Attached Annex A spells out current and potential problems caused by
production cutbacks in Libya and the
closure of Tapline. The resulting
tanker shortage has caused shortages in the US of residual fuel oil and asphalt, threatened to curtail
air pollution regulations, and could severely hurt the profitability of
small inland refiners. If the situation continues to deteriorate it
could lead to rapid changes in existing patterns of US oil ownership in the Eastern Hemisphere
and severe political strains between us and our European allies (and to
a lesser extent with Japan).
Annex B spells out in some detail existing problems between oil companies
and the Libyan government. Annex C reviews the Tapline problem. Annex D reviews the
tanker situation.2
If you approve in principle to this approach, we will send you separate
memoranda on the talking points.
Annex A
Effects of Current Oil Problems in the Arab World
Summary
The closure of Tapline and cutbacks in oil production in Libya
have caused a tanker shortage and increased crude oil and petroleum
product prices in Europe. The chances for reopening Tapline soon are only fair. The
probability of increasing production in Libya in the foreseeable
future is not promising; the real problem in Libya is to avoid
further cutbacks.
The effect in the US has been a
shortage of residual fuel oil and asphalt, and a reduction in oil
imports. There is the immediate threat that air pollution
regulations will have to be suspended, and the possibility if the
tanker crisis continues that some small US refiners may be forced out of business because they
will have no markets for their import tickets.
Our NATO allies are thinking of
making direct deals with governments of oil producing countries if
oil deliveries are further curtailed. If Arab oil is partially or
wholly denied US companies because of
arms shipments to Israel or other reasons, the USG will be in an awkward position
between the interests of our companies and the requirements of our
friends in Europe. A crisis could be reached if Mediterranean oil
production were reduced another 400,000 to 900,000 barrels per day.
End Summary
I. The Tanker Shortage
The world supply and price of crude oil and petroleum products have
been severely affected by the very rapid recent increases in tanker
rates to very high levels caused by the shutdown of Tapline, production cutbacks ordered in Libya, and
expectations of further shortages. Spot tanker rates have more than
doubled, radically shifting trade patterns. It is now more
economical for Europeans to import the marginal barrel from
Venezuela rather than the Persian Gulf, and it is more economical to
consume the whole barrel of Middle East and African crude in Europe
than to export residual oil and other products to the United
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States. The cost advantage
of Middle East or African oil delivered to the East Coast over crude
produced in the US used to be about
$1.40 per barrel. This advantage has now almost disappeared and may
be negative in some cases. US oil
imports from Venezuela and the Eastern Hemisphere have
correspondingly dropped.
The high tanker rates initially affect only the small amount of world
trade on the spot or short term tanker market (about 20 percent of
tankers in operation) but rates for one year charters have also
risen. The cost of operating long term charters (12 years) or
tankers owned by oil companies (which together makes up about 70
percent of the world tanker fleets) are affected only indirectly.
However, any oil company seeking new tanker capacity to fulfill its
contracts, such as Occidental which needs to replace production in
Libya with crude located further from its markets, will have to pay
the going high prices.
Major oil companies with their own fleets and established markets to
supply will also experience cost increases because of the need to
conserve scarce tanker capacity by using it on the shortest possible
routes, even if this means using high cost Venezuelan oil in some
cases instead of cheaper Persian Gulf oil.
II. Duration of Current Tanker
Shortage
Construction of tankers at current rates is barely enough to keep up
with growing demand in Europe and Japan. World shipyards are full
and booked up for the next two or three years. If the Tapline and Libyan situation remain
as they are now the current high tanker rates can be expected to
last for at least another two or three years until world shipyard
capacity can be increased.
1. Chances of Reopening Tapline
The Syrians claim their only interest in Tapline is to increase transit payments. They want a
$50 million payment to allow the line to be reopened and to start
negotiations for a new agreement. Tapline has offered a $5 million “advance” payment plus
forgiveness of a $7 million debt. Both sides at present seem far
from agreement.
King Faisal is understood to
be unenthusiastic about reopening Tapline. He believes it leaves a significant part of
Saudi Arabian export capacity potentially exposed to the whims of
Arab guerillas, Israel, and Syria, any of whom could cut the line at
any time. If Aramco did not use
Tapline in its planning for
Saudi exports, Faisal
reasons, it could in time arrange for tankers to export an
equivalent amount from Ras Tanura, and Saudi Arabia’s export
earnings would then be largely unaffected by further disruptions in
Tapline. He has not,
however, forbidden “discussions” between Aramco and Syria but has insisted that “negotiations”
take place only after Syria allows Tapline to be reopened, and that talks should then be
with all transit countries.
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We understand some Aramco members
themselves may not be anxious to reopen Tapline. Companies with large tanker fleets may be
relatively better off during a period of high tanker rates than
companies who are tanker short. Companies without enough tankers of
their own would of course be anxious to reopen the line.
The chances of reopening Tapline
soon must therefore be judged fair at best.
2. Chances of Increasing Production in
Libya
Since Libya has cut back production in the name of conservation, it
might be expected that such cut backs will be more or less
permanent. In their zest for conservation the Libyans may be
partially motivated by the desire for more detailed oil field data.
It has been a longstanding Libyan goal to get such data from the
companies, as is done in the United States, so that authorities can
accurately judge whether in fact a field is being produced too fast
or not. It is possible that if the companies present the Libyans
with enough data in defense of the higher production rates, some
production increase might eventually be allowed.
The immediate threat in Libya is the possibility of further
reductions which could take place in the name of conservation,
higher posted prices for
Libyan oil, Arab-Israeli politics, or a combination of these
factors.
The Libyan Government is understood to be thinking of imposing higher
posted prices on the oil
companies by decree. Such a move would not necessarily affect the
rate of production in Libya.
III. Effect on US
1. Residual fuel oil and asphalt
Almost all residual fuel oil used in the US for generating electricity and other industrial
purposes is imported from the Caribbean and Europe. With decreased
imports, supplies of resid are so short that a shortage has also
developed of asphalt, which can be made instead of resid in the
refinery process. Asphalt supplies are now being rationed to
customers by suppliers.
2. Pollution regulations
Existing anti-pollution regulations in many US cities, especially in the Northeast, require the use
of low sulphur resid. Much of this has been imported as a “left
over” from refineries in Western Europe using low sulphur Libyan
oil. The continued tanker shortage and reduced US imports of resid from Western Europe
will necessitate the use of resid with higher sulphur content from
the Caribbean. This could mean the suspensions of some existing
anti-pollution regulations as well as delay of more stringent
regulations.
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3. Small inland refiners
Many small inland refiners in the US
depend on the value of their import tickets for a substantial part
of their operating revenue. In some cases net profits are less than
the value of the import tickets. The value of these tickets is now
nearly zero, although the effect on most refiners has not yet been
felt because most inland refiners exchanged their year’s supplies of
tickets with importers last January when the tickets were worth
$1.25 to $1.45 per barrel. Should high tanker rates remain into next
year, however, the inland refiners will be badly hurt.
IV. Effect on our allies
Western European countries are concerned over the security of their
oil supplies. The West German cabinet has reportedly instructed the
newly formed state oil supply company, Deminex, to seek arrangements for crude supply directly
with government-owned oil companies in oil producing countries. This
is an ominous step, since most state oil companies existing in the
Arab world at present have little or no crude oil of their own to
market. There is the clear suggestion in the FRG’s instructions to Deminex that it seek an immediate accommodation with
major oil producing states in the Middle East in the event of an
emergency such as nationalization in order to assure West Germany’s
security of supply. We do not doubt that other European countries
would do the same in similar circumstances. Such a move would of
course primarily affect US and
British oil companies which supply most of Western Europe’s oil
requirements.
Any such development would put the USG in a most awkward position between our oil
companies and our NATO allies. The
oil companies can be expected to insist the USG protect their rights in oil producing countries and
might ask for our political support in seeing that oil “tainted” by
expropriation is kept out of their European markets. However,
European governments would certainly override any attempt by US oil companies to boycott oil
shipments (with or without USG
support) if there appeared any chance their industries might suffer
any shortage of oil.
V. Crisis Point
Under present very tight tanker supply conditions, industry
representatives have told us that Mediterranean oil production
(Libya, Algeria and the IPC
pipeline) can only be reduced another 400,000 to 900,000 barrels per
day before Europe would actually be forced by the shortage of
available tankers to begin to draw down stocks.
Reductions in the availability of Mediterranean oil so far have been
justified on the basis of demands for increased transit payments in
the case of Tapline, and oil
field conservation in the case of cut backs in Libya. Further small
cut backs may be made in Libya for conservation
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reasons, but any major cut backs by
Iraq, Algeria, or Libya of up to one million barrels per day would
probably be made for political reasons or to apply pressure to
increase posted prices in
Libya. Any new major cut back in production would be susceptible to
a “political” solution between European consuming countries and Arab
producing countries over the heads of US oil companies.
