26. Paper Prepared in the Department of State1



During the June 1967 Middle East crisis certain Arab countries attempted to use their oil to retaliate against the U.S., U.K., and West Germany, which were believed to be unfriendly to Arab aspirations and partial to Israel. As a result, partial and total embargoes on oil exports were imposed with the objective of exerting political and economic pressures on the Western countries. These actions, which initially caused a dislocation in sources of oil supply and a sharp rise in prices, were regarded with concern by Western governments. Although the Arab governments later decided to reinstitute exports to Western consumer countries, the danger of recurrence of these embargoes and the continued closure of the Suez Canal require careful appraisal of the role of Arab oil.

Libya’s geographical position and high production make it uniquely important for Europe today, but neither Libya nor any combination of two major Arab producers will be irreplaceable when the large number of mammoth tankers comes into use next year. The significance of Arab oil and its inherent danger to Western interests lies in the fact that Arab oil, as a whole, cannot be replaced now or at any time in the next ten or fifteen years.

The Arab oil producers supply ten million barrels of oil per day, that is, one-third of non-Communist world production. The United States consumes a negligible amount of this Arab oil and has the capacity in the United States and the rest of the Western hemisphere to meet its present and anticipated requirements up to 1980, the final date of the time period projected in this study. Although certain military supplies have come from Arab sources, these would be replaceable at higher cost from Western hemisphere sources. In a physical sense, therefore, the United States does not now or in the foreseeable future require Arab oil. However, about 65% of the oil produced in Arab [Page 66] countries is from United States investments there. According to company sources these investments return an annual profit of about $1.5 billion to the American oil industry and make a net contribution of over $1 billion per annum to the balance of payments of the United States.2 While these are considerable sums and have great importance to the United States economy, it is believed that the loss of profits would not have more than a temporary depressive consequence. On the other hand, the loss of $1 billion annual credits to the U.S. balance of payments would be a matter of very great concern to the U.S. Government.

The oil consuming countries of Western Europe and Japan would be very adversely affected should they lose their supplies of Arab-produced oil. These countries now consume about 11.3 million barrels a day of which 8.3 million barrels come from the Arab world. While about 35% of total Arab country output is produced by Western European-owned capital, the loss of all income generated from this production by the Western European countries would be an excessive burden only for the U.K. and the Netherlands. However, if Western Europe and Japan were deprived of all of the oil, undoubtedly a very critical situation would ensue. This heavy dependence on Arab oil can only be partially compensated by additional production, at most 1.6 million barrels per day in the short-run,3 leaving a gap of 8.4 million barrels a day which would have to be absorbed largely by Western Europe and Japan. By 1980, these two areas are expected to be even more dependent on Arab oil, requiring 18 million barrels per day of Arab oil of a total consumption of 28 million barrels. Under the most favorable assumption, other free world conventional sources might supply 5 million barrels per day by 1980 while non-conventional sources such as tar sands, shale, and coal might under a crash development program at huge economic cost—mainly to the United States—raise another seven million barrels per day. The shortfall for Western Europe and Japan by 1980 would still be six million barrels per day. Even then, these new supplies would cost at least double the current price. Under these circumstances, Western Europe and Japan are likely to be vulnerable to Arab threats of an embargo of exports.

While a total embargo may not be regarded as likely, since 90% of the foreign exchange income earned by Arab oil exporting countries4 comes from the sale of crude oil, the potential Arab capacity severely [Page 67] to disrupt supplies to Western Europe and Japan cannot be discounted. Such extreme action might possibly occur as a result of renewal of Arab-Israel hostilities, nationalizations, a unified anti-Western policy by the Arab countries themselves and/or Communist domination of the area. (At present, however, Soviet activities do not constitute a major threat.)

The danger exists that Western Europe and Japan would be willing to pay heavy political and economic prices to avert the loss of Arab oil. We have, therefore, a prime interest in improving the bargaining power which Western Europe and Japan would have in face of a possible oil export embargo by the Arab countries.

Some Arab nationalists are discussing the possibility of the nationalization of Western oil interests and an offer to sell the oil to politically acceptable buyers. This is by no means out of the question. While it would mean the loss of the substantial investment in the area and the loss of a valuable addition to the balance of payments especially for the U.S. and the U.K., at least part of the Free World would continue to receive its energy supplies as the Arab states which might have nationalized would wish to continue to sell their oil and even increase their profits.

Given the inherent instability in the Arab world, it is important to seek and develop alternatives to Arab oil while recognizing that complete independence thereof is not likely to be achieved in the foreseeable future. As a tactical matter, to reduce Arab confidence that oil can be used as a political weapon, we should give maximum publicity to new developments. We should do this in a manner, however, which does not give unnecessary offense to the Arabs to whom we should stress that we welcome access to Arab oil so long as it is offered on reasonable terms.

The following are specific recommendations:

Importing countries should increase their storage capacity to reduce the immediate adverse impact on their economies and to give additional time for economic pressures to attenuate any future Arab embargoes.
The search for and development of non-Arab sources of oil should be accelerated to the extent possible.
U.S. imports should be kept as at present to a small proportion of consumption and further consideration should be given to imports from the Western hemisphere.
Projects to expand production of oil from shale and tar sands should be accelerated.
Our NATO allies and Japan should be permitted and encouraged to participate in the development of our shale and tar sand resources. This should take the form of capital investments and sales contracts both of which would help the U.S. balance of payments.

[Page 68]

Our political strategy should aim at encouraging Western European countries, whose stake in Arab oil is greater than ours, to take greater responsibilities in the Arab world.

The Suez Canal remains important economically if not strategically. The closing of the Canal appears also a situation in which the stake of Western Europe and other maritime nations is greater than ours and one on which they might well take the lead. We should give such support as is feasible in terms of our efforts to achieve an overall settlement of the Arab-Israel problem.

Without prejudice to the principles governing our attitude on the Arab-Israel problem, it remains important, in light of continued Western dependence on Arab oil, that we maintain and strengthen our position in the moderate Arab states.

[Here follows the body of the paper.]

  1. Source: National Archives and Records Administration, RG 59, SIG Files: Lot 70 D 263, SIG/MEMO: #52, 2/9/68, IRG/NEA, IRG/AF Study on “Western Interests in Arab Oil.” Secret. No drafting information appears on the memorandum. An attached memorandum from Battle to Katzenbach, January 18, 1968, states that the study was prepared by an interagency group in response to Katzenbach’s request at the time of the Senior Interdepartmental Group’s consideration of the Holmes report, and was approved by IRG/NEA and IRG/AF. It was forwarded to SIG members by Staff Director Hartman on February 8, 1968.
  2. This does not include investment in downstream facilities outside the Arab world. [Footnote in the source text.]
  3. Within six months, given a crash program, a total of an additional four million barrels per day might be produced in the non-Communist, non-Arab world, leaving a deficit of about six million barrels per day. [Footnote in the source text.]
  4. For Algeria, the amount is 50 percent. [Footnote in the source text.]