At worst the oil producers could expropriate
our holdings and deny petroleum exports to the Atlantic
countries. This would mean:
- —Loss of up to $500 million in net US foreign exchange earnings from oil holdings per year;
- —Loss of net non-oil trade earnings of up to an additional $500 million;
- —Loss of billions of dollars in US capital assets;
- —UK loss of up to $1 billion in foreign exchange earnings;
- —A crisis in sterling and in the international monetary system.
- There is a high risk that the oil producers would do their worst in the event of a military engagement-or perhaps even escort action-in the Gulf of Aqaba.
- Short of a military confrontation, we would have to expect the oil-producing countries to take some action against us, ranging from scattered sabotage to sequestration of oil holdings and selective prohibition of exports. These costs would be more manageable, but the effects might at least in part be irreversible.
Our ability to minimize these costs depends
- —Holding the Europeans to a common front by presenting a credible prospect that we can face Nasser down quickly enough to avoid major disruption in oil supplies (most of them have stocks for 50 days).
- —Making it clear to the Europeans and Japanese that we stand ready to bear our share of the physical and money costs of disruption in oil flows, including eventual rationing.
- —Giving the producing countries the best possible excuse for moderation by presenting a plausible image of evenhandedness towards Arab and Israeli, along with a prospect of Nasser’s failure.
- If it appears that there will be a major and continuing interruption in oil flows, the Europeans and Japanese will be seriously tempted to make side deals with the producers—including takeover of US and UK operations.
- Even if the Arabs do their worst, we believe we can maintain the flow of aviation and other fuels to Viet-Nam—now supplied almost entirely from Saudi Arabia and Bahrain—from domestic sources. This would require protection controls and product allocation procedures in the US.
- Source: Johnson Library, National Security File, Country File, Middle East Crisis, Vol. II. Secret. Read sent the report to Walt Rostow with a May 31 covering memorandum. A May 31 memorandum from Battle to Rusk, also attached, states that it was the first report of the Working Group on Economic Vulnerabilities, comprised of representatives of the Departments of State, Defense, Treasury, and the Joint Chiefs of Staff, and the White House staff. The group was a subcommittee of the Middle East Task Force. A May 31 memorandum by Eugene Rostow formally established the Task Force and a Control Group, chaired by Rostow and including Walt Rostow, Vance, Kohler, and Battle. Battle chaired the Task Force, which included Hoopes, Popper, Country Director for Soviet Affairs Malcolm Toon, Assistant Legal Adviser for Near Eastern and South Asian Affairs Donald A. Wehmeyer, Assistant Secretary of State for Economic Affairs Anthony M. Solomon, and Saunders. (Ibid., Vol. III) The Task Force suspended its formal meetings on June 15. (Memorandum from Eugene Rostow to the Control Group and Task Force, June 15; ibid., Vol. VI)↩
- The attachments, titled “Vulnerabilities of Arab Countries to US Economic Actions,” “Oil,” “Financial Aspects,” and “Airline Traffic Rights,” are not printed.↩