350. Memorandum Prepared in the Department of State1

MEMORANDUM ON “THE ROLE OF THE INTERNATIONAL OIL COMPANIES”

At the close of the April 2nd meeting in Brussels on the Role of the International Oil Companies, the Chairman of the Ad Hoc Group was asked to prepare a single document which would synthesize earlier USG, German and Italian submissions and reflect also the exchange of views among member governments.2 The Chairman was encouraged [Page 991]to enlist others in the completion of this task; it is our hope the following will be of assistance. If all of us have far more questions than answers, that fact alone should be of interest.

First, as was suggested by a number of the delegates, the emphasis placed in all three submissions on the importance of the international aspect of oil supply could be the critical observation on which the study will center: whether one addresses the question of “transparency” or the role of national oil companies as part of the system, or the international oil companies themselves, or other issues—unless the interdependent character of the system is kept fully in mind, efforts to modify the system could prove ineffectual or harmful.

Second, in view of the range of questions raised at the first Ad Hoc meeting it is clear that a review in depth of recent changes and their probable consequences must be completed and discussed in the Ad Hoc Group before any “prescriptive” modifications can be advanced.

Our review could proceed by considering the related elements in the “system” in order to better understand the magnitude and complexity of its varied operations: the logistic component, exploration and production aspects, the marketing operation and the immense capital requirements. The international, interdependent character of the system should emerge clearly from such an analysis.

Having considered the elements of the system, we might then discuss the entities which operate within it—international private companies, and national companies, private and governmental—as they relate among themselves and with the rest of the international economic system.

Third, as was also pointed out in the Ad Hoc discussion, the changes which have occurred in the system come from actions of both producing and consuming interests, as well as from the private oil companies themselves—witness the significance of the so-called “independents”—and from the emergence of national (private and governmental) oil entities. The reasons for the changes are complex and varied and differ with time and circumstance. To describe recent changes which have been wrought largely by producing interests as if these interests were the principal engine of change would overlook the past three decades in which far-reaching changes were initiated through consuming government interests. We need to understand more fully the comprehensive nature of all these changes if we are to assess the present evolution, and then to appraise the future.

Fourth, an interesting similarity of the German and Italian submissions was their references to the likelihood of the continuing importance of the international oil companies. Even with the rapid pace of recent change, the international oil companies are going to have an on-going role of very considerable importance. Presumably, this is due largely to the risks which the companies have been willing to take and [Page 992]to the very large volumes of oil which the internationals have been able to find, move, market and finance—essential requirements for many producing states and for expanding world oil supply.

International oil companies are thought to contribute significantly to the operations and efficiency of the world oil market through their willingness and ability to take risks and their market integrating functions. If this is the case, then transparency of company price might not prove as important to an understanding of recent events as transparency in regard to the functions served by the major international firms. Without an understanding of the rules by which the international companies play, there will be a tendency to focus on areas that may not be meaningful in safeguarding consumer interests.

As was suggested also—and it is an important observation—the hazards of the further politicization of oil should be a determining force in shaping the system and governments’ role in it, as these political forces can overwhelm the economics of oil.

In conclusion, the common denominator of the three submissions and of much of the Ad Hoc Group’s discussion was the implicit recognition of the international interdependent nature of the system; a national perspective may not be sufficiently broad to indicate where change could truly strengthen the responsiveness of the system to a single nation’s interest or whether such change will in effect weaken a link. Serious analysis of the present and prospective roles of national oil entities and the international companies will be necessary to deepen our understanding of the system and to enable us to evaluate it.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 321, Subject Files, Energy Crisis, Part 2, April 74. No classification marking.
  2. The Ad Hoc Group on the Role of the International Oil Companies of the ECG met in Brussels on April 2 prior to the April 3–4 meeting of the ECG. The chairman of the Ad Hoc Group was Italian member Ristagno. Telegram 72419 to all OECD and OPEC capitals, April 10, reports on the meeting and the papers submitted by the United States, Italy, and Germany. (Ibid., RG 59, Central Foreign Policy Files)