7. Draft Paper Prepared in the Department of State1

Oil Imports Review—Part One—Summary and Conclusions

1.
The State Department has one overriding foreign policy objective in any oil imports program: the United States must be able to cover its energy needs from its own sources or from secure foreign sources during limited emergencies; i.e. limited war, foreign revolution, disruption of foreign supplies or politically inspired boycotts. This carries one important corollary: Western Hemisphere sources of crude oil may be considered for most purposes to be as secure as United States domestic oil and must be given special consideration.
2.
We would not recommend basing any petroleum imports policy on assumptions of a nuclear war. In this case domestic petroleum at the well-heads would be relatively invulnerable and crude petroleum supplies would be the least of our problems. We also do not believe it would be necessary to plan for a repetition of World War II; i.e. American cities essentially intact but with tankers from the Gulf of Mexico or the Caribbean to the US East Coast under submarine attack.
3.
For the purposes of this paper, we assume that the petroleum discoveries in Alaska will be great enough to supply a significant portion of our additional needs in petroleum for the next decade and that this petroleum will be no more expensive, delivered in the United States, than is domestic oil at the present time.
4.
When we know the size and producibility of the reserves in Alaska and the cost of production and of transportation, our oil imports policy may again have to be reviewed.
5.
If the oil import program were abolished today with no restrictions on imports we foresee the following developments:
a.
prices would drop in the United States to the equivalent of foreign prices plus transportation differentials.
b.
prices abroad would rise somewhat, but probably not significantly, as a result of new American markets (it is probable that foreign crude prices will rise in any case because of higher government taxes or royalties or new fees levied on oil producers).
c.
within ten years, according to industry sources which we are in no position to dispute, US domestic production would drop, and the US would become dependent on foreign sources of oil for fifty percent of its petroleum requirements. (This could be radically improved if Alaskan oil proves to be as inexpensive to produce as its more ardent protagonists maintain.)
d.
importers would shift to the cheapest sources of oil, i.e. the Middle East.
e.
while oil companies have shown some signs of trying to diversify their sources of supply, the Arab countries are still supplying almost the same proportion of oil in world trade as they did ten years ago (two-thirds); were the United States to take a significant portion of its oil from them (at present only 10 percent of our imports come from the Arab countries) the US would be vulnerable to political pressure from that quarter. However, it should also be noted that the major Arab producing states (Saudi Arabia, Kuwait and Libya) have strong ties to the United States.
f.
Venezuelan oil and Canadian oil would be displaced in our markets, the cost of production in both countries being higher than in the Eastern Hemisphere. The reaction against the United States in Latin America would be hostile as Venezuela would undergo considerable financial hardship. The reaction in Canada would also be sharp and could adversely affect our other economic and military interests there.
6.
We believe the relative degrees of security for sources of petroleum are as follows:
a.
Domestic sources—most secure.
b.
North American oil (mainly Canadian)—almost as secure as domestic oil.
c.
Western Hemisphere oil (mainly Venezuelan)—next most secure. Although we must recognize the possibility of political upheaval in Venezuela, it has been a secure source of oil in all crises in the last thirty years. We must assume that it will continue to be secure, as any assumption to the contrary would tend to be self-fulfilling; i.e., were we to decide, for the purpose of the oil imports program, Venezuela is not secure and then were to follow this by moves which would result in decreased Venezuelan oil exports, we would cause economic hardship in that country; this would provoke a reaction against the United States and quite probably a political upheaval in that country.
Several other Latin American countries, i.e., Bolivia, Colombia, Ecuador and Trinidad may be in a position to export increasing quantities of petroleum in coming years. Although the relative security of these countries as a source of supply has not yet been tested, from a geographical standpoint at least, they would rank with Venezuela as a secure source, and should be treated accordingly.
d.
Eastern Hemisphere oil must be considered relatively insecure. While it is difficult to assess relative degrees of security, we would say that of the major producers,
1)
Indonesia and Iran are more secure than
2)
Nigeria, the Arab states and Portuguese Africa.
7.
The security of the United States is tied to the security of our allies and the well-being of many oil producers in the non-Communist world. Fortunately, the oil producing countries in the Eastern Hemisphere can continue to find their markets in that hemisphere and we will probably not need to make special provisions for them in our import policies.
Indonesia might be a special case. It is the most important country in Southeast Asia; it has a strong government which reversed the pro-Communist trend of Sukarno and is heavily dependent on US economic assistance. While we could not propose specific favorable treatment for Indonesia, any provision, such as the elimination of Hawaii from the imports program or a guaranteed percentage of the market for overseas oil, which would provide continuing access of Indonesian crude to our markets, would be in the long-range interest of the United States.
8.
Special treatment given any one country in the Eastern Hemisphere would cause immediate demands for similar treatment from others; this would lead to a country-quota system for oil, with each country demanding a higher share and each country trying to get maximum prices from the United States.
9.
In case of a limited emergency such as disruption in deliveries by traditional suppliers, the United States would need to do what it could to cover the requirements of its allies. However, spare capacity for this purpose should not be part of our petroleum planning. The American consumer has paid more for his oil than has the European; this has been done to give the United States a healthy domestic industry capable of supplying our needs in emergencies. Our allies, who now enjoy lower cost petroleum, cannot and do not expect the American consumer to continue to pay for shut-in or reserve capacity to take care of their needs in limited emergencies.
We should remain prepared to discuss with our allies at any time the construction of secure supplies for them in the Western Hemisphere provided they were willing to pay the major part of the cost of this security. So far, they have not been interested.
The security of our allies can probably best be met under existing circumstances by maintaining storage at the levels recommended by the OECD and by encouraging the maximum diversification of production.
10.
The present system of oil import controls has met our security needs during the two major oil crises we have faced since the [Page 24]inception of the program: the Vietnam war and the Middle East crisis of 1967. We produce 75 percent of our own needs and import most of the remainder from secure Western Hemisphere sources.
11.
We believe that the program, as organized at present, would not give us the same degree of security in the future. The freight advantage which Venezuela now enjoys will be lost to the giant tankers, and oil companies will soon find it cheaper to import Eastern Hemisphere (largely Arab) oil, to the detriment of Venezuela. While we probably could still meet our basic needs from domestic sources or other non-Middle East oil, it would be more difficult to do so than it was in the 1967 crisis.
12.
Other proposals have been made which might give us the same security protection at a lower cost. These include government construction and then shutting-in of oil production capacity, shutting-in of private capacity in return for permits to import oil, storage for six months or storage of a year’s petroleum product needs. Such systems however would result in increased imports from the Eastern Hemisphere and would harm Venezuela and Canada which would not be in our long term security interests.

Conclusions

A complete and simple lifting of import controls would result in a short time in the United States becoming dependent on Eastern Hemisphere oil—most of which would come from the Arab states. This would not be tolerable.

Alternate schemes of shut-in capacity or storage might or might not be more costly than the present system but would result in rapidly increased imports from the Middle East. In these cases, narrow US domestic security requirements might be met but wider security considerations, which include the health and stability of other Western Hemisphere suppliers, would not be.

A country-quota system might satisfy some countries but it would cause far more problems than it would solve.

We believe that a system of import controls which would give sufficient preference to Western Hemisphere producers to enable them at least to maintain their present share of the market, but which would still allow some growth in imports from the Eastern Hemisphere, would best meet the security objectives of the United States—probably at the least cost to the US taxpayer and to the US consumer of petroleum products.

This system of preference for Western Hemisphere suppliers could be nothing more than a relaxation of the present system with the proviso that an important share of increased imports would come from the Western Hemisphere; or it could be a complete restoration of the overland exemption for Canada with some special consideration also given to other Western Hemisphere producers; or it could go as far as a complete Western Hemisphere common market in energy, with free [Page 25]exchange of petroleum across the borders and a common tariff against Eastern Hemisphere oil. (This of course could not be placed so high as to exclude Eastern Hemisphere oil.) The first alternative could probably be enacted immediately on executive order. The last would probably have to be phased in over several years, would probably require GATT waivers, and would require congressional approval and the approval of the governments of the other countries involved. It might also arouse hostility on the part of Eastern Hemisphere producers because of apparent discrimination against them.

[Omitted here is Part 2, related to the Task Force Questionnaire.]

  1. Source: National Archives, RG 220, Records of the Cabinet Task Force on Oil Import Control, Entry 10, Box 3, Classified Documents, State Department Draft on Foreign Implications of Oil, 7/22/69. Confidential with unclassified sections. Transmitted to Areeda under a covering July 22 memorandum from Akins. (Ibid.)