103. Telegram From the Embassy in Venezuela to the Department of State1

7564. Subject: Petroleum: Analysis of Recent Venezuelan Oil Measures.

Summary: This telegram attempts to assess meaning and significance of recent Venezuelan measures which will have effect of substantially increasing prices of Venezuelan petroleum products while forcing oil companies to increase their output and exports, and to make preliminary recommendations as to best course of action for USG.

Recommended Action: Embassy recommends that USG continue avoid overt involvement in developing controversy between oil companies and GOV, while seeking learn how companies view situation and what course of action they propose follow. USG should avoid any reactions that merely demonstrate pique without any likelihood of affecting outcome of dispute. End summary.

Background.

1.
Embassy believes that decision to impose export controls was logical, if unfortunate, result of objective situation in which Venezuelan Government found itself, whereas decision on prices was somewhat irrational GOV response to political and psychological factors. Given difficult budgetary situation, and danger of further decreases in oil output in 1972 which would only worsen situation, some form of controls to boost or sustain oil output had to look very attractive to GOV. Embassy had doubted that they would create and sustain workable mandatory controls, but did not doubt that they would attempt some form of strong moral suasion or “voluntary” output quotas backed more by threats than legal penalties. Obviously, they have elected to attempt mandatory control approach.
2.
Re prices, Embassy now believes that government’s intentions escalated as time passed, and that until very recently they were intending to make only modest increase in TRV’s that companies had expected, that is, nothing much more than 10 cents per barrel foreseen in latest budget estimates for 1972. In retrospect, change in GOV thinking seems to have been signaled in December 15 statement by COPEI Deputy and oil expert Jesus Bernardoni, who said government no longer thinking of increase in 10 cent range. Embassy believes GOV [Page 243]was stampeded toward higher prices mainly by the opposition’s loud and repeated insistence that an increase of only 10 cents would be a sell-out, and that TRV’s should be increased by 40 cents or more. Contributory factor may have been over-confidence from successes GOV has had with other measures against oil companies, which were in their time called unrealistic and unworkable.
Significance of GOV Measures.
3.
Combination of increases in TRV’s with controls over exports and exploration constitutes, as Minister Perez said, an oil policy without precedent in Venezuela. It represents an attempt to isolate and insulate Venezuela from normal market forces, by proclaiming to oil companies that they must export whatever quantities of oil the GOV tells them at prices set, in effect, by GOV, and regardless of prices at which oil from other overseas producing countries may be available to them. It tells oil companies to shut down computers that monitor production costs, tanker rates, and other factors and tells companies to shift some purchases from one source to another. It tells them to just ship specified quantities at specified prices, regardless of market factors.
4.
Venezuelan measures could also be interpreted as move toward creation for themselves of Western Hemisphere preference in US market, or at least benefits of same. Main advantages Venezuela would hope derive from W. Hemisphere preference would be assured market for all petroleum they wish sell (or at least for specified quantity) at a price substantially higher than current price for offshore oil. If oil companies abide by new Venezuelan measures, GOV will in fact have achieved assured market for given quantity of oil as well as higher prices, which could well be increased in future increments until they reach maximum level that they could reach under a hemispheric preference, that is just below delivered cost of US oil in US markets.
5.
Venezuelan oil will become more expensive, at least at low tanker rates, than oil from other sources which will mean lower profits for those who must sell it, unless other suppliers break their five year contracts and increase their prices as well. Increases other oil producers will receive under rubric of compensation for fall in value of US dollar could not be comparable in size to Venezuelan price increase.
Effect on Companies.
6.
How seriously oil companies here will be affected by Venezuelan measures would seem depend mainly on whether they can pass along to ultimate consumers increased costs resulting from higher tax reference values. They passed along results of last increases in TRV’s with little difficulty, but they believe market conditions will make it more difficult now.
7.
If oil companies cannot pass along price increases, then their profits will be less than they would be if they were free to fulfill their needs in each market from most economical source. Director of large oil company here estimates that increased taxes will cause profits of most profitable companies to fall by 50 percent and those of least profitable to disappear.
8.
If oil companies are able to pass along price increases to consumers, presumably this would involve increase in price of certain products in US even though Venezuela may only supply portion of US needs for such products. If so, companies would reap windfall gain on oil from US and other non-Venezuelan sources where taxes had not been raised. This however might cause other supplier countries to think themselves entitled to share in increased profits being made on their oil.
9.
Given their past record in marketing, it is probable that major oil companies can find way to pass along cost increases from increased Venezuelan taxes. If so, major problems for them in going along with Venezuelan measures would seem to be 1) danger that other producers might imitate Venezuelan action thereby upsetting 5 year period of stability they thought they had achieved; and 2) unpleasantness of having to abandon traditional method of operation involving shifting of purchases from one country to another as market factors change and having to go along with more rigid system of buying fixed quantities as prices subject to change by action of others.
Options Open to Companies.
10.
Embassy only sees two options open to companies: either to go along with Venezuelan measures or to create outright confrontation or showdown with GOV.2 Early soundings here suggest that companies are more likely to go along and try to find some way to live with measures than to go to the brink with GOV. However, reaction from headquarters of parent firms might be more aggressive.
11.
Embassy is reluctant to discuss possible apocalyptic consequences of a real showdown between companies and GOV, but it believes they must be mentioned because measures short of an outright confrontation seem unlikely to cause GOV to abandon its program.
12.
In any real showdown, stakes would clearly be assets of companies. Difficult predict scenario, but crisis could be precipitated by sudden very large decline or cessation of production in early 1972. Resulting unemployment and chaos would lead to unpredictable consequences. One possible outcome might be fall in government, perhaps precipitated by military. Another, perhaps more likely outcome, would be nationalization of the oil companies, with public and military rallying around government.
Recommended Action:
13.
Embassy believes that USG should continue to maintain low profile in this controversy, at this time. In particular we should avoid threats, inflammatory statements and small retaliatory actions that can have no effect on outcome and will only unnecessarily inflame US-Venezuelan relations before we are sure what is best course of action. Next step would seem to be to learn how oil companies view situation, what course of action they propose to adopt, and what help, if any, they would want from USG.
McClintock
  1. Source: National Archives, RG 59, Central Files 1970–73, PET 6 VEN. Confidential. Repeated to Algiers, Dhahran, Djakarta, Jidda, Kuwait, Lagos, London, Tehran, Tripoli, and Vienna.
  2. In telegram 7600 from Caracas, December 28, the Embassy reported that Creole, presumably backed by its parent company Esso, found Venezuela’s actions to be “so damaging to position of international oil companies that they are unacceptable and must be opposed even at cost of showdown” with Venezuela. Of particular concern were the mandatory export levels, which would “undermine entire basis on which private international oil companies operate.” If other countries adopted this policy, the mandatory global export would “add up to more oil than could possibly be sold worldwide.” Creole would, therefore, take a stand. (Ibid., PET 12 VEN)