Foreign Relations of the United States, 1964–1968, Volume XXXI, South and Central America; Mexico

532. Memorandum From the Under Secretary of State for Economic Affairs (Mann) to the President’s Special Assistant (Califano)¹

Washington, January 6, 1966.

The conclusions expressed here supplement the two background memoranda on Venezuela residual oil, copies of which you have.²

Our best guess is that Venezuela seeks about 28¢ a barrel increase in the price of its residual oil.

This would mean a net loss to us balance of payments wise of about 50 million dollars. On the assumption that Interior continues to carry out its plans to liberalize the import of residual oil, we would expect that the price increase would be partially off-set by more competition, by a decline in the value of the “tickets” for imported resid, by the probable desire of residual oil importers to stay competitive with coal, and by the continuance of discounts to large users. Moreover, the price increase would probably be delayed for a while due to existing contracts but prices would probably gradually rise by almost 10¢ a barrel, if current ticket premiums are eliminated. There are about 300 million barrels of residual oil consumed annually in the United States.

If the Venezuelans after further discussion with the companies do not insist on the companies increasing prices but use the new price as the basis for tax calculation, it is Interior’s judgment that the companies for competitive reasons may pass on only the 15 cent cost increase which will wipe out the ticket value and may result in very little price increase to the consumer.

On the other hand, efficient oil industries no longer produce resid in large quantities and we would probably have to admit that the Venezuelan price of resid is lower than it should be—principally because the private companies have deliberately kept it low in order to maximize their sales.

I do not believe the Venezuelan action was the result of our liberalizing our imports of residual oil since the Venezuelan motivation has been to capture the ticket premium. More probably it was something that the Venezuelans have been thinking about doing for some time and which they were loath to do while they still had hopes of getting us to change our policy so as to permit Venezuela to realize more on its sale of crude to the United States.

The oil companies will be negotiating with the Venezuelan Government and they have some hope of getting the Venezuelans to modify this price increase. I do not expect, however, that they will allow this to reach a breaking point with the Venezuelan Government.

We should instruct our Ambassador to support the companies’ effort by making the following points at a high level:

1. There was no advance consultation with the United States.

2. The United States is doing everything possible to hold the line on balance of payments and price problems while carrying a very heavy load in Viet-Nam and around the world. Venezuela has both an economic and a security stake in our efforts. The recent action on residual oil makes it much more difficult for us.

3. If the purpose of the resid order was to use government action to force increased prices, this is bad in principle and violates the terms of the oil concessions. If the purpose of the order is to modify existing tax arrangements without advance notice and discussion with the companies, this is also bad in principle.

4. The price action if carried through rigidly may adversely affect in the long run the investment decisions of the oil companies.

5. While Venezuela and the United States have not agreed on the Venezuelan proposal to de-ticket Venezuelan crude, the United States is nevertheless the principal market for both Venezuela’s crude and residual oil. It has been a safe and reliable market in which Venezuela is earning annually only slightly under a billion dollars. One of the reasons for this is the attitude of the United States to encourage preferences for Venezuelan crude. For example, Canada continues to import large amounts of Venezuelan crude and has refrained from exporting to the United States market some 50,000 barrels of crude a day which is readily available. In Puerto Rico the United States has required the two refineries and petro-chemical complexes to import feed stock from the Western Hemisphere, i.e., Venezuela. In spite of its balance of payments difficulties, the United States has maintained a requirement that the Defense Department continue to purchase foreign crude at the 1962 level of 120 million dollars a year, most of which is supplied by Venezuela. The action of the Venezuelan Government is inconsistent with these acts of cooperation.

II

Turning now to the question of leverage, I would be less than candid if I did not point out that these arguments may have no effect whatever on Venezuela for the following reasons:

A. Venezuela has a long established policy of trying to raise the price of its crude and residual oils while discouraging increased production on the ground that Venezuela is using up its irreplaceable natural resources too fast. They are not likely to be impressed with the argument about reducing the volume of their exports so long as they believe their revenues will not decline especially in the short term. They can carry through their new price policy flexibly, so as to preserve their European market.

B. What GOV wants from us in essence is an exemption of Venezuelan crude oil imports from our controls. This would pass to Venezuela the more than a dollar a barrel which our refineries now make on the “tickets” and, from their point of view, might result in price increases in the future in both crude and resid to say nothing of giving them a stranglehold on U.S. oil companies in Venezuela.

C. Venezuela technicians know that our leverage is very limited in the short term. While Venezuelan oil prices are somewhat higher FOB they are competitive in our market because of lower shipping costs as compared with Near Eastern and North African oils. And, insofar as resid is concerned, there is no alternate source to which we could readily turn for comparably priced residual oils. It is doubtful that the Defense Department could buy elsewhere more than a fraction of the heavier fuels we now buy from Venezuela, and to the extent they could buy in the United States, our balance-of-payments savings would be more than offset by the loss to our budget. Such measures as this and the freeing of the refineries and petro-chemical plants in Puerto Rico to buy elsewhere could be irritants rather than deterrents but as events develop, it might become advisable to try them.

D. Opinions of the experts are that the sheer inconvenience and cost of handling coal as compared with fuel oil make coal noncompetitive with most users of oil even at the price which Venezuela has in mind. Further, a sudden demand on the coal industry for substantial additional amounts of coal for the east coast would, it is estimated, result in a price increase in coal.

E. In addition, Venezuela has very considerable leverage on the United States because of our large investments there—more than 3 billion dollars. In the nationalistic climate which prevails there, steady pressures on investors in the form of increased taxes and otherwise is an ever-present danger. Also, it should be noted that Venezuela holds about $400 million in dollars and treasury obligations in its reserves and has been resisting pressures to follow the European pattern of increasing its gold holdings. There is nothing to prevent them from turning in dollars for gold.

III

If holding the price line is the decisive consideration, probably the most effective action—in addition to approaching the Venezuelans as suggested above—would be to de-control residual oil or so administer it so as to eliminate the ticket premiums. This would probably have the effect of eliminating the value of the tickets, currently estimated at 15¢ a barrel, from the resid price. Tighter restrictions on U.S. imports of Venezuelan residual oil would perpetuate the additional 15¢ a barrel ticket cost and would put pressure on resid prices in this market. It would not give us any leverage with Venezuela.

While de-control of residual imports would make economic sense from the standpoint of holding the price line—especially since the coal industry is said to be operating at a near capacity level and is experiencing a scarcity of coal miners—de-control would be strongly opposed by the coal industry and by those users of resid in this country who would lose the value of their “tickets.”

Thus, this recommendation involves domestic political questions more than international ones.

Thomas C. Mann ³

1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, PET 17–2 US. Confidential. Drafted by Mann. President Johnson called Mann on January 6 to discuss “the resid matter,” asking if Mann “was going to be able to work it out.” Mann told Johnson that “it looked pretty tough for us to do anything because we do not have leverage. He asked the President to read the memo sent over today.” (Memorandum of conversation, January 6; Johnson Library, Papers of Thomas C. Mann, Telephone Conversations with LBJ, May 2, 1965–June 2, 1966)
2. Neither found. The memorandum of conversation cited in footnote 1 above notes that the President saw the two memoranda sent over on January 6. (Ibid.) Johnson may have seen a paper entitled “Consequences of Proposed Action of Venezuela re Residual Fuel Oil,” January 4. (National Archives and Records Administration, RG 59, E/ORF FSE Files: Lot 70 D 54, PET 17–2, U.S. Imports, January 1966) No evidence has been found, however, that the paper was forwarded to the White House.
3. Printed from a copy that indicates Mann signed the original.