51. Action Memorandum From the Deputy Assistant Secretary of State for International Resources and Food Policy (Katz) to the Assistant Secretary of State for Economic Affairs (Trezise)1

  • SUBJECT
    • Oil Problems in Libya and the Middle East

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

Action Recommended

1.
That you call in representatives of US oil companies in Libya—at least Esso and Occidental—express our concern over the seriousness of the situation there, ask for their assessment of the situation, and urge they seek every means available to deal imaginatively with the problem of seeking to accommodate themselves with the foreseeable evolution of events in Libya, consonant with their own long-term best interests; that you say specifically that we fear that failure to move on the posted price issue will result in Libyan action against the companies.3
2.
That you speak to Aramco representatives, express our concern with the wide-spread effects the temporary closure of Tapline is having, the more serious effects should Tapline remain closed for the rest of this year or longer, ask for their assessment of the situation, and urge they make every effort to work something out with Syria and other transit countries consonant with Aramco’s best interests.

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 [Page 119]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 [Page 122]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.

  1. Source: National Archives, RG 59, Central Files 1970–73, PET 6 LIBYA. Secret. Drafted by Clark; and cleared in AF/N, NEA/ARP, NEA/ARN, and E/FSE.
  2. Attached but not printed at Annex B is the paper entitled “Outstanding Issues Regarding Petroleum in Libya.” Annexes C and D were not found, but the topics are summarized in Annex A.
  3. Akins and Trezise met with Esso officials on August 4. Executive Vice President Emilio Collado stated that Esso would not pay unilaterally imposed posted price increases, even though this would bring the company into “immediate conflict” with Libya. Collado gave several reasons: high prices could not be passed on to consumers, the company could not operate at a loss, and Esso feared that similar demands would develop in the Persian Gulf setting off a “never ending process.” Trezise and Akins stated “we do not take seriously” the Esso assertion that nationalization was preferable to an increase in posted prices. They commented that higher costs of oil from either the Persian Gulf or Libya would be passed on to the European consumer. (Memorandum of conversation, August 4; National Archives, RG 59, Central Files 1970–73, PET 14 LIBYA) During a subsequent meeting that day, Esso executives discussed the European supply picture, tankers, pipelines, and increased Western Hemisphere production. (Ibid., PET 18 NEAR E)